Glass Houses and all that…
Posted on: 13 Jul 2012 by James Farmer

The FSA is lecturing us about accountability, says IFA Centre’s Gillian Cardy. So lead us from the front, please

Last month was a busy time for the regulatory speech writers.  Hector Sants delivered his last speech as Chief Executive of the FSA and Martin Wheatley, his successor at the FCS spoke twice, all in the space of a fortnight.

 

We used to fear “regulation by speech”.  It was hard enough to divine the meaning of rules in the ever-expanding Handbook without having to check the speaking engagements of FSA managers of varying seniority to work out what was expected of us. But FSA speechwriting does provide strong clues as to the real thoughts, concerns and motivations behind the specific rules and decisions that the regulated community has to grapple with.

 

Mr Sants’ speech was not merely a contemplation on his years in charge, but a clear statement of future intent, presumably agreed with his successor.

 

And I’m afraid.

 

“Constructive Tension”

Sants told us that a company board must “set the right tone” for the organisation and must be constructed to avoid “group think” and “herd mentality”. Yet his analysis of corporate governance and organisational culture in firms that failed in the financial crisis could also, shockingly easily, be applied to governance and culture at the FSA – especially inadequate understanding of aggregation of risk – and regulators without appropriate technical competence in authority over the regulated.  Let he that is without sin …

 

We need, apparently, a sufficient understanding of the issues and the confidence to speak up so that debate can be enhanced, with the Chair creating an environment where this confidence and debate is encouraged and valued.  Physician, heal thyself??

 

Mr Sants clearly expects leaders to be driven by the desire to ‘do the right thing’, or integrity in other words, but he also recognises that this isn’t going to happen.  He argues there should be a “constructive tension” between regulator and firm, yet continues to maintain we should be frightened of the FSA.  Fear often leads to tension, but it’s rarely constructive.

 

The Right Sort of Fear?

Fear is also an extremely bad basis for any relationship, regulatory or otherwise.  It has unintended consequences.  People will not own up to failures and will hide their mistakes.  They will not ask for help if they are unsure, in case their confession of ignorance is itself punishable.  They will say and do the right things publicly but behave differently in private.

 

But no-one works (or lives) well in an environment of fear.

 

Furthermore, constructive tension implies two things, joined, associated, linked, but pulling in different directions.  Good and bad.  Profit and social responsibility. Sales targets and treating customers fairly.

 

So, where is the regulatory dividend for those who are doing the right thing, whose organisational culture does display all the right characteristics, who do care about their clients, whose incentives are driven by integrity, not financial reward?

 

So Mr Wheatley, as you settle in to your new office, two things :

 

Firstly, please understand that we want to “do the right thing” but we do not want to be afraid (and, frankly, you don’t want us to be afraid either).

 

Secondly, you have standards, but so do we.  We are accountable, but so are you.

 

 

Tags: aggregation | chief executive | contemplation | corporate governance | do the right thing | fcs | financial crisis | fortnight | fsa | gillian | hector sants | mentality | motivations | regulated community | regulators | seniority | speaking engagements | speech writers | speechwriting | technical competence