Regulation

The Americans are busily searching for the culprits of the financial meltdown and the SEC, FBI and others are beating the bushes, but in the UK the heads of the Bank of England, the FSA and the Government make speeches - various people from the Bank of England and the FSA are moving on, but it is safe to predict that no one will be found to be responsible except, of course, the bankers and hedge funds. It is fortunate for them that burning at the stake is out of fashion.

Lloyd's of London has had some experience of failed regulation and after the failure to recognize the imbecilic behaviour of a lunatic fringe, major reconstruction became necessary (without any contribution from the taxpayer). After this near death experience Lloyd's passed hundreds of new regulations and imported herds of regulators - there were more at Lloyd's than were considered necessary for the rest of the UK insurance industry - with dire consequences. The market again sustained many billions of losses but since corporate capital had arrived and the losses were overwhelmingly sustained by this capital rather than the Names, it did not attract much notice However, it was obvious that the legions of regulators were ineffectual and the missing key component was knowledge, which was in short supply, not power, which they had in abundance.

The current Franchise Board at Lloyd’s was created in response to this so that now regulation is firmly practitioner led. The Franchise Board came to power in a fast improving market environment but the current signs are promising: it has the power and the knowledge.

It is not clear that the Bank of England or the FSA really understood the nature of the risks which financial institutions were accepting or, if they did, that they had any clue what to do about them. The new regulations and armies of new regulators which will arrive on the scene as a response to current events will be similarly handicapped. Unless the regulators are really up to speed with what the markets are doing they will prove to be as ineffectual as before.

History – In 1929 the Willcox Syndicate at Lloyd’s insured the solvency of secondhand car dealers – with predictable results. Lloyd’s, thereafter, insisted that all businesses operating in Lloyd’s should agree not to accept Financial Guarantee risks. This interdiction has been slightly modified since but is still in force – some people do learn from history.