January 7, 2009 - By George Fanning

Scarcely a week seems to pass without the Canary Wharf-based Financial Services Authority adding to the already weighty pile of evidence that it is not fit for purpose as Britain’s principal financial regulator. 

 Indeed, the FSA has started 2009 much as it conducted itself throughout 2008: with an extraordinary display of high-handed indifference to public sentiment and gross failure to appreciate the real risks inherent in market mechanisms. 

2009 was only five days old when the FSA posted a statement on its website under the rather arcane title “FSA proposes to extend short selling disclosure regime”.   As with most of the FSA’s pronouncements, the title of this statement is utterly misleading. 

The true significance of the announcement only becomes clear further down, almost as an incidental aside, with the statement that “In addition, the FSA proposes that the ban on the short selling of stocks in UK financial sector companies will expire on 16 January.”    In other words, the FSA is delighted to announce that short selling is back!

Short selling is the pernicious practice whereby speculators – typically hedge funds — borrow and then sell shares in the expectation of being able to buy them back later when their price has fallen. The speculators therefore make a profit when the share price declines. This form of betting on share price falls has been widely blamed as a major contributor to the worldwide financial crisis, which is why the FSA was originally forced to step in to suspend short selling of financial stocks in September 2008.   Now that short selling is poised to resume with the FSA’s blessing, we can surely expect to see a recurrence of the sort of rumour-driven speculative attacks on major banks which so disgraced the City of London last summer.

The FSA’s latest error of judgement in reinstating financial sector short selling is by no means an isolated mistake. Since its inception in Gordon Brown’s first year as Chancellor, the FSA’s institutional failure to understand market risk and prioritise its own work effectively has been its indelible hallmark.  A financial regulator should be like a lion at the heart of the financial system, but the FSA has acted more like a skittish kitten, chasing in circles after every irrelevant mouse, but cowering away from the packs of city wolves that attacked longstanding British companies and defenceless consumers alike.

The FSA was happy to punish banks which scrupulously reported minor breaches of customer identification rules, but it seemed oblivious to clear-cut warning signs of the impending collapse of major institutions like Equitable Life and Northern Rock. Indeed, during 2008 the Parliamentary Ombudsman specifically accused the Financial Services Authority of maladministration in the final years leading up to Equitable Life’s collapse in 2000, when Gordon Brown was still Chancellor.

On a number of occasions, the FSA has gone out of its way to preserve the anonymity of firms involved in mis-selling activity, seemingly preferring to side with slippery spivs rather than their consumer victims.  Perhaps this is not surprising in view of the composition of the FSA’s ruling Board, which is now chaired by former CBI Chairman, Baron Adair Turner of Ecchinswell and staffed entirely by financial industry placemen, with no significant consumer representation whatsoever.

Anyone who doubts that the Financial Services Authority has utterly failed to discharge its duties as financial regulator should consider the FSA’s four statutory objectives under the Financial Services and Markets Act 2000:

• maintaining market confidence;
• promoting public understanding of the financial system;
• securing the appropriate degree of protection for consumers; and
• fighting financial crime.

Not even the most deluded inhabitant of Cloud Cuckoo Land could believe that any of these objectives has been advanced by the FSA over the past 12 years.   In fact, market confidence has evaporated, public understanding of the financial system has faded, consumers have been ignored and left unprotected and, by common consent, financial crime is rampant. 

Surely the British public is entitled to expect that the regulatory body tasked with these objectives should be held to account for the self-evident failure to achieve any of them?  It is now time for a new stringent rules-based system of financial regulation, with the Bank of England at its heart.  The FSA is just another piece of residual New Labour flotsam which, like New Labour itself, deserves to be swept away on a tide of righteous public anger.