OK, who tied the FSA’s hands to the mast… | FT Alphaville

OK, who tied the FSA’s hands to the mast…

In our first post in this series we pointed out how Andrew Bailey, head of prudential regulation at the Financial Services Authority, wants supervision to be transparent. The chairman of the new Financial Conduct Authority, John Griffith-Jones, has recently made similar noises. From the FT (emphasis ours):

The UK’s new Financial Conduct Authority will seek to be more transparent than the watchdog it replaces and will regularly publish reports into regulatory failures, its chairman pledged on Tuesday.

This is encouraging, but as we alluded to in our previous post, there isn’t exactly a tradition of transparency in regulation in the UK. The above, in any case, seems like a more of the post-mortem approach than a proactive one.

To explain how opacity is truly part of the system for all but the most flashy disasters, one may look to the explanatory note of Section 348 of the Financial Services and Markets Act 2000. It covers “Restrictions on disclosure of confidential information by Authority etc” and reads thusly:

Subsections (2), (3) and (4) define what is, and what is not, to be regarded as confidential information. Subsection (1) makes clear that this information is not to be disclosed by a “primary recipient”, or a person who has received the information from a primary recipient, without the consent of the person from whom it was obtained and, if different, the person to whom it relates. Subsection (5) lists primary recipients.

“Primary recipients” are regulators, people working for them, and auditors and experts that the regulator “instructs”.

“Confidential information… relates to the business or other affairs of any person,” was given to the authority because they are the giver’s regulator. Information summarised form (and thereby the identities of the givers hidden) is excluded from this definition, as is information which has already been publicly disclosed, like the letters that we have thanks to the Treasury committee looking into Libor that featured in the last post and will make an appearance in this one.

This, Section 348, is what the FSA will refer to when one calls to get information on something interesting. Their hands are tied. Even if they are bursting to share information, they can’t.

There are also some rather curious cases, like the letter the FSA sent to banks in October about setting bonuses with recent scandals in mind, and noting that claw-back provisions should be utilised. Why not just publish that? In any event, parts of it were leaked to the media.

So we are left with scraps revealed in the course of parliamentary investigations and court cases — with an add-on sprinkling of revelation arising inadvertently from regulations that require something to be made public (cough, cough).

One scrap was passed to us by Andrew Tyrie MP, the chairman of the Treasury committee, when he asked Barclays to disclose some letters deemed relevant to the Libor investigation last summer. Here’s what Barclays’ (outgoing) chairman Marcus Agius wrote in response to the parliamentarian’s request in July (emphasis ours):

You will understand that we consider it to be essential that there is a mechanism for a free and open, but confidential, exchange of information between a bank and its regulator.

Alphaville reads: Frankly, we’d rather you not see. Families are so difficult.

It is, therefore, important that confidential correspondence such as the documents you have requested remain confidential between both parties.

Alphaville reads: Seriously, please bugger off.

Otherwise, there is a risk that the ability of regulators to provide direct feedback and challenge to the banks they regulate is seriously undermined, which would not be in the interests of financial stability.

Hmm, actually that seems debatable to us. It’s not to say that every interaction needs to be made public, as that would be ridiculous. But what if a deal has already been done and the FSA is challenging it? Or if there are big question marks about a bank’s internal risk models? Or unclear financial reporting?

Over to the British taxpayer and Barclays investors reading this: How do you feel about the FSA’s hands being tied because of the breadth of the definition of “confidential information”? Does more disclosure of direct feedback and challenges by the FSA mean that financial stability will be threatened? Was the FSA reminding banks to mind those bonuses going to roil markets?

It is now with great irony that we present to you a couple of slides from a presentation given by a few weeks ago by Victoria Saporta, Head of the Prudential Policy Division, Financial Stability, Bank of England. Her data is from a survey completed by, errr, Barclays Capital, and it speaks specifically to the methodology behind risk-weighting assets for the purpose of regulatory capital calculations — something the FSA effectively polices, Basel edicts taken as a starting point.

The overarching message is that the market doesn’t seem to like all this opacity. Go, figures:

…dare we say this could be a threat to financial stability? Let’s hope the UK’s regulators mean what their saying about increased transparency, this time. And not just after the event.

Related links:
Call for BoE to be more accountable – FT
FCA chief pledges improved transparency – FT
FSA says Barclays ‘gamed’ regulators – FT
More Angry Birds, less regulatory arbitrage, please – FT Alphaville
Barclays visits the securitisation BISTRO – FT Alphaville
Regulatory arbitrage: Basel is watching you – FT Alphaville
Back to the BISTRO for today’s securitisations, Part 1, Part 2 – FT Alphaville