The only problem with this is that before we get to tomorrow we have to pass through a whole series of unknowns. Investors cannot rely on extrapolating what has happened previously because, as they are constantly reminded, past performance is no guide to future returns.
From 2013, however, the new FSA, or equivalent thereof, is going to turn this all on its head and actively take a “forward-looking” approach to its supervisory role, and second-guess the investment management industry. It has even spoken about having the ability to ban business models that it deems too risky.
This was all outlined in a speech made at the Queen Elizabeth II Conference Centre yesterday by Hector Sants, the current chief of the current regulatory body, the Financial Services Authority, who will head one of the three new regulatory bodies (the Prudential Regulatory Authority) from 2013.
Sants told those present: “Central to this supervisory model is the presumption that regulators cannot trust the judgment of the management of the firms they supervise.”
It has given itself the ability to force management changes, limit dividends and restrict business activities.
Much, in fact, that would have helped to spot the last financial crisis. But as we have been told, the past is no guide to future performance, so is the PRA positioning itself to predict and avert the next crisis?
In a word, no.
As a micro-manager, the FSA had many notable successes, but it was largely unable to see the bigger picture. As a micro-manager, the PRA will continue in the FSA’s footsteps – and it is also most definitely structuring itself to look at that bigger picture – but it is far from clear that it will be able to interpret the warning signs, let alone act on them.
There are plenty of lawyers and head-hunters who will tell you the talent to do this is also lacking. That may not just be confined to the regulator, admittedly – the relative scarcity of those who predicted the 2007 crash – before it happened, at least – adds evidence to this.
One of the great unknowns is what is going to happen with financial markets and those who operate within it over the next few years. We will undoubtedly have more Madoffs and even Goodwins, and the PRA will be powerless to stop them.
One definite known is that the PRA will undoubtedly be best-of-breed – in a monopolistic kind of way – at least until the next financial crisis.
