oh, dear Sir Howard Davies, regulator emeritus

Sir Howard Davies’ decision to resign from his most recent position as director at the London School of Economics gives us an opportunity to reflect on his role as the founding executive chairman of the Financial Services Authority (FSA) in the UK from its inception in 1997 to 2003. This was before he left and took up this academic position from which he is currently resigning.

He resigned this time over what he says was a “principle” that he had given advice to the evil Libyan government as part of a government-to-government assistance programme at a time when it was looking relatively less evil. He was not personally paid for the service he rendered, he says. He did not procure pecuniary advantage, he says. He did it for the UK government, not the Libyan government, he says. He did this for the good of ordinary civil servants in the Libyan government and not for an evil leader, he says. We should all remember this distinction when dealing with the underdeveloped world, he says. And so he must resign.

What a wonderful opportunity not to be missed for the ever-correct Sir Howard. To resign in style, with guns blazing, while he is still at the top of the game, and have the last word on morality on the way out. He must live for moments like these, and when they do come, he is not wanton on seizing them, even at the risk of irking the leadership of the LSE for making a mountain out of a desert plain.

I am not impressed. I think that he may not have resigned if he had actually broken an actual law, a principle or something that others thought was actually wrong. No, that would have required him to stay on grounds of principles.

But in this instance, nobody can say that helping the Libyan government build a better civil service was particularly wrong. Not the same thing as saying he helped Gaddafi build a bomb that he used on his own people. So resigning was the perfect way to make a statement on what is right or wrong without fear of being caught out on anything.

My friends in the UK suggest that Sir Howard resigned because the LSE accepted a sizeable donation for funding from a charity controlled by Gaddafi's son, Seif, an LSE alumni. There are also questions over Seif’s PhD thesis awarded by the LSE. Was he, as director, involved in making these decisions? I would be surprised if he was, because for all the nasty things we can accuse Sir Howard of, surely complicity in compromising the standards of an organisation cannot be one of them. Outside of these, in a country with a malfunctioning moral compass, people can't decide if he was heroic in sacrificing himself or they understand the plot in the first place.

But the reason I take interest in this man’s actions here is because something we have to come to terms with, as the world’s regulators try to cobble together regulatory frameworks that actually make sense, is that the final product has more to do with how personalities play out than any inherent shared values. In my view, no one proves this point better than Sir Howard himself.

Regulators in the UK and in countries as far away as Australia are generally bringing back the administration of systemic risks into the central bank, because this man, by his conduct, made the FSA appear too difficult to manage than it really was.

Finding the correct regulatory model is a very important topic today. Regulators in developed countries in American, Europe and Asia are scaling up their staffing like never before. In the US, up to 5000 new staff at the SEC alone, absorbing a slew of young graduates trained in law, accounting, economics, business. Such large numbers make regulatory agencies nearly impossible to manage, let alone serve their designed goals.

Central banks are taking on more roles than it is designed to handle. The DNA of any organisation, whether it is a regulatory agency or a for-profit business, depends on what it does best. So, to ask the Bank of England, to look after macro-economic and prudential regulation and the systemic risk and consumer protection, all under the same roof is simply untenable. They will let the ball drop on one or several of their mandates.

Sir Howard was right. The FSA did exist to perform a very important function. But the way he went about defending his role was what spoilt it all. In 2009, I interviewed him for The Banking Conversation http://thebankingconversation.com/?cat=106. and if you watch his inconsistencies in that interview, you will understand that we are dealing with a man who strains at gnats, just to let camels through.

I asked him whether he made it his personal mandate to use the FSA to err on the side of the consumer. He said no, that was not the goal of the FSA. This is correct. But the evidence of the many headline prosecutions the FSA procured when he was chairman, point to the fact that it did more on consumer related prosecutions, while fatally neglecting its primary role of systemic risk surveillance, resulting in the Northern Rock crisis.

Most people are self-serving when they argue their point. But Sir Howard does it with such gusto, that we think he is pursuing a valid point. At one point in the interview, I asked him what it took to carve out the FAS from the Bank of England when it was very easy. “One day there were 300 staff in the Bank of England and the next day, they were at the FSA.” But when I asked him on whether re-merging the two institutions would be similarly straight forward to achieve, he disagrees.

I don’t think that Sir Howard is a bad person. He is even brilliant, but brilliant on the pedantic and short on the execution. Sir George Mathewson, the former chairman of RBS, had a particularly cryptic way of describing people who do exactly that by asking the question, “If there are five frogs on a log and one decides to jump off, how many frogs do you have on the log?” The answer? “Five. Because decision is not action.”

It would appear that Sir Howard is decisive on many things, what they are and what they are not. The Financial Services Authority was conceptually a brilliant creation at a time when the UK’s regulation of financial services players was almost as fragmented as that of the US today.

But we have heard almost nothing from him on the technicalities of making it actually work. In fact we have only heard him defending the definition of what the FSA does or does not do, over and over again. The long list of complaints of the FSA from the way it handled over-charging payments in its earlier days to Northern Rock years after he left it, points to a dysfunctional organization, staffed by the wrong people, whose motivations for being in the FSA were never really clear, and who had very little coordination skills with the other regulators, especially with the Bank of England.

In the end, even if he was right about everything related to the FSA (underpaid staff and its choice of directors, to name a few), the general opinion in the UK today that it be folded back into the Bank of England is borne not so much out of conceptual differences, but by the sheer mess that it was in. Nobody is the wiser about the fact that if the FSA were run by less prickly people, with the right skills, and who worked hand-in-glove with the other agencies, without fanfare, as other regulatory personalities around the world do, it could have been working just fine.

None of this would have been of any concern, if not for the fact that he inadvertently triggered a global trend for central banks to take back more of the regulation functions back from agencies that are the equivalent of the FSA in their respective countries. This despite the fact that several central banks actually invite Sir Howard to advise them on regulatory models. It is curious that they then do the exact opposite of what he tells them to do.

Sir Howard’s best skills have been in defining a problem, a solution, an institution or a business model. Then he must leave – even if always on his own terms. That is what he did at the FSA and in all likelihood that is essentially what I think he is doing at the LSE. But unlike what he did at the LSE, what he did not achieve at the FSA has had a profound effect on the road that regulators the world are taking today. Ironically, it is not the one he would have liked them to be on in the first place.

 

Twitter     @EmmanuelDaniel

 


Comments

  1. I don't think anyone in the UK has come out of this issue with any credit, including Davies. There is both anger and shame in the UK aboout the whole thing. Davies has walked away right at the beginning and we all wonder what else will be revealed. The university has called for an enquiry and the public, and especially the students, will not allow this to be queitly swept under the carpet.

    Today we hear that a British Nobel Prize winner has also resigned from the charity saying that funding was made without any of the directors being involved and that Saif was maiking making the funding decisions. With other directors being Andreotti and the Rev Chung Hwan Kwak, chairman of the Universal Peace Federation, part of Sun Myung Moon's Unification Church he has hardly been careful with his associates.

    And it also appears that the Professor who ran the LSE unit that accepted the money lasy year was Saif's academic tutor – he also resigned in December. I see red faces all round.

  2. My last comment was on academic (and British) greed when it comes to getting money off dictators. On the other hand I suspect that many of us do not look carefully and whom we do business with and it is only when these countries start bombing their own peoiple that our relationships become embarrassing.

    Tthe other issue ED raises is the trend for central banks to try to control all aspects of regulation and the economy. The ideal situation is a triumverate of central bank (economy), regulator (the rules) and supervisor (the policeman) and this was the target set in the 80s. But almost everywhere countries are back-tracking from this situation (or objective), whilst at the same time insisting on proper corporate governance in banks – board, compliance officer and CRO matching the above triangle.

    How do we force proper governance on our central banks and regulators? The current trend is not acceptable.

  3. Adanani Khannanu

    Sir Howard was not minded to resign until it came to light that Prof Fred Halliday ( a world renowned and very well respected Professor in the LSE International Relations department, now deceased) had strongly objected to the donation made by Saif. The fact that Sir Howard ignored a strenuous objection by a person with such unquestionable integrity (who was ultimately proven right) meant his position was no longer defendable, hence the resignation.

  4. We coulv’de done with that insight early on.

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