If you have just reached this blog and wonder what it is about - this series of posts is primarily about Bank charges (and a bit more - how by using that subject it may lead us to a better understanding of how the failures of regulators, central bankers and governments got us into the financial mess many of us now face.)
I am using a very simple, but crucial, question on Bank charges, namely:
Let's ask Lord Turner and the FSA this very simple question:
Do you believe that the charges levied by Banks on their customers were and are fair or unfair?
In my earlier posts I set myself four tests - this is a continuation of Test 2, the earlier posts do however remain very relevant.
Test 2 - Evidence that the Financial Services Authority have failed to meet the statutory obligations imposed on them by Parliament.
Let's restate the three statutory obligations that apply:
• Securing the appropriate degree of protection for consumers;
One of the ways in which the FSA sought to achieve that objective was by adopting a high level principle called, Principle 6 - "Treating Customers Fairly".
And yet, as I recorded in an earlier post, in a speech The Future of Retail Banking in the UK. given by Dr. Thomas F. Heurtas, who in 2007 was the Director Wholesale Firms Division at the FSA, we find this comment:
" ... Technically, the FSA has "switched off" Principle 6 ("Treating Customers Fairly") with respect to deposits ..."
Does that decision to "switch off" the means by which the FSA sought to meet their statutory objectives strike you as fulfilling them or failing them?
Now let's list the two other statutory obligations:
market confidence - maintaining confidence in the financial system;
financial stability - contributing to the protection and enhancement of the UK financial system
In my earlier post, I asked if just by looking around you at the state of the UK finances, and as we face higher taxes, cut backs, and job losses, you could work out for yourself without comment from me, whether you thought those objectives had been fulfilled or failed.
I promised in my last post to limit my comments and head to Test 4, so I won't discuss the dire financial news from Ireland yesterday, nor how the financial crisis is affecting those living in Greece, nor why in the financial stability the FSA were obliged to secure it was necessary for the UK Government to use legislation designed for terrorism to secure the deposits of those whose money had been placed with Banks in Iceland.
Instead I want to use just one example, that of Northern Rock. The speech given by Dr Heurtas was given just a few short months before the queues started to appear outside the doors of Northern Rock.
Please read the speech from Dr Heurtas, about the "Future of Retail Banking in the UK" but here are some extracts to encourage you to do so:
" ... What we seek is to assure that banks are soundly managed and well capitalised, so as to limit the risk that the bank will fail and consequently harm consumers and/or disrupt financial stability ..."
" ... The challenge for the banks and for their regulators is to assure that banks remain soundly managed and well capitalised...."
" ... We have no objection to allowing banks to reduce their capital ..."
Yes, in part I am being selective, but, beyond asking you to read the whole speech, what I want to highlight is that speech contains all the elements that 3 short months later led to the collapse of Northern Rock, and not much later, the collapse of RBS and HBOS. So did the FSA fulfil or fail to meet their obligations - on the face of it the failure, total failure, is self evident.
So did the FSA know what they were doing, did they understand the lessons of history, and not just those we often hear cited, those from the 1930's?
Let's go back to 2003 to answer that question - and use a speech by Howard Davies, who in 2003 was the Chairman of the Financial Services Authority. From tulips to dotcoms: What can we learn from financial disasters? is a cogent and reasonable analysis of how and why financial disasters happen - they have indeed happened throughout history.
Again, I ask that you read the whole speech, but let me use this one extract to point to the answer to Test 2 - did the FSA fulfil or fail in their statutory objectives.
" ... It would be heroic to think that we could develop our understanding to the point of being able to forecast the next outbreak of mad tulip disease, but we should nonetheless do what we can to help spot danger signs. That is particularly important now that the FSA has a statutory duty to promote public understanding of the financial system, linked to its parallel objective of maintaining confidence in the UK’s markets... "
Now ask yourself - if the Chairman of the FSA was able to understand how financial disasters had arisen thoughout history, and thought the FSA could help by spotting the danger signs, how could it be that 4 long years later with the FSA on the job, Dr Heurtas could discuss the "future" of retail banking in the UK, when it was about to collapse about our ears? Did we have a lookout in the shape of the FSA, or were they asleep down below deck?
Ask yourself - Might that possibility also apply in equal fashion to the questions over Bank charges? If the FSA could not see the big picture - what is the probability that they would never ever notice a much smaller item on the radar, no matter that it affected millions of people, and involved £millions?
Remember this BBC News item I used earlier? It is a few months after Dr Heurtas' speech, and by then Howard Davies has moved on and been replaced as Chairman of the FSA by Callum McCarthy.
It relates to Northern Rock. What did Callum McCarthy, on behalf of the FSA, say about the situation at Northern Rock? This:
" ... Northern Rock's business and capital base themselves have been judged to be sound by the Financial Services Authority, which reiterated on Saturday that deposits and withdrawals could still be made.
It described the long queues at branches and difficulties with the bank's website as "entirely logistical and are in no way related to the bank's solvency or its underlying ability to deliver funds to savers who wish to withdraw".
"To be absolutely clear, if we believed that Northern Rock was not solvent, we would not have allowed it to remain open for business," FSA chairman Callum McCarthy said...."
Two days later, this BBC report :
" ... The government has said that it will guarantee all deposits held by the embattled Northern Rock bank. The government has said that it will guarantee all deposits held by the embattled Northern Rock bank.
The chancellor reiterated comments made by the Treasury and financial services watchdog the FSA that Northern Rock is a solvent business.... "
Would that be some of the deposits that the FSA "switched off" their principle from? Ooops!
A few short months later, this BBC News report:
" ... Northern Rock to be nationalised ..."
Now think also of RBS, and HBOS and all the other items I mentioned earlier - how would you decide Test 2 is looking? In support of the FSA or otherwise?
Test 2 - Evidence that the Financial Services Authority have failed to meet the statutory obligations imposed on them by Parliament.
I suspect you may already have decided on your answer. Have you?
Jon Pain, a Managing Director, Retail Markets at the FSA has. About a year ago, he conceded " ... serious mistakes by financial institutions, governments, central banks and regulators, including the FSA ..."
No, I haven't this time given you a link, just not yet, because what Jon Pain said, and what the FSA, and many in it have said and conceded will form the basis for Test 4 - and the link will appear there, plus the evidence that answers this question:
Let's ask Lord Turner and the FSA this very simple question:
Do you believe that the charges levied by Banks on their customers were and are fair or unfair?
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