The Committee found that “naivety” and inaction underscored the “the dysfunctional relationship between the Bank of England and the FSA which existed at that time to the detriment of the public interest.”
The erroneous calculation by the bank and the FSA as well as the Bank of England was that early cooperation would pay dividends. The settlement did not place the blame on any individual executive; nor was there initially any expectation from UK or US regulators that resignations were required or appropriate.
Each was taken aback by the ferocity of political criticism of the deal and the perceived lack of accountability for infractions that point to widespread collusion. FSA chairman Lord Adair Turner belatedly acknowledged this, saying the activities of Barclays revealed “a degree of cynicism and greed which is really quite shocking… and that does suggest that there are some very wide cultural issues that need to be strongly addressed”.
Regulating culture
The disjuncture between stated and lived values, linked to the failure of internal compliance or disclosure to counteract it, underpins political demands for an oversight design that better institutionalises restraint.
The crisis and its aftermath demonstrate much more holistic approaches to risk management are required that link private rights to public duties. If defective disclosure was not the cause of the myopia, a better articulation of risk is unlikely, in itself, to be effective.
Satisfactory answers require an evaluation of how a reform agenda addresses not just objective efficiency (ie lower transaction costs). Three additional distinct but overlapping criteria must be applied. First, permissibility (i.e. whether a particular product can be sold and if so to whom and on what basis); second, responsibility (ie who carries the risk if the investment sours and on what terms); and third, legitimacy (i.e. does the product serve a legitimate purpose and who should determine it).
The danger is that an ill-thought-out structure will exacerbate rather than resolve conflicts within the industry. It risks creating another layer of formal restraint that does little to change either corporate practice or facilitate voluntary progression towards higher ethical standards. It is also clear, however, that the construction of accountability mechanisms cannot rely on self-certification alone. It demands external validation.
