Financial Services Authority (FSA) chairman Lord Adair Turner said the regulator is reviewing its approach to supervision following the LIBOR scandal, but said it would cost too much to prevent all malpractice in the industry.
In a speech given to Bloomberg entitled ‘Banking at the Cross-Roads’, Turner (pictured) addressed the recent scandals in the banking sector, and said the City watchdog has been questioning whether its traditional approach to supervision is still tenable.
“In the past, it is fair to say the FSA did tend to assume that relationships in wholesale markets should be governed largely by a caveat emptor, market discipline approach.
"But increasingly we are aware that at the end of the chain of wholesale institutional relationships there will typically lie a retail consumer. And that shoddy wholesale market conduct is certainly not a victimless activity. A somewhat more interventionist approach to wholesale conduct issues is therefore likely to be appropriate.”
A paper to be released in the autumn will discuss some possible options for supervision and the implications for FSA resources, Turner said.
However, he added the FSA could not possible prevent all malpractice in advance without employing “an army” of supervisors.
“If we did deploy that army, we might well add more cost to the industry than the cost of customer detriment averted,” he added.
Turner said trust in the City has collapsed because of the “cynical greed” of LIBOR-fixing bankers, and alluded to some incriminating emails between traders which surfaced during the investigation.
“People are angry with banks and bankers – and with the policymakers who set the rules within which they operated – because of a Great Recession whose origins they believe, quite rightly, lay within the financial system itself.
"But the outrage which led directly to the [Economist] headline ‘Banksters’ is also a fury about values, provoked by the quotes revealed in the LIBOR scandal: “I’m opening a bottle of Bollinger”, so we can celebrate fixing the LIBOR rate. Those quotes reveal a dealing room culture of cynical greed.”
Lord Turner said there is nothing new about dealing room culture, pointing to the “testosterone-driven culture” of FX trading in the 1980s. However, because the financial sector is such a lynchpin of the economy today, its conduct has become more closely scrutinised.
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