Over the last week the collapse of the Co-op bank and the reverberations surrounding its former Chairman have filled the air at Westminster. It has brought home two sad truths. Ethical mutuals may not be all they are cracked up to be. Co-op bondholders are learning an expensive lesson as they face losses and a capital reconstruction. Regulations, now stronger, statutory and enforced by Labour then by the Coalition still may not stop error, incompetence, bad appointments, or worse.
Under the last Conservative government I had the Ministerial job of being the City Regulator. In those days the non banks were regulated by the DTI, now the Business Department, under the supervision of a Minister. The law said anyone operating a regulated financial business had to be “ fit and proper”. Today many more people, many of them much better paid, are now involved in regulating. The Minister is no longer in charge, but an independent Regulator with an expensive Board and Chief Executive. There are many more rules to enforce, and more people to enforce them. Yet at its heart, one essential strand of the regulation is still the same. People in positions of power must be “fit “and “proper”.
Mr Flowers, the former Chairman of the Co-op bank, has recently been cross examined by the Treasury Committee in Parliament. It does not make good listening or reading. Let us leave aside his unusual private life and his brush with the authorities. He does not come across as a man well versed in his bank, its scale and financial activities. He has no formal qualifications that make him an obvious choice for the job. How had the various regulators overseeing him assessed him as “fit”? Why had there been no follow up to the questions over his exit from a charity? The interview with a representative of the Methodist Church on Sunday also made poor listening. The Church said he had remained as a religious Minister and a representative of their faith because there had been no complaints. Their assessment system for who can become and remain as Methodist ministers clearly does not work well in all cases.
I have regularly warned in the Commons that simply adding more and more regulations to the lawcodes everytime there is an error or crisis in financial services does not make for a better future. The bad cases of misconduct and failure in recent years were actions against the laws and regulations years ago, long before this generation of politicians has greatly increased the list of rules and the numbers of regulators. What is needed is better detective work and a better nose for the minority of cases where bad decisions are made and the wrong people appointed. That does not take more laws or more regulators. It requires a few regulators with good sources, a good screening system, and an ability to recognise a disaster in the making. It certainly requires regulators to see that mutuals may go as wrong as for profit companies. They are not ethically superior just because they say they are. They need to earn that status by their deeds. Too many laws can make it difficult for honest businesses, and can obfuscate the regulator’s view of who is fit and proper and which organisation is solvent.