Over the past few years, Britons seem to have developed a new favourite pastime: hating the financial sector. Who can blame them? Almost five years after the run on Northern Rock in 2007, many are still without jobs or homes and face bleak prospects for the future.
But criticising is easy – Lord Adair Turner has to actually do something about it. As Chairman of the Financial Services Authority, he is in charge of overseeing the regulatory response to the financial crisis, which involves the unenviable task of trying to realign the incentives in the financial sector with the interests of the rest of British society. For the UK’s most prominent problem solver and a self-proclaimed ‘technocrat’, this is just another job.
Turner’s talent and ambition were clear from his days at Cambridge, where he accomplished every hack’s dream: Presidency of the Cambridge Union, Chairmanship of the Cambridge University Conservative Association and a double first in History and Economics. “I think I probably assumed at that time that I would be involved in politics but I steadily developed the habit of not seeming to be able to stay in one political party.” He now happily sits as a cross bencher in the House of Lords.
But his path, though distinguished, has been rather unusual. Turner has flitted in and out of the private and public sector, though he remembers his time as a director at McKinsey particularly fondly. ‘I hugely enjoyed McKinsey between 1992 and 1995 when I worked on the development of the creation of the consulting business in Eastern Europe and Russia.’ He enjoyed a front row seat watching history unfold, as planned economies transitioned into market economies and experienced the stresses and strains inherent in that.
As chairman of the Financial Services Authority, Turner is again at the forefront of a remarkable period in the history of capitalism. The consequences of the great financial crisis continue to dominate our headlines, and it is this question of high pay in the financial sector which seems to most antagonise the British public. Quite surprisingly, it antagonises Lord Turner too. Though he is open about having enjoyed oversized pay packets while Vice Chairman of Merrill Lynch Europe, he still worries that today’s inequality is greater than the average citizen is willing to tolerate.
‘The legitimacy of a market economy can survive significant differences in pay, but we haven’t seen today’s differences since before WWI!’ The solution to the problem is far from obvious, however, and unfortunately ‘there are no easy public policy levers which lean against it’.
Here at Oxford, the disproportionately large salaries paid by investment banks have drastically changed attitudes to careers among many students. Lord Turner shares the public’s unease. ‘I do have some concerns about too many of the most talented people heading off towards banking. You can’t criticise people for doing that, I would have thought of it myself if that had been the case when I left Cambridge.’
But it’s what the students actually do when they get there which is particularly worrying for Turner. ‘The crucial thing is that as regulators we need to set a regulatory framework so that the industry can only make profit and give high pay out of things which are adequately controlled in risk terms, and are actually socially useful. Before the crisis there was an explosion of some activities in the investment banking arena which were pretty socially useless, and that must be brought under control.’
With so much talk about banking at Britain’s best universities, it begs the question, who on earth is at the FSA? The asymmetry of resources between the banks and their regulators was cited as a major cause of the financial crisis in the US, but the UK is different. ‘We are in a better position than our colleagues in the US because they are deliberately starved of money from legislators who would prefer not to have a strong regulatory authority. Instead, the FSA has not been constrained by public sector pay requirements so we are able to pay some to people higher than for instance civil service grades.’ But this doesn’t mean wages are near equal, as Turner notes: ‘We still pay nothing like the private sector but we are still able to attract people fascinated by the policy role.’
You don’t hear of big bonuses at the FSA, but in all offices which surround its premises in Canary Wharf, you can virtually hear the sound of cash registers ringing. The City’s bonuses certainly increase inequality, but frustratingly it’s not even clear whether they raise performance. Lord Turner continues to ruffle feathers with his stance on performance related pay, and conceded his reservations on the matter, saying, ‘I have severe concerns actually that a lot of what we have done over the past 15 years (on performance related pay) has produced unintended consequences.’
He is of course referring to the distorted incentives the pay structure in much of the financial sector provides for its employees. ‘All options in financial markets have more value the more volatile it is, so the more logical rational selfish person at the top of a company would like to create as much volatility as possible so his shares would pay off.’ Similarly, what we have learned from the downfall of RBS is that many executives judge their success on short term indicators such as the size of the balance sheet, while showing a complete disregard for the long term stability of their institution. The solution proposed by Lord Turner is unadventurous: ‘a more simple and straight forward salary structure’ with a far smaller bonus component. This is typical Turner: progressive, pragmatic.
Lord Turner is said to be an unpopular man in the City, and I begin to see why when we tackle the hardest issues of financial regulation. How can the FSA keep London competitive and implement adequate regulation? Easily, he says, because ‘the idea everyone will go off to New York is not true’. In fact, he tells me, ‘it was an extremely bad idea to put into the statutory requirements of the regulator that it should have regard to competition issues.’
That’s not to say government should ignore competitiveness altogether, however. ‘It is perfectly legitimate for the Treasury to have an interest in speaking up for an industry’, but regulators should remain independent, Turner argues. While this is a difficult balance to strike, his experiences suggests the FSA is getting the competitive balance just right.
‘What is interesting is that you hear as many banks in the US complaining of the high standards they are being forced to accept compared with their European competitors as you do the other way around. When you hear it on both sides of the Atlantic it makes me feel as though we have got it right and are not allowing this process of regulatory arbitrage to flourish.’
Lord Turner is not just unpopular in the City, but among some journalists and politicians too, who blame the FSA’s regulatory approach before the crisis for its severity. He has accepted that mistakes were made and that ‘any benefit we could have got from a light touch was offset many times over from the disadvantages which came from the crash’.
As Turner tightens regulation at the FSA, he is trying hard to get globally agreed policies, but argues ‘if need be, we should act unilaterally’. The implementation of the Banking Report by Sir John Vickers was, in a way, a unilateral measure, but Lord Turner points out that ‘a debate is now breaking out in Europe over whether Vickers’ ideas are applicable’. As long as Lord Turner remains at the helm of regulatory policy in the UK, we can be confident that where Britain leads, others will continue to follow.
