I USED to play a game with a former colleague, a delightful individual – but not completely suited to the company we were both working for at the time.
The game involved showing him job adverts for positions so wildly implausible or so unattractive to someone of his temperament that only desperation would have made him apply.
The game rather faded away after I sniffed out the job of chief accountant at a fertiliser plant in Bangladesh, which we agreed would be a hard act to follow.
When the Bank of England advertised earlier this year for a successor to Sir Mervyn King, I thought of sending an application form to my old friend, but I realised on reflection that the governor’s job is already difficult beyond the point of parody.
He has to support the general policy of whatever government is in power without being seen as the Chancellor’s glove puppet – he has to play a leading role in restoring the reputation of the financial sector in general, and the banks in particular, institutions struggling against the widespread prejudice that they are run by speculators rather than prudent business people.
If the Bank keeps interest rates low, it is accused by one set of voices of deliberately and immorally taking money away from cautious savers, who didn’t cause the financial crisis, in order to save the more aggressive borrowers and their lenders, who did. If and when it starts to tighten policy, another different set of voices will cry out that the Bank is heartlessly throttling the recovery by starving businesses and families of credit.
This unenviable list of tasks is about to increase as the Bank prepares to take on overall responsibility for some of the regulatory work being done by the Financial Services Authority (FSA). There is a general feeling that the tripartite arrangement – whereby the Bank, the Treasury and the FSA share these responsibilities – has been proved weak and ineffective – it neither prevented the financial crisis nor solved it. So the Bank itself will now take direct responsibility for banking supervision and financial stability, and all the other functions of the regulator will be performed by a slimmed down version of the FSA.
This is obviously relevant to those such as myself whose trade is looking after other people’s money. These guys can close us down and put us in prison, so it is in our interest to pay very close attention to what they say. One side effect of this close attention is that we notice apparent tensions between different regulatory objectives, or between a particular regulatory initiative and the stated mission of the regulator to improve what are called desired client “outcomes” – that is, clients have their investments managed in a way which is suitable to their circumstances and clearly understand this to be the case.
The particular example I am thinking of, which the Bank’s taking control of regulation will highlight, is that the Bank’s current policy on interest rates is pushing many investors away from assets such as government bonds, and into areas which the regulator regards as higher risk, such as corporate bonds, commercial property and equities, and indeed into structured products and hedge funds.
All of these have a part to play in a diversified portfolio, even for the risk-averse investor – moreover, anyone who can remember the way inflation wiped out the real value of bonds in the 30 years after the last war will regard as simply wrong the idea that a government bond is a risk-free investment.
Nevertheless, there is nothing more certain in investment than getting your interest and capital paid on time if you lend money to the government, because if it runs out of money to pay you back it can either raise a new loan to pay off the old one or simply print some more twenty pound notes.
At the moment, the most cautious investors, whose main motive is to earn a bit more on their cash than they get from the bank or the building society, are being driven by the policy of the Bank of England towards investments which the regulator tells us are less suitable or even not suitable at all.
So I have two questions for the new Governor. Do you accept that this is a clear conflict? What are you going to do about it?
• Gareth Howlett is fund manager director at Brooks Macdonald
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Monday 20 May 2013
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