Tony Shearer, who saw the incompetence of the FSA first hand, writes of how they regulated minutae and completely missed the big picture failings at RBS, HBOS and Kaupthing Singer & Friedlander. He was chief exec of Singer & Friedlander as it was acquired by Icelandic behemoth Kaupthing in 2005 - three years later, after to Kaupthing's implosion and seizure by the Icelandic FSA, everything went foom and the FSA was forced to step in.
As Shearer notes of then FSA chairman Callum McCarthy:
I invited him to visit Singer & Friedlander to see at first hand how the FSA regulated what I called "trivia and minutiae" and paid no regard to the possibility of "systemic failure of the banks" (which was one of only two of the FSA’s objectives).It was, in hindsight, inevitable. If you staff the FSA with moderately intelligent but unimaginative drones and then micro-manage them, they're going to focus on the ticking or crossing of many small boxes on pages and pages of forms, with a short summary essay at the end. They're not going to take the time to look at the big picture and ask "what if" despite the fact that this is exactly what a national-level financial services authority should be doing. Where's the personal job security and professional advancement in that? They have no skin in the gain. After all, no-one was going to be fired even if half the UK banking sector went "kablooie".
If you want effective regulation you need to hire really good people, pay them very well, but defer most of their pay over 5-10 years and have it at risk in the case of failure or significant fraud in the institutes they regulate. Maybe even pay them in restricted share units of the institutes they regulate. I want very sharp regulators who feel that their testicles are on an anvil, and that the taxpaying public is nearby with a large hammer. In the case of Hector Sants, I'd like this to be literally true -- assuming that he can find the organs in question.