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This is the most important topic for our democracy. What is the constitutional position of regulators? Are they a 4th branch of the State or subsidiary to the existing 3 (executive, legislature, law)? Amazingly no-one knows and modern constitutional law textbooks make no mention. Is the spirit of Magna Carta which set in train the restraint of arbitrary questionable power over us dead when people we have no ability to hire and fire rule our lives in ever greater minute detail?

Their reach. Our lives these days are shaped in the UK (mut. mut. elsewhere) by the likes of OfCom, Ofgem, ONR, Ofwat, ASA, BBFC, CMA, EHRC, GBGB, ISPO, OGA, SHC, CAA, ORR, CQC, NHSI, CNHC, GCC, FCA, PSR, PRA, EA – in total 90 regulators in the UK :-O And that’s before we mention quangos (NDPB’s non-departmental public bodies) which in the UK employed 111,000 in 2009. As we heard in LFP112 the FCA is currently proposing to de-democratise P2P. How can they have these powers? Who are they to remove your freedom or mine. I mean that sincerely – its one thing if parliament removes our freedoms, thats bad enough but at least we can vote the government out. We have no such choice when it comes to the FCA or any of the other proli9ferating regulators.

Their cost. Furthermore all this bureaucracy and micromanagement of our lives does not come cheap. In UK-FS the cost of BoE/PRA/FCA has increased six-fold since 2000 The cost of  the 90 regulators is direct expenditure of £4bn and indirectly are believed to cost industry £100bn p.a. to comply (source: Short-Guide-to-Regulation.pdf">National Audit Office).

Does it work? Lord Turner in LFP065 agreed w/r/t FS with Niall Ferguson’s “excessively complex regulation has become the disease for which it purports to be the cure”. John Kay in LFP055 also felt, like I, that in FS this new approach was leading to more crises not fewer.

Asymmetric risk profile of regulators. In essence there is no cost to retraining Gulliver’s freedom down with one more thread, one more paragraph of regulation but they run a huge risk if Gulliver goes on a bender and trashes the local village. There is little downside for them in the short term in reducing the freedom of citizens to do what the hell they want. However when something goes wrong – and it always does – there is hysteria and political calls for public flogging of regulators. What would you do in those circs if you worked in a regulator?

150x150.jpg" alt="" width="150" height="150">Sir Paul Tucker not only has 34yrs experience at the BoE, as well as roles on the broader banking stage, he is now a research fellow at Harvard, and chairs the Systemic Risk Council a body set up in 2012 of wise elders such as Paul Volcker, Lord Turner, Jean-Claude Trichet, Paul O’Neill, John Reed and many more who advise current regulators. All of this in itself would be more than sufficient to have clear insights into regulation per se. However above and beyond all this Paul has spent several years working on a super-impressive tome called “Unelected Power – The Quest for Legitimacy in Central Banking and the Regulatory State” and has thus been thinking super-deeply about the topic. The book itself is well over 500pp with an astonishing 30pp bibliography and is guaranteed to become a reference work in this topic. None less than Paul Volcker says of the book “Paul Tucker has written a most timely and thoughtful analysis of the role of independent agencies in democratic societies.”

Paul is also not arguing from any position of “leave it to the mandarins” as cynics might think. Both he and the governor Mervyn King argued against the BoE being given excessively enhanced powers post-crisis. He has said “Too much govt power lies in the hands of unelected regulators” and would have subtitled the book “How technocracy should retreat to preserve our system of government and in its own interests”. Another comment I warmed to was “policy makers should refrain from participating in many other and broader issues confronting their societies”.

So it’s a super-important episode for us all as citizens let alone for the development of Fintech and FS. And a super long intro to the show notes which I will wrap up with a quote from inside the cover of the book:

“Unelected Power lays out the principles needed to ensure that central bankers, technocrats, regulators, and other agents of the administrative state remain stewards of the common good and do not become overmighty citizens…Tucker explores the necessary conditions for delegated but politically insulated power to be legitimate in the eyes of constitutional democracy and the rule of law. Tucker explains how the regulatory state need not be a fourth branch of government free to steer by its own lights, and how central bankers can emulate the best of judicial self-restraint and become models of dispersed power. Like it or not, unelected power has become a hallmark of modern government. This critically important book shows how to harness it to the people’s purposes.”

Topics discussed include:

• I wonder whether Wolverhampton is the centre of world control
• Football
• Paul’s career including Hong Kong
• Basel’s origins in 1974 Herstatt crisis “daylight credit exposures”
• “the big change in our adult lifetime in Europe is the shift away from a model of State intervention based on public ownership and control to privatisation and regulation.”
• “the privatisation of near-monopolies and the regulation of them as utilities”
• the rationale for this re stability of outlook less affected by the political cycle
• whilst insurance regulation goes back to the 19thC everywhere, in the UK banking regulation doesn’t have a statutory form until the mid 1970s!
• it came in with the secondary banking crisis and as a result of EU law…
• what happened with the secondary crisis and how there were holes in the informal regulatory oversight of the BoE
• by 2007 the focus of the FSA had shifted from this to whether customers were getting a good service
• Byzantine Empire regulatory structure echoed for a thousand years
• self-regulation – when it works
• background to Big Bang
• the missed opportunity to create an SEC in the 1980s
• the problem with the SROs
• the over-reaction re the overly ambitious remit of the FSA
• the FSA
• central banking and supervision
• “the Labour government did a good job in the way it designed the BoE as a monetary policy body”
• however the changes to regulation weren’t particularly debated, they were just announced
• the real reason Eddie George (the then governor of the BoE) was annoyed in 1997/98
• “one of the themes of my book is don’t delegate power to technocrats without public debate”
• Paul’s talk on youtube “LSE Events: Unelected Power: the quest for legitimacy in central banking and the regulatory state”
• in some regulators there is not a committee making a decision but one person! (esp in utility regulators)
• the day this was recorded OfCom made a recommendation to government about the regulation of social media platforms – one person’s decision!
• [MB: Not on the podcast, but having looked into this later myself it seems to me tp be another example of “regulator regulates the people” – FB, Twitter et al do not produce content – you and I do…]
• the benefit of voting as with the BoE with interest rates where votes are published along with the minority opinion
• what regulations really are [check it out at 27:15]
• the South Sea Company, the Bank of England and politics
• how long it takes to regulate a culture
• the need to understand the market by direct experience rather than “distant bureaucracy”
• balancing closeness and distance from the regulated industry
• regulation has grown-up in an unprincipled way
• we need principles for regulation per se [some are suggested in Paul’s book]
• three types of regulatory distance from government – completely insulated (eg Bundesbank), semi-insulated (need annual budgets approved) and when “at beck and call” (Executive Agencies in the UK)
• France has taken the lead in coming up with principles and implementing them
• the need to find a vocabulary that make sense to regular people
• regulators, regulation, and regulating
• secondary legislation and the reaction
• the need for clear objectives
• what to do when you can’t
• the movement in the FSA from disclosure enforcement to wanting to regulate products (which relates entirely to the current FCA/P2P hoo-ha)
• Paul’s advice to the FSA in re
• “we ended up with a halfway house, there was next to no public debate about it”
• how the SEC copes with differing objectives and emphases changing
• strategy steers versus long shopping lists
• the ever-increasing length of regulation
• people are less inclined to follow the spirit of rules than they were
• the culture of trying to stop anything going wrong
• big picture versus detail/certainty
• common law and restrained judges in the UK
• are regulators under the triangle of branches of the state or part of a new square?
• congress blaming regulators whereas the solution lies with congress!
• “politicians have discovered that its quite convenient for them  in the short run to shift the decisions to unelected technocrats”
• in FS with Dodd-Frank an awful lot just says to the SEC et al “can you go and fix X”
• Sir Humphrey and Yes Minister in re
• the huge importance of select committees for our democracy re regulators
• constitutional law books totally overlook this huge change!!
• “We shouldn’t refer to them as regulations we should refer to them as laws because that’s what they are”
• Mervyn King and Paul Tucker’s positions on BoE powers in the changes post-2008
• Napoleonic Code and US legalism
• proportionality
• we’ve allowed the structure of governance in the UK to change profoundly in a casual way that doesn’t live up to our long heritage of careful consideration of governing
• the Systemic Risk Council’s work

And much much more

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