BoE's Robert Jenkins says Investors must break their silence on financial reform

In an extraordinary speech, the Bank of England's Robert Jenkins called on investment fund managers to break their 'silence' on financial reform and to 'speak up' as they were needed to 'counterbalance the banks' otherwise the result of financial reform would be an even 'weaker system' than we have now.

For confirmation, just look at the US which passed the Dodd-Frank Act.  An Act written by and for Wall Street.

The Blob (aka politicians, financial regulators, banks and their lobbyists) used the momentum for reform after the financial crisis to substitute complex rules and regulatory supervision for transparency and market discipline.  In doing so, the Blob systematically weakened the financial system in the US.

Mr. Jenkins is warning that the same result could occur in the UK.

Fund managers have been accused of being “silent” and risked being seen as little different from investment bankers, in a warning from a top Bank of England policymaker. 

Robert Jenkins, a member of the Bank’s Financial Policy Committee (FPC), told an audience of senior fund managers that they had to “speak up” on bank reform or miss out on the “debate of a lifetime”. 

“You are the missing piece. What stakeholder group other than the investment management industry has the combination of financial expertise, credibility and clout sufficient to counterbalance the banks and so better shape the outcome of the debate? None. Also, no stakeholder group has been more silent,” said Mr Jenkins. 

In calling for the investors to counterbalance the banks, Mr. Jenkins is explicitly acknowledging that financial regulators are predisposed to favor the banks so as to avoid pushback from politicians.

This is a very important observation as under the FDR Framework, on which every developed country's financial system is based, financial regulators are suppose to be a counterbalance to Wall Street and the City.

Specifically, they are suppose to ensure that market participants have access to all the useful, relevant information in an appropriate, timely manner so that the market participants can independently assess any investment and make a fully informed investment decision.

Regular readers know that financial regulators failed to act as a counterbalance that ensured transparency and the result was a financial crisis.  Regulators let huge swaths of the financial system become opaque including 'black box' banks and 'brown paper bag' structured finance securities.

Now, the question is how to reform the financial system and return it to is roots in the philosophy of disclosure.

To do this requires talking not to Wall Street, the City and their army of lobbyists, but rather talking to the investors and the investors only!

The former City financier warned fund managers they risked being seen as little different from investment bankers if they continued to keep quiet on how to shape the finance industry. 

“At the end of the day you are guilty by association. You are members of the financial sector and the financial sector has wrought much damage. Bankers, money managers and, yes, financial regulators as well - in the eyes of the public we are all investment bankers now,” he said.... 

Mr. Jenkins correctly identifies the guilt of the money managers.

Recall how few lawsuits money managers filed against Wall Street and the City when it was clear that the investors whose money they lost suffered a loss as a result of illegal behavior.  For example, where are all the lawsuits related to Libor interest rate manipulation?

He warned that unless more investors spoke out on reform they would allow “the old financial structure” to be replaced by an even weaker system. 

“Its foundation is flawed, the walls are thin and the beams are brittle. You did not design it. You are not building it. But you and your clients will have to live in it,” he said.

Please re-read the highlighted text again as Mr. Jenkins is clearly saying that the UK is likely to repeat the US experience and pass the equivalent of Dodd-Frank that will systematically weaken the UK financial system.

Call this a race to being as investor unfriendly as possible.  A race that the US is currently leading with Dodd-Frank.

A race that no country can afford to win as it places maximum taxpayer money at risk for little in the way of benefit to the winning country.

Mr Jenkins comments come at a time of sweeping changes to financial regulation, as the Government prepares to push through new legislation governing the way banks and other financial firms can do business.

So far, the UK legislative and regulatory push is playing out just like Dodd-Frank.  Yes, I know that the UK substitutes ring-fencing for the Volcker Rule, but in the absence of requiring banks to provide ultra transparency both are fundamentally flawed and neither will reduce risk in the financial system or reduce the probability of the next bank bailout.

The question is will investors remind politicians and financial regulators that they expect transparency to be brought to all the opaque corners of the financial system and that financial regulators should be held responsible for insisting on the maximum amount of disclosure (it is the investors' decision what data being disclosed they want to look at)?