Enterprise Forum: Financial Amnesia

At the House of Lords for the latest Enterprise Forum we held a Panel Debate in partnership with the All-Party Parliamentary Group on Entrepreneurship and Financial Architecture.

The Forum was on ‘Financial Amnesia’ If the financial market forgets lessons from history, is effective regulation possible?

We asked: What are the causes and characteristics of Financial Amnesia? How do we identify the best way forward? Have any of the lessons been learned, and how are new Government measures going to produce different results?

Focusing on the recent Financial Amnesia Report by the Chartered Financial Analysts Society of the UK, (CFA UK).  We first heard from Sheetal Radia, CFA, founder of Financial Architecture and the report’s author. He framed the discussion, saying financial market participants seem doomed to repeat the same mistakes and regulators appear to have been ineffective in preventing failure. The recent crisis was a case of “déjà vu all over again” rather than being an unexpected event.

“Financial amnesia is when financial market participants forget (or behave as if they have forgotten) the lessons from financial history. Financial amnesia disarms individuals, the market and the regulator”

Sheetal gave an engaging presentation that was ideally pitched for the mixed audience of Parliamentarians, entrepreneurs and business owners, academics and finance professionals.

Sheetal identified the three key lessons that participants appear to forget:
Lesson 1: Innovation; the illusion of safety and ‘this time its different’

Innovation is usually a variation of a theme -  “The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version.” (Galbraith).

The expansion of credit plays a key role in fuelling ‘innovation’ while the creation of an illusion of safety results the continuation of unsustainable activity and risk taking. For example the ‘end of boom and bust’ was a fallacy. Sadly, it is never different.

Lesson 2: Regulated financial firms are prone to failure

Financial services firms, by acting in their own self-interest and in the interests of their shareholders, are supposed to impose market discipline. History demonstrates they commonly fail to act as expected either because of poor information, poor governance or flawed incentives. The financial sector is supposed to be the ‘brain of the economy’ but needs robust internal governance otherwise these firms are able to impose market discipline effectively and not trigger the moral hazard on the rest of society As even Alan Greenspan recently admitted, the market doesn’t know best!

Lesson 3: Ineffective regulation

The frequency of market failure places a greater onus on the regulator to be more effective in encouraging and imposing market discipline.  The inability of regulators to supervise and enforce effectively contributes to crisis.

Why do regulators fail? In essence they fail to supervise and monitor the regulations in place to ensure financial firms are behaving appropriately. In regulators also have structural and behavioural barriers that prevent them from being effective.

Much of the cause is human behaviour, as our behavioural traits create a spiral of activity when people follow the herd. It’s also due to cognitive dissonance, the way we see the world - our innate reluctance to change our point of view and keenness to maintain the status quo.

Of course ineffective regulation is key – but Sheetal argued there isn’t a perfect rule, ‘we don’t need more or different sets of regulations, far better to work harder to supervise those we already have’ saying also that ‘regulation is the last line of defence in the economy’.

He explained how crises have happened throughout history, although the one in 1929 was pivotal Following the 1929 crash, authorities realised the dangers of unfettered capitalism. However, by the 1970s and 1980s as the painful memories of this event faded, many of these effective regulations imposed following the 1929 crash were repealed; hence contributing in part to the most recent crisis.

Sheetal believes that capitalism didn’t fail but our and other nations’ system of governance did; the laws of demand and supply cannot work properly without an effective rule of law. We need to create an ‘institutional memory’ so we don’t forget the pain of this crisis. We must collectively avoid the ‘its different this time’ attitude – its not!

He asked why after a crisis Government always plans to create a new framework and set of rules. In fact, its vital to get better at enforcing the existing rules as well as create greater independence for regulators. Part of this must be improved internal governance.

Sheetal suggests we ‘create an environment where we have market command with effective control mechanisms’.  He said ‘financial amnesia is an embarrassment to our profession’. Sheetal’s solutions are:

Solution 1: Educate investment professionals to maintain and apply their financial memory

Solution 2: Consider the development of an ‘index’ to monitor credit growth and financial innovation

Solution 3: Encourage Boards of financial institutions to undertake an annual amnesia check

Solution 4: Encourage the regulator to:

emphasize supervision rather than regulation;

establish and operate supervisory processes that mitigate adverse behaviours;

aim for informed independence from market influence.

Dr John Potter then chaired  wide-ranging debate with excellent contributions from Lord Erroll, Chairman of the APPGE, and Dinah Bennett OBE as well as the other senior participants.

There was further discussion on human behaviour, which is clearly integral to all market activity.



John asked whether there was still ‘good’ debt and ‘bad’ debt, which Sheetal felt was a case of ‘good’ lenders and ‘bad’ lenders. It was pointed out not all lenders fell into the trap of lending to those unlikely to repay, but this was based on brave decisions – going against market behaviour, the group-think of the time.

Merlin Erroll commented that after 1929, risky and safe investment was separated, but the Act was later repealed. There are calls today for this to occur again by splitting up retail and investment banks. Perhaps if this had been the case, the riskier investment banks would simply have been allowed to fail?

But without ‘risky’ investment much of the infrastructure of society, the big engineering projects of the Victorian age, the railways for example, simply would not have been built.

John Potter summed up our discussion. Everyone had gained far greater understanding of how the financial framework should operate and the practical and achievable steps that Government could – should- take.

It was agreed we should urge policy makers that there are solutions to limit the impact of future crises, we need to ensure this is a collective issue not one just for the financial sector and Government. We need a thorough post mortem.

Hosted by the Earl of Erroll and Helene Martin Gee, we then enjoyed refreshments kindly sponsored by Financial Architecture and spent time continuing our discussions and meeting other debate participants.

For more information
please email: sheetalradia@thinkpositive.co.uk

http://www.financialarchitecture.co.uk/

Cocktails & Jazz at the Royal Garden

One of the certain highlights of the Pink Shoe calendar was this truly fabulous evening in aid of Save the Children Fund. Helene Martin Gee was event Chairman for the STC Kensington event, so of course she combined the fundraiser with a party for many of the marvelous Pink Shoe Ambassadors, who so kindly supported the charity.

At the Royal Garden Hotel we kicked off with cocktails, Champagne and Mohitos, and mingled with Kensington society in the Palace Suite, listening to jazz piano courtesy of Robin Phillips.

Helene welcomed guests, thanking them for coming to support and enjoy the evening, especially the volunteers and generous donors, including those who provided the fantastic silent auction lots. She thanked Event Patron Jeffrey Archer, whom she told us has raised over £41m for charity alongside his prolifically successful writing career, currently No 1 in the Best Seller lists of 11 countries! 

Then it was over to Jeffrey who gave a rousing speech, thanking all the generous sponsors, the Royal Garden Hotel and especially its staff who have worked hard throughout the year, having chosen Save the Children as their charity.

After also thanking Pierre Hermes Chocolates, Fifi Bijoux Jewellery and the other kind sponsors. Jeffrey inspired guests to generously donate, even as he was closing there began a stampede to place auction bids, sponsor health worker training and buy raffle chocolates!

Shahnaz Guivi presided over the Silent Auction which was a massive success, due to her hard work and the team of STC volunteers who were a perfect mix of friendly persistence and charm. Victoria Lyon Dean, STC regional manager was everywhere, ensuring things went without a hitch; with the charity team on hand to let people know about the vital work the charity does.

After a short film on Save the Children’s work we heard a little about how the monies raised would be spent. Our gallant MC for the evening was Lyndon Gee, who kept things running smoothly and further encouraged us all to keep giving, also auctioning off signed copies of Jeffrey’s latest book, generously donated and newly signed by the author.

Over a sumptuous mezze at our tables, we enjoyed brilliant jazz from 'The Bright Young Band' during the tasting supper from head chef Steve Munkley and his brigade –rounded off with a pudding buffet to die for, we were spoiled for choice from the breathtaking array. So good was the food we persuaded the kitchen team to take a bow! Whilst Martin Myers and his banqueting team ensured we were looked after royally.

Along with Julia Bowles and her party, Pink Shoe tables were hosted by Pauline Crawford, Atiti Sosimi and Diane Shawe, with their gracious guests. Helene sent huge thanks to everyone who gave so much, to the donors and buyers of the wonderful auction lots, to the hotel and staff for their magnificent sponsorship and for the excellent food and superlative service, and to the tireless event committee for pulling it all together.

Most importantly, the event has now raised £20,000! This will train 200 health workers around the world. Each health worker will go on to treat 5,000 children in a year, so this event has literally helped save the lives of 1,000,000 children worldwide. Thank you!!

Pink Shoes at the Races

At Aintree for Liverpool Day, Úna Mcbride organised a marvellous day out!

We all dressed to the nines and watched the parade of Liverpool Lovelies arriving in an array of outfits, both maxi length and very short...All the ladies seemed to be feeling good and were putting their best feet forwards.

Our first stop was of course the Pink Bar! Clearly made for us, and a stopping place for many other race goers.

Then it was over to the Sun Lock Restaurant for Champagne and the first of our lovely meals.

We watched some racing and in no time at all it was time for a superb 3-course lunch, where we met many other race goers and exchanged tips, shared ideas and swapped business cards.

If I give the impression this was a never-ending round of fine food & wine, entertainment and excellent company it would be right!

From the private terrace we had amazing views of the racing too and some of us actually won...

Alongside this we met many interesting business people from the North West and further afield. It was a memorable day and we will definitely return next year!