1. Lessons from the British Experience and History Professor Leslie Hannah November 2009 Investor Protection in China

2. Slide 2 Agenda What lessons have we learned from the financial crisis? What makes the UK special? Free Market and Regulatory Traditions Why things have changed What is to be done

3. Slide 3 What lessons have we learned? The Financial Crisis has caused us to question everything! No longer can we be confident that institutions, markets and rules will work in the way we expected Our attempts at regulation, like Basel II, have turned out to be major mistakes We are finding it difficult to learn from our own experience Many of us feel that China can now teach us

4. Slide 4 Distinctive features of the UK 1989-2009 Medium sized economy, but large financial centre Centre of international markets, dominated by foreigners History of self-regulation Increasingly subject to European laws and guidelines MiFID is now influential in policy Very different from China

5. Slide 5 Economic Traditions Within Europe, the British are the key advocates of a free market approach Stock Exchange, Lloyds (insurance)and banks were historically self-regulating with very little government influence Brands were a guarantee of quality “The Englishman’s word is his bond” Regulation is costly and so should be minimised

6. Slide 6 All this changed because Complexity increased but leaders didn’t understand risks Accountants, credit rating agencies and credit insurers didn’t do their jobs New regulations didn’t work eg Basel II – unforeseen side-effects Governments were forced to ignore rules to prevent collapse For example, increasing compensation limits above those promised Rescuing insolvent? as well as illiquid banks

7. Slide 7 None of this should have been a surprise We have seen it all before 1930s financial crisis provoked the same reactions Some good and some bad responses Good: SEC requiring quoted companies to publish accounts Bad: Regulation Q (do we really want to fix maximum interest rates to bank depositors?) Not sure: Glass Steagall (ten years ago considered bad, now a serious option) Many later crises since: similar responses

8. Slide 8 What will happen next? We don’t know! In the past, politicians felt “we have to do something ” Today there are similar feelings and something will be done But it may be stupid! And …… Increase instability Create rewards that are disapproved of

9. Slide 9 Options being discussed A ‘Tobin’ Tax Restrictions on bonus Increasing regulation of hedge funds Better rules for preventing conflicts of interest Clearer accounting guidelines to prevent ‘off balance sheet’ accounting Transparency and better information flows A mixture of good and bad?

10. Slide 10 Criticisms of Regulators “we should not conclude that more regulation is the solution if regulators are the problem” Criticisms have been: Incapacity – labour turnover, lack of expertise, bad management Corruption? Or conflict of interest/regulatory capture? Tripartite system has not worked

11. Slide 11 Some Real Issues: The Madoff Case Problem Specialist blindness (“to a hammer, everything is a nail”) Regulator wrongly Investigated front running Madoff was respected and influential ‘Whistle blowers’ were not trusted Madoff crime Ponzi scheme: paying returns from new funds, rather than earnings In fact Madoff lied

12. Slide 12 Misselling Protecting investors requires transparency ‘Independent’ financial advisers (IFAs) were not really independent In the past, they were forced to declare whether they were acting for one company only From 2013 IFAs will no longer be allowed to take commissions from investments and will have to charge fixed fees Reflects MiFID guidelines

13. Thank you

14. Questions and Discussion