This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

Grenfell: Lessons for the Investment Community

 

The Grenfell Tower disaster shocked and saddened the whole of the UK. It leaves questions about how such a tragic series of failings, which led to the disaster, were allowed to happen. It is to be hoped that the forthcoming public enquiry will shed some light on this.

A recent article in the Financial Times, however, may offer some clues. And I believe that some of the failings have parallels that the financial services industry could learn from.

The article reports that building regulations in Scotland were tightened after a tower block fire in 1999. This has resulted in much less use of potentially combustible cladding north of the border than in England. No action to tighten regulations in England was taken, despite the warnings from the Scottish experience. Instead, there has been an aversion to “excessive regulation”. It also reports that the Conservative chair of the all-party parliamentary group on fire safety says that the group has been calling for a review of English building regulations for the past 11 years.

ShareSoc and its members have repeatedly warned government, the FCA and the LSE’s regulatory team that their regulatory regime has proven ineffective.

The article also highlights that the English building regulations have been ambiguous. Successive governments, since the 1980s, have preferred less prescriptive rules, supposedly to allow “innovation”. Unfortunately, the type of “innovation” that such an approach encourages is innovative ways of working around the rules, to minimise costs and maximise profits.

Ambiguity of financial services regulations is a bane of financial firms’ compliance departments and that ambiguity can lead to arbitrary and unnecessary constraints being imposed on their clients. These constraints depend on exactly how the compliance departments interpret the rules. Regulations need to be straightforward and unambiguous.

Some company directors and advisers seem adept at finding ways of skirting financial regulation, to the detriment of their investors.

Another potential failing highlighted in the article is that in England commercial “inspectors” can sign off on building works. In Scotland only local authorities can do so. To make matters worse, the fire risk assessment function was delegated from local fire services to building owners and landlords.

Subcontracting regulatory enforcement to commercial organisations leads to conflicts of interest which, in turn, can lead to lax enforcement. Investors in the AIM market will be only too well aware of this problem, whereby a) NOMADs paid for by clients subject to AIM regulation are supposed to be ensuring those clients’ compliance; b) independence of the LSE’s own regulatory function for AIM is conflicted by the LSE’s interest in growing AIM & maximising fee income. A truly independent body, such as the FCA, should be undertaking market regulation.

 

One of ShareSoc’s core aims is to improve the regulatory landscape for individual investors and we will work tirelessly to do so. Please join ShareSoc, if you have not already done so, to add weight to our voice and ensure that we have the resources we need to be effective.

 

Mark Bentley

3 Comments
  1. John Kingham says:

    Another example of the failure of commercial inspectors is the credit rating agencies in the run up to the financial crisis. In essence, they stamped mountains of sub-prime-filled CDO junk as triple-A because if they didn’t, the banks would go to a competitor who would. I’m sure there are many more examples.

  2. Stephen Burke says:

    I think there’s a general thread running through most disasters, including financial ones. There are usually people pointing out the risks in advance, but they get dismissed on the basis that the risk is theoretical and nothing has ever gone wrong in practice. It seems to be a basic feature of psychology that people can’t believe in the possibility of something without it actually happening. The only counterexample I can think of is the millennium bug, and that’s more often ridiculed than cited as a rational response to a potential risk. Conversely, after something happens the perception is usually that the chance of another disaster is practically a certainty, e.g. people being evacuated from other tower blocks at a few hours notice – in the financial case that means drastic changes in regulation rushed through at short notice.

  3. cliffw8 says:

    I thought the FT article was one of the finest I have seen. It explained the issues very well. It illustrated the points with very helpful diagrams and good graphs. The Scottish data was very interesting, but I would have liked to have seen more benchmarked data from Europe and overseas – it simply said “Some countries — notably the US — have in effect prohibited the installation of the type of cladding fitted to Grenfell on high-rise blocks for a long time. The latest country to take this step was the United Arab Emirates in 2013 following several large fires.”

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