Leveson failed to learn from credit crisis


There is extreme reluctance to believe that regulatory lessons from one industry can be applied in others; that we can learn about financial services from electricity, or about pharmaceuticals from airlines. But there are often relevant parallels.

No one who has read the evidence to Lord Justice Leveson’s inquiry into British press standards can doubt that the behaviour of certain newspapers was disgraceful and that the self-regulatory Press Complaints Commission proved useless. But then the judge adopted the lawyer’s stance of believing that bad outcomes are the result of bad procedure and that the solution lies in better procedure – a perspective shared by his critics as well as his supporters.

There are many similarities between this response to the press crisis of 2011 and the reactions to the financial crisis of 2008. In both cases the demand for better processes and new rules largely missed the point. The real problem was not with rules and processes but with the political context in which they were applied.

The press behaviour that aroused the most justified criticism was phone hacking designed to reveal the private lives of people in the news. As many commentators have noted, such activity was already illegal. Nevertheless, it happened, apparently on a wide scale. The journalists involved thought they would get away with it, and they were mostly right.

Until July 2011. What changed was not law or regulation but the political climate. Before then, politicians regarded a close relationship with sections of the press – and in particular with those parts of it associated with Rupert Murdoch – as essential to gaining and retaining office. After that date, a close relationship with press barons became a liability. Wide-ranging investigation of journalistic wrongdoing and prosecutions followed.

The analogy with British financial services regulation is again apparent. In July 2012, the Bank of England and the Financial Services Authority were able to insist on the resignation of Bob Diamond as chief executive of Barclays, and require the bank to make fundamental changes in its approach to business. This was not because the regulators had obtained new information about the bank: the Libor rate-rigging scandal and other events that attracted justified criticism had been known to them for some time. Nor was their action facilitated by any change in regulatory rules or organisation. The power to blackball bank directors had always existed. The difference was the shift in political opinion that followed the public revelation of extensive misconduct.

But in financial services as in the newspaper industry, it is the mechanics and institutions of regulation that grab attention. What should be the composition and legal standing of a body that supervises the press? Should bank supervision be located in the central bank or some other place? Then we devise rules that would have prevented the latest crisis from happening if they had existed a decade earlier. The enduring metaphor of regulatory policy is the noise of stable doors being firmly shut behind the horse.

The content of rule books, the sanctions available to regulators, and the composition of regulatory bodies are not trivial issues. But the principal reason both press and financial services regulation were lax is that political leaders wanted them to be lax.

In one case this is because they were intimidated by the perceived power of the press; in the other because they held an exaggerated view of the economic importance of the financial services industry and of the abilities of those who led it.

Regulation always operates in a political context. And so it should. Regulation is the means by which big industries are required to address wide public-policy concerns, and in a democratic society politics is the means by which these concerns are expressed. Independence should mean regulators are free to take day-to-day decisions free of political interference, not that regulators are free to define policy directions for themselves.

From Fukushima or press scandals, from the Challenger space shuttle or the financial crisis, we tend to blame the machine and the operatives for systems accidents. But real responsibility generally lies higher.

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