By Martin Tillier
When I started contributing to NASDAQ.com I didn’t intend to write about scandals and regulatory issues. I still don’t, but events keep taking over.
As details emerge about the collapse of PFGBest, it seems that it is a different situation than the troubles of JP Morgan (JPM) and the LIBOR fixing accusations against Barclays (BCM). This looks more like an old fashioned Ponzi scheme. Bank accounts that were reported to have a balance of $225 million actually held around $5 million. Clients’ money has gone missing. Whereas JPM and Barclays can be accused of a failure to oversee their employees, it appears that PFGBest was just one giant scam.
It is human nature to look for somebody to blame when things go wrong, and in this case ‘the regulators’ are no doubt ripe for some criticism. In January of this year, the CFTC (Commodity Futures Trading Commission) said that there was no evidence of "material breaches of customer funds protection requirements" in an investigation of brokers following the collapse of MF Global.
In the complaint filed in court, however, the CFTC cites evidence of shortfalls dating back to at least 2010. The NFA (National Futures Association), rather than the CFTC, was the main regulator for the firm. According to a report by Reuters suspicions were raised when PFG resisted a move to electronic reporting of customer funds.
What? . . . wait . . . a complex industry is moving to electronic monitoring of bank accounts in 2012, a change my 76 year old father in law made about 5 years ago? No wonder there are problems.
To me, though, the root cause is not in the specifics. It is not over-regulation or under-regulation. Although each individual regulator can legitimately claim to be underfunded and understaffed, I don’t think the real problem is even money. The system of oversight is just too complicated. Retail broker/dealers are overseen by the self regulatory body FINRA, for example, but also by the SEC, the CFTC, the MSRB and for all anybody knows, a host of others. The alphabet soup of regulatory agencies reminds me of boxing. While the WBO, WBA, WBC et al fought for control, the public lost faith and interest in the sport. We cannot afford for the same thing to happen to financial markets.
I had hoped that the movement towards financial reform that led to Dodd-Frank would address the issue. Instead it proposed another layer of regulation, the CFPB. The industry has always insisted on self-regulation, and when that fails the government creates a new regulator to oversee the regulators. Enough already!
One well funded and staffed body to oversee the financial services industry would lead to renewed faith in the industry, greater transparency and quite likely cost savings. It would have to have multiple departments to deal with today’s complex products and markets. It would have to have sweeping powers to investigate anybody associated with the industry. Most of all, it would have to be feared and respected by those whose living comes from finance. A big, powerful government body is scary to most Americans, and for good reason, but if we could recognize that it is needed if we are to stop lurching from crisis to crisis, we could at least begin the conversation as to how it should look. The alternative is bigger and bigger bowls of alphabet soup.
Martin Tillier has been dragged, kicking and screaming into the 21st century, and can now be followed on Twitter @MartinTillier and Facebook Martin Tillier.