Regulating small firms

The current furore over FSA regulation of building societies is interesting. A whistle-blower alleges that

A culture of apathy and complacency marked the FSA in the period of its nadir, with anyone standing up against light-touch official policy criticised for rocking the boat and branded a troublemaker.

I have no idea of the truth of this, but three points are worth making.

• In a regulator, the status of staff depends to some extent on who they regulate. The big swinging dicks are the ones who regulate the biggest banks. Building societies are not glamourous, and hence the quality of regulator here may well have been lower than elsewhere.
  
• Many regulators are really quite bureaucratic. The scope for individual staff, especially line staff, to make decisions is limited. Anything of substance is likely to go up the chain of command. Therefore if there have been failures, it is the senior people who are likely to have been responsible.
  
• Building society supervisors are likely to be a conservative lot - even more conservative than bank supervisors. What they think is dangerous may be a rather large class - and one that includes some reasonable innovations.