John Kay - Finance System & Regulations

On Wednesday 12th (May 2010), John Kay gave a lecture on the finance system and regulations. One question from the audience was: If we went back in time with all our knowledge to 2006/2007, would we be able to prevent Lehman Brothers from declaring chapter 11? The answer was: “We don’t want to prevent Lehman Brothers to go bust, this is capitalism! We want the regulators to allow them to go bust without taking the entire system with them.”

This led to many questions on how to regulate such conglomerates? John Kay has the answer in favouring structural regulations. In conglomerates, different sectors as asset management, securities selling, market creation, etc... all have conflicts of interest. The new structural regulation will help to create non-interdependent small robust resilient networks which will form a big system. This will enable to regulate capital by removing the arbitrage element of spreading capital in different sectors that fall under different regulations. Furthermore, this will make it possible to increase accountability of the chiefs in big organisations.

A second question was regarding the stakeholder’s society growing stronger, and what impact would that have on the new regulations? John Kay talked about an un-focused public anger which creates the need to break the political influence on the financial market and vice-versa. Once more, the resolution is in separating and compartmenting the structure of conglomerates. An example would be to put in place narrow banking through segmentation: on one side, small individual investors, and on the other, ‘casino game floor’ for conglomerates.

A third question was how to solve regulation’s own problems of asymmetry and capture? The answer was once more in structural regulations: regulators would be experts in organisation’s structure rather than behaviour, they will be un-bias and consistent within different sectors.

Prudential caring for Asia

The success on the Prudential bid for AIA relies on more than finance.

AIG founded in Shanghai in 1919, is the only foreign insurance firm to have the privilege to operate independently, with not local joint-venture. Prudential on the other hand, in January 2005 acquired a 50:50 joint-venture with China CITIC.

With talks with China Regulatory Commission (CIRC), Thiam said he intends to keep its stakes in the joint-venture with China’s CITIC group. However, as both Prudential and AIA have separated JVs in India, the regulators made it clear that the company cannot have two licences.

The intention of Thiam to keep its stake with CITIC is well approved by China. This single, yet, important decision shows the understanding of Prudential towards China main goal: China’s local growth.

The successful story of L’Oréal is one of a few examples. L’Oréal professionally cherished and excelled at respecting China’s will: After moving to China, the French cosmetic company waited nine years before making local profit. Now it is one of the most successful brands in its type in China.

As numbers show, the Asian insurance market is about double digits growth through development and education. To maximise one future profit, it is vital for Prudential to work hand in hand with China’s government.