The Financial Services Authority—founded by ex-chancellor Gordon Brown in May 1997—is widely regarded as having made a dog’s breakfast of regulating the UK’s financial sector over the past decade.
The Tories pledged to scrap the FSA before they gained power in May, a commitment which together with talk of breaking up “too big to fail” banks such as Barclays and Royal Bank of Scotland, played a part in their electoral success.
The FSA’s Achilles heel was that, taking its lead from laissez-faire ideologues, it had a tendency to put promoting London as a financial centre ahead of ensuring institutions based there were properly managed, acted responsibly or treated customers fairly.
Its ‘light touch’ and ‘limited touch’ approach meant that important matters, such as whether UK banks were actually solvent or taking outrageous risks, got sidelined or ignored. And its shocking inability to protect consumers from the more rapacious financial firms earned it the consistent nickname the “Fundamentally Supine Authority”.
The regulator may lately have found a few teeth—for example, it fined JP Morgan £33.32m for failing to protect its clients' money by lumping it in with its own, and later fined Goldman Sachs £17.5m for failing to disclose that CDO salesman Fabrice Tourre was being investigated by the SEC—but unfortunately it put the dentures in four years too late.
I am therefore surprised to hear there are some in the financial establishment who don't want the FSA to be abolished after all. (Or perhaps I shouldn't be surprised—maybe some City folk rather like a feeble regulator and would do anything to avoid re-regulation a la Dodd-Frank Act). Their fear is chancellor George Osborne will replace the FSA with something altogether more consumer-oriented.
The UK Treasury's proposals [PDF, 1.27 MB] for reshaping the regulatory landscape, published on July 26, have therefore had a mixed reception in the City. Interested parties have been given until October 18 to respond, ahead of draft legislation next year.
In an early response (which also included a useful summary of proposed changes) the lawyers Freshfields Bruckhaus Deringer said [PDF, 110 KB]:
“There [are] clear benefits in having prudential regulation and supervision housed within the Bank of England … But the new regime will throw up new challenges. Creating separate prudential and conduct of business regulators will require the boundary between these two areas of regulation to be defined in a way that has not been necessary while the FSA has been responsible for both."
The PR firm and regulatory consultancy Lansons Communications slammed the Treasury's paper for “signally failing to provide the rationale for reshaping the regulatory landscape" as well as for being sloppily drafted.
Lansons took issue with claims that the Bank of England, which will take on some of the FSA’s functions, has a “judgmental style and culture better suited to prudential regulatory work”, and its 'assertion' that the “FSA is considered to have not been judgmental enough and prone to a “tick-box” approach.” Lansons claimed the FSA had, in fact, been judgemental in the extreme, and the Bank could no longer assume a "raised eyebrow" from the governor would prompt a bank to amend its ways.
The UK government wants the proposed Consumer Protection & Markets Authority to be “tougher, more proactive and more focused” than the FSA was. But this did not please Lansons either.
“So the CPMA is to be a tough and overt consumer champion. Sadly, public policy requires more subtle judgments than simply hyperbole spiralling ever higher … There is only good and effective supervision. Anything less is incompetent; anything more is an abuse of power.
Even in the post-crash world, in which market fundamentalism is discredited, Lansons seems to believe markets should reign supreme and questioned whether the FSA should be scrapped at all.
“The objective of regulation should be clean and effective markets so the CPMA should be an effective market champion, not a consumer champion: consumer outcomes will be optimized when the market is as efficient as we can make it."
I thought that such thinking had been disproven by the crisis. There is no denying that the transition from the FSA's failed approach to the coalition government's proposed alternative is fraught with danger. However I, for one, am a little surprised that the FSA still has cheerleaders in the City.
Further reading on future financial regulation and regulatory reform
- Viewpoint: Viral Acharya and Julian Franks, Regulation after the Crash
- Why Organizations Need to be Regulated—Lessons from History, by Bridget Hutter
- Principles versus Rules in Financial Supervision—Is There One Superior Approach? by Mark Quintyn
- Is corporate culture where the danger lies, and should regulators get involved? by Anthony Harrington [blog post]
Tags: Bank of England , financial crisis , Financial Services Authority (FSA) , Lansons Communications , regulation , risk , UK