Originally published on 10 May 2010
The FSA published its Business Plan for 2010/11 on 17 March,
2010. The old philosophy of the "light-touch"
retrospective approach with its focus on systems and controls is
discarded in favour of a more proactive outcomes-based approach.
This highlights a willingness on the part of the regulatory
authorities to intervene earlier than was previously the
case.
Whether the FSA will ever be able to carry out this plan and what
impact the new Financial Services Act will have very much depends
on the effect of the general election result. The Conservatives
have proposed radical change to the regulatory framework,
abolishing the current tripartite system and giving the Bank of
England responsibility for maintaining financial stability.
The Financial Services Act contains an array of measures born out
of discussion and debate arising from the credit crisis and broader
powers consistent with its new proactive philosophy. There are
provisions that relate to recovery and resolution plans or
"living wills", controls over executive remuneration, new
FSA powers to suspend firms and individuals from carrying out
regulated activities and ever broader information gathering
powers.
The Act gives the FSA an additional regulatory objective of
contributing to the protection and enhancement of the stability of
the UK financial system. Together with broader rule making powers
the Treasury or the FSA will be able to implement binding rules
without further parliamentary approval or scrutiny, the loss of
which should, in our view, be considered very carefully.
It is a natural response to the near catastrophic failure of the
financial system to look hard at deficiencies in the regulatory
framework which may have contributed to the crisis. The reality is
that none of the firms, as far as we are aware, which were
supported by the British taxpayer, directly or indirectly, were
guilty of breaching any regulation at least in any way which may
have materially contributed to the crisis. In addition, it would be
a perverse result if any regulator would have had the vision and
tenacity to step in and prevent financial institutions from making
the business decisions which led to their downfall –
aggressive expansion, massive leverage, risky lending - when the
highly paid senior management entrusted by shareholders with
running the institutions failed to see the flaws in their business
models and execution. This reality is relevant to the regulatory
reforms now being considered globally, and in our view the focus is
rightly on the quantity and quality of capital required to support
a bank's activities and on structural changes designed to
protect the "utility" from the "casino". The
FSA's Business Plan emphasises the retention of principles
based regulation but with subtle refinement focusing on outcomes
and not inputs. It would, in our view, be dangerously naive for
anyone to expect changes to prudential regulation to turn
regulators into sophisticated business and risk managers, however
worthy the intention.
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