The Financial Services Authority, once regarded as the model of modern regulatory sophistication, has fallen on hard times.
Slated for complete disbandment by the U.K.’s Conservative Party before last month’s general election, it will now survive thanks to compromises forged by the new coalition government of Prime Minister David Cameron and Deputy Prime Minister Nick Clegg.
But the FSA will not emerge unscathed.
Under new — and still relatively hazy — plans revealed by the incoming U.K. administration, the Bank of England will now oversee financial regulation, effectively ending the so-called tripartite power-sharing arrangement that split responsibility among the FSA, Bank of England and Treasury.
The Bank will now be responsible for monitoring systemic risk and ensuring macroprudential stability as the government attempts to close the gaps exposed by the banking crisis.
“The new system will look more similar to those of other countries, which usually have a separation between monetary policy and regulation/supervision,” says David Green, a former FSA official and current adviser on international affairs to the Financial Reporting Council, an independent U.K. regulator charged with promoting good corporate governance. “It is a much more mainstream approach.”
The FSA, chaired by Adair Turner, will be limited to regulating the banking industry, asset management and the capital markets, and its judgements will now be overseen by the Bank of England — a response to its self-confessed failure to control Britain’s once-thriving banking industry. But many industry insiders say they believe it’s the right move.
“The circle has been squared by not abolishing the FSA but putting the Bank of England in as its board — in effect, make the FSA a subsidiary of the Bank,” says Guy Sears, a director at the Investment Management Association, a London-based trade outfit. He adds that the new measures will restore the Bank of England to its position at the top of the regulatory pecking order.
Nick Beecroft, senior foreign exchange consultant at Saxo Bank in London, says the old system is partly to blame for the extent of the U.K.’s recent banking woes. “The tripartite system was the biggest mistake New Labour made. It is part of the reason the U.K. suffered more than almost anyone else and its banks were in such a mess. Prior to that the Bank of England had done a good job for centuries.”
In practice, the Bank of England will see an expansion of its day-to-day role, and the FSA will focus on regulation of individual banks. What’s new is the Bank of England’s responsibility for macroprudential stability, a concept introduced in March 2009, following the credit crisis. The aim is to have one regulator considering the whole banking system and questions of systemic risk, rather than just individual banks. Under the old system set up by the Labour government under Tony Blair, the FSA had responsibility for supervision of the banks but no responsibility for the stability of the system. The Bank of England didn’t supervise banks, but it had responsibility for stability. The gap was exposed by the crisis.
There are other reasons for the FSA’s comedown: The tripartite system was the bedrock of New Labour’s regulatory structure, and the Conservatives were eager to dismantle that legacy. One senior lawyer suggests that the Bank of England is simply seen as a more capable pair of hands — it attracts higher-caliber staff and has a better understanding of the banking system.
The FSA has been saved by the need for compromise by the Conservatives with their new coalition partners, the Liberal Democrats. Most notably, Business secretary Vince Cable of the Liberal Democrats had never supported the dumping of the FSA. City insiders had always felt the dismantling of the FSA to be nakedly political, as any new regulatory authority was likely to have looked much the same.
For those being regulated there is likely to be little immediate change. Roger Doig, credit analyst at Schroders, says the central bank’s oversight of capital adequacy as part of its new systemic stability brief will present a far thornier issue for the banks, which may be forced to carry more capital in stressed situations.
“There will be changes to the amount and quality of capital required,” says Doig. “Banks will be faced with a choice of deleveraging or raising capital. To justify the latter, they will have to increase the cost of credit for customers, which is the stick they are using against politicians when calling for the calibration of the new requirements to be eased. The end point will be a more stable banking system, but the transition process may be volatile. ”
