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.