On September 30, the UK Financial Services Authority (FSA) published a response to the feedback it has received on the Turner Review and the related discussion paper DP09/2, both published on March 18 (as reported in the March 20 edition of Corporate and Financial Weekly Digest). The Turner Review, led by Lord Turner, the FSA Chairman, considered the underlying causes of the financial crisis and recommended a regulatory response stressing the importance of future regulation and supervision based on a different approach.

The response sets out the FSA’s analysis of the feedback received and reports on the progress made since March in implementing changes and in achieving international agreement. Generally, the feedback received agreed with the analysis set out in the Turner Review and the broad approach it proposed. The majority of respondents offered clear support for the analysis of causes, the main recommendations and the FSA’s supervisory approach as detailed in the Turner Review and the discussion paper.

The feedback raised the following key issues:

  • Respondents agreed upon the need for an international approach when looking at policy options.
  • Respondents raised concerns that any measures implemented by the UK alone could damage London’s competitiveness in the global market.
  • Large firms were opposed to increasing requirements for systemically important firms.
  • Respondents stated an impact assessment of the ”whole package” of reform is needed.

The issue of most concern for respondents was the need for international consistency in formulating and implementing the regulatory policy response to the global financial crisis.

In the foreword to the response, Lord Turner stated that “wider debate has continued on the overall approach to financial regulation and the FSA’s own thinking has continued to evolve”. The FSA considers that some issues which were covered only to a limited extent in the Turner Review now require a more detailed analysis. As a result, the FSA intends to publish a further discussion paper in October which will focus on key areas, including:

  • Systemically important firms—the Group of Twenty Finance Ministers and Central Bank Governors has called for higher prudential standards for systemically important firms, and thus the FSA intends to address in particular the issues related to how to identify and deal with such firms, what policy tools are available and how they might be applied.
  • Cumulative impact of capital and liquidity reforms—There is a need for a comprehensive analysis of the combined impact of the various elements of regulatory reform which have been proposed or are under consideration. These elements include more robust capital and liquidity requirements, changes to trading book capital and countercyclical capital. The changes will have a significant impact on leverage and maturity transformation in the banking systems, and thus the FSA will have to consider methodologies for making trade-offs between the costs of intermediation and financial stability.

The full text of the FSA’s response can be found here