On 18 June, consultation closed on the Turner Review and the FSA Discussion Paper that accompanied it. The major UK industry associations have all published their detailed responses. Unsurprisingly, they focused on different aspects of the review. Robert Finney and Emma Radmore look at some of the most powerful messages in the responses.

The themes

The themes of the Review and Discussion Paper on which many responses focused included:

  • drivers of the crisis;
  • regulatory co-operation;
  • systemically important firms;
  • reforms: banks versus other market participants;
  • rescue packages;
  • supervisory structures;
  • credit rating agencies.

There is general agreement on reforms to capital and liquidity requirements for banks. This article concentrates on comments from the wider market. We focus on responses from the fund management industry (IMA and AIMA), investment banking (LIBA), derivatives (ISDA) and insurance (ABI).

Drivers of the crisis

Non-banking sector respondents stress that the crisis was not caused by their constituencies. They explain how the structures, business models and behaviours of their membership differ from the models of the banks and lenders at the heart of the crisis, so solutions necessary for banks are unlikely to be necessary for other financial market players, some of whom had suffered because of banks’ actions.

AIMA in particular welcomes FSA’s recognition that hedge funds are not to blame for the crisis and urges FSA to continue to make its views clear in Europe, given the controversial proposal for a Directive for Alternative Investment Fund Managers.

Several respondents point out that, although the finger of blame points to the lending practices of banks and banklike institutions, no-one had blamed significant breaches of regulation. The logical conclusion must be, then, that regulation was wholly inadequate.

Regulatory co-operation

Respondents agree that co-operation is key, and encourage co-operation on three fronts:

  • between UK regulators: one domestic issue at the heart of current political debate is the tri-partite system and whether the Bank of England should get, or take back, powers of macro-prudential supervision over banks. No response highlights this; indeed, all seem to assume a largely unchanged role for FSA;
  • within Europe: respondents generally support colleges of supervisors, and have no objection to the EU’s plans, confirmed since publication of the Turner Review, to strengthen European supervisory mechanics. However, some responses recognise the tensions between home and host state supervisors on cross-border issues. ABI, though, criticised FSA for its lack of willingness to work with the current branch passport supervisory structure;
  • internationally: again, it is a common theme that the crisis is not of itself a European problem, so solutions should be as global as possible.

Several associations are concerned at FSA’s hints it might go out on a limb if Europe and international regulators seemed to be dragging their feet.

Systemically important firms

Most respondents appreciate FSA’s reasons for not pigeonholing firms but instead determining whether a firm or a sector is systemically important and so merits closer supervision. LIBA comments the UK must take care not to make unnecessary changes that would make it a less attractive venue for business. It highlights this as one reason not to have a formal split of regulation between systemically important firms and others, since the risks systemically important firms pose can be dealt with in the existing framework.

On Glass-Steagall style segregation or ring-fencing of banking business, no respondent favours a ban on “utility banks” carrying out “commercial” activities. IMA gives reasons why such an approach would fail. Generally, responses favour capital requirements as a method of containing banks’ trading book risks, although there were many comments on how certain aspects of the proposals might work.

Reforms: banks versus other market participants

Following identification of crisis drivers, it is not surprising most associations think changes for banks should not apply to all institutions. Many pick up on Lord Turner’s comment about “social usefulness”. LIBA says firms must be able to serve the market’s legitimate needs without being concerned whether their activities were socially useful. Contrast calls by regulators, for example at this week’s BBA conference, for banks to behave in a more socially responsible manner.

AIMA argues there should be no unintended creation of barriers to continued operation of existing firms or entry of new firms into the market. There is general concern that measures should not stifle new participants in lower risk areas from bringing much needed capital and innovation to the markets. Innovation is not a “dirty” word. IMA wants a policy of low barriers to entry so new types of intermediary can enter key markets where banks have been unwilling to commit capital. ISDA’s concern is that reforms should not stifle trading innovation and access to trading markets. All non-banking trade associations want FSA to appreciate that their constituencies did not undertake the activities which led to the failure and should regulate them accordingly.

The Financial Services Consumer Panel alone argues for FSA to take fully within its remit all aspects of its regulated community’s business, including consumer credit.

Rescue packages

No respondent argues for a category of “too-big-to-fail” firm. IMA goes so far as to call the rescue packages “unhealthy” in terms of customer service and choice. Governments had to take the measures, but there is strong appetite (echoed by the European Commission) for getting banks to look after themselves again as soon as possible – witness the pressure by the EU Competition Commissioner, Neelie Kroes, reported extensively this week. Some point out the firms that have failed did so because of imprudent business practices – essentially, they brought about their own demise and did not deserve to be saved. ISDA argues that lack of capital was arguably not the reason for failure. AIMA claims that the few hedge fund managers who needed to wind down have done so in an orderly and successful manner. Respondents welcome the Banking Act 2009.

Supervisory structures

There was little discussion by trade association lobbyists on what should be the proper roles of the tri-partite authorities, and none argues that the Bank of England should take back banking supervisory powers.

Respondents see macro-prudential supervision as an area for significant improvement but stress it is critical to have appropriately knowledgeable FSA staff to understand firms’ business models and risk exposures properly. LIBA also comments on the lack of a proper definition of “macro-prudential”.

Some respondents worry that there appears to be no appreciation of the aggregate effects and costs to firms of all the reform measures. BBA says FSA must model the impact of measures overall before carrying on with the more radical aspects. Trade associations are concerned at the pace of change despite increasing press comment that reform is stalling and momentum being lost.

AIMA seeks greater consideration of market structure issues. It believes market structures and regulatory requirements should combine to control or mitigate the issues that arose in the Lehmans failure.

Respondents see no need for additional product regulation.

Credit rating agencies

No respondent objected to the (now agreed) policy of regulating CRAs.

Conclusion

Of course, each industry association works to an agenda of representing its own membership. But that is also why association responses to consultations are valuable, not only in gathering views from a wide range of regulated firms but in the impact analysis from these diverse constituencies . FSA should be heartened by the mixture of responses to the Turner Review. Inevitably, there are some criticisms, mainly on aspects of capital and liquidity regulation that need more attention. And a consensus that FSA should not carry on regardless, if other regulators in Europe and beyond are not moving fast enough for its liking. But overall, trade associations seem to consider Turner’s proposals a measured response, but express concerns about aggregate impact, in terms not only of cost but also of implementation capacity, particularly if FSA brings in too many changes too close together.

This article originally appeared on Complinet on 6 July 2009.