FSA has published feedback on responses to the Turner Review and Discussion Paper it issued in March. It must be pleased with the support it received. In this article, Robert Finney and Emma Radmore look at how FSA and other regulators have already moved on since March, and key messages from the feedback. Robert and Emma looked at responses to the Review in detail in their article “More or different regulation”?

Good in parts?

Overall, respondents found the Turner Review and DP were better than merely good in parts. They supported the views and priorities FSA expressed in the paper. Most of FSA’s suggestions for fundamental reform also had support, although many respondents had particular views or reservations on some issues.

Headline issues

Lord Turner sets out his recommendations in the Review under 15 main headings:

  • capital adequacy;
  • liquidity;
  • institutional and geographic coverage;
  • deposit insurance in the UK;
  • UK bank resolution regime;
  • Credit Rating Agencies (CRAs);
  • remuneration;
  • central clearing of Credit Default Swaps (CDS);
  • macro-prudential analysis;
  • FSA supervisory approach;
  • Firm Risk Management and Governance;
  • cross–border banks (within Europe and global);
  • product regulation (specifically mortgages and CDS);
  • additional counter-cyclical tools; and
  • balancing liquidity versus stability concerns.

FSA’s Feedback Statement looks at progress and comments on each of these.

Already underway

FSA notes global agreements and developments in key areas identified by the Review and taken up at April’s G20 Summit in London. Many of Turner’s suggestions have met with domestic agreement and are also part of international plans. But sometimes FSA has moved ahead of the field, which has not pleased everyone. More on this below. Aspects of the Review recommendations where there has already been significant progress by FSA or the UK Government include:

  • an interim regime for achieving higher quantity and quality of capital is already in place: for nearly a year now FSA has been requiring certain banks to have core tier 1 capital of four per cent after applying stress tests. It is now waiting for international agreement on a longterm solution;
  • active involvement in negotiations for implementing Basel proposals on trading book capital;
  • applying variable scalars to counter cyclicality. FSA plans to roll this policy out further;
  • working with the international community towards introducing counter-cyclical buffers;
  • the new liquidity measures: FSA has just put these in place for firms to implement in stages until 2010 and beyond, some aspects pending agreement on international measures;
  • deposit insurance: increased cover, action on distinguishing bank brand versus entity, taking a “single customer view” approach to calculating amounts due and temporary large balance rules in compensation claims. FSA has also worked on consumer awareness of compensation schemes;
  • the Banking Act 2009 has introduced a new UK bank resolution regime and the Government is reviewing resolution arrangements for failing investment banks;
  • both EU and IOSCO have set standards for credit rating agency (CRA) regulation and supervision (the EU Regulation enters into force this month with existing CRAs having to apply for registration by July 2010) and the Basel Committee is reviewing use of ratings in the securitisation framework;
  • the Remuneration Code: this applies to major banks and broker dealers and takes effect in January 2010. FSA will review it later in 2010;
  • co-operation with other regulators on central clearing of CDS: there are no UK-specific initiatives, but clearing services have already been launched and the industry has agreed targets for clearing eligible products;
  • the Council for Financial Stability (comprising the Bank of England, Treasury and FSA) will be established in the next parliamentary session to address macro-prudential issues from a UK standpoint with supposedly clear allocation of responsibilities;
  • FSA has implemented its Supervisory Enhancement Programme, and will put in place further measures on balance sheet analysis and macro-prudential capability by the end of 2009;
  • risk management and governance within firms will be covered by the Walker report: an interim report was published for comment in July and the final report is expected in November;
  • colleges of supervisors globally and within Europe have begun to work together and FSB and EU proposals are underway for further cooperation;
  • FSA’s review of the UK domestic mortgage market review will be published before the end of the year;
  • Treasury and FSA have responded together to the EU Commission’s consultation on OTC derivatives; and
  • Treasury has proposed a new financial stability objective for FSA – this too should be put to Parliament in the forthcoming session.

Among recommendations on which there has been no specific UK action since the Review was published, FSA particularly notes G20 support on institutional coverage (treating institutions appropriately to their economic effect – the Turner “duck test”) and geographic coverage (global agreement on how to deal with risks presented in any particular country by activities outside it). FSA has taken no specific further steps to address these issues yet.

Leader of the pack?

A major concern of the financial sector is that, by implementing changes ahead of any other country, FSA risks making the UK uncompetitive. BBA has been particularly vocal in its concerns. FSA agrees international co-ordination is paramount but argues that some changes, particularly to liquidity requirements, are so important it will press ahead with its planned implementation timetable. However, FSA appears to be holding back on domestic action in some key areas (in particular dealing with cross-border issues and capital adequacy requirements), channelling its energies into participating in international discussions instead.

Sticking points

On some of the more controversial proposals in the Review:

  • FSA received mixed responses on the implications of direct regulation of holding companies. Bankers are particularly opposed to this. FSA has already increased the scope of the Approved Persons regime to catch decision takers in unauthorised group companies. FSA worries that parent companies are not subject to the same incentives or oversight as their regulated subsidiaries when considering policy and strategy. However, the resolution of this issue will depend on international discussions and the outcome of FSA’s work on groups and intra-group exposures;
  • most respondents agreed with FSA that a Glass-Steagall style approach would be a bad idea. They commented on the dangers of institutions that are too big to fail (some saying these institutions should be broken up) and that systemic importance is about more than just size. FSA will continue to participate in international discussions of these wider issues;
  • most respondents opposed a pre-funded EU-wide deposit guarantee scheme or more direct powers for Host State supervisors over branches, although they agreed the EEA branching system needs review. FSA has reiterated its belief the branching regime is inadequate and colleges of supervisors will not properly address the risks to depositors and taxpayers. It wants a clearer right for host supervisors to get prudential information about the institution and its group and to take measures to restrict branch activities if there are significant weaknesses the home supervisor seems not to have addressed. Both respondents and FSA agree there are sectoral differences which mean a differentiated approach to regulation will sometimes be appropriate; and
  • on CRAs, respondents thought transparency and investor education could improve the role and responsibilities of CRAs but doubted that investors’ risk assessments should completely replace ratings. As part of its ongoing work, FSA will discuss how firms use ratings in the context of EU and IOSCO measures on CRAs.

What next?

So, many core elements of the Turner Recommendations are underway and awaiting action from outside the UK. However, FSA will publish another Discussion Paper this month to focus on two outstanding issues:

  • systemically important firms: the paper will encourage more debate on how to identify such firms, the tools available for regulators to deal with them and how regulators should use them. It will discuss “living wills”, domestic and international aspects of whether these firms should be subject to different capital and liquidity standards and whether retail banks’ trading activities should be limited. The DP will also address the problems of “too-big-to-fail” and “too-big-to-rescue” institutions; and
  • cumulative impact of capital and liquidity reforms: respondents expressed concern about the overall effect on their businesses of the aggregate of planned changes. The DP will consider whether FSA should make trade-offs between costs of intermediation on the one hand and financial stability on the other. In the meantime, FSA will explain how currently very profitable banks and investment banks should retain capital now in anticipation of higher regulatory requirements in future.


Lord Turner must be pleased at the progress already made on some of his Recommendations, and the extent of express or implied support of them from industry, UK Government and internationally. Now it is critical to FSA to maintain momentum, much of which must now come from others. FSA must strike a delicate balance between restoring trust in the UK markets and regulation while not stifling UK institutions’ ability to compete globally.