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Advance guard

The FCA could end up with some worrying powers


The Treasury’s paper, A new approach to financial regulation – building a stronger system, says the financial crisis was caused by the failure of financial institutions to manage themselves prudently and of the regulators to spot the risks that were building up across the system as a whole – the result of what is described as a flawed system of financial regulation.

The key message from this paper is that steps must be taken to ensure financial firms are never again allowed to take on risks that are so significant and so poorly under-stood they result in a financial crisis. The Prudential Regulation Authority will be responsible for prudential regulation of significant firms (principally banks and insurers), and the Financial Conduct Authority will oversee the conduct of business and market regulation for all firms, as well as prudential regulation for non-PRA firms.

The challenge is how this can be reconciled with the avowedly intrusive and judgemental policies of the new regulators. The threat is that predictability will be achieved – but only of intrusive and negative intervention and that against this background, no rule will ever be viewed as unnecessary for ensuring stability or investor protection. Firms will need to be bold in holding to their positions and the regulators confident in their judgements to avoid this most und-esirable of possible outcomes.

What will be new is the formalisation and institutionalisation of these intrusive and judgemental practices. The market is likely to experience a sharper, more informed and more directional form of regulation than ever before. The FCA’s level of challenge and intervention will likely be viewed as hostile and confrontational rather than market-friendly.

The Government intends the FCA to be an open regulator, disclosing information about its activities when appropriate and that it should have the power to require firms to make more disclosure. Both powers are subject to overriding duties of confidentiality and also safeguards to ensure firms maintain an open relationship with the FCA but it is clear that more information will be made public earlier on than at present.

Two new powers proposed are for the FCA to publicise a firm has been required to amend or withdraw a misleading advertisement or sales practice and it has commenced disciplinary action. These are both concerning because they would empower the FCA to give publicity to a damaging assertion before the facts have been fully determined or the firm has had an adequate opportunity to make representations. It is unfair for the FCA to be able to air damaging allegations against a firm of a type brought in enforcement proceedings where the allegations may not have been fully investigated, have not been tested by any tribunal and the firm does not have an equal opportunity to respond. The message is clear – the FCA will vigorously pursue and develop the FSA’s new policy of scrutiny, challenge and intervention.

Simon Morris is a partner at CMS Cameron McKenna


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