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Heavy hints of an end to light touch

After years of so-called light-touch regulation, the financial crisis seems to be bringing about a significant change in attitude to regulation from politicians of all descriptions and from the bodies responsible for the oversight of the financial world.

Last week, Tory Shadow Chancellor George Osborne told the FSA that if the Conservatives got into power, they would end light-touch regulation and would take a tougher approach towards fraud and other misconduct.

Cicero Consulting director Iain Anderson says: “There is no doubt that if the Tories win the next election, we are going to have a radical change of emphasis at the FSA.”

But regardless of who wins the election, Anderson says the FSA will be focusing much more on prudential supervision of firms in the future and less on consumer issues.

He says: “The big secular theme of regulation will be more detailed rules and more prudential supervision. I think principle-based regulation is just politically not sustainable after what has happened in the last 18 months.”

The FSA’s 2009/10 business plan shows the regulator is gearing up for a more stringent regime. The plan sets out an increase in running costs for the next year of £117m, of which the majority, £70m, has been earmarked for the cost of delivering higher- quality supervision.

In mid-March, the FSA will publish a major review of the regulation of banks, which will be accompanied by an FSA discussion paper setting out proposals for the changes in regulation and the supervisory approach.

FSA chairman Lord Adair Turner says: “That review may have further implications for the resources needed to do an effective job. It is, for instance, likely that we need improved ability to conduct macro-prudential analysis, identifying in close collaboration with the Bank of England the key developments in overall systemic risk which need to be reflected in our supervision of individual firms.”

Bill Warren Compliance managing director Bill Warren says: “I would love to have the confidence to say they will stick with principle-based regulation but people run for cover when things go wrong.”

Lord Turner also floated the idea of introducing product regulation into the market at a recent Treasury select committee meeting. He said this was something that regulators had previously been wary of but this was now open for review.

Anderson thinks the FSA is closer to regulating financial products than it has ever been before. “I do not know if it will happen but we are quite close to seeing moves in that direction.”

But Warren is wary of the FSA taking this route as it could stifle innovation in the market. “They have tried this before with Cat-standard mortgages which were a total failure because consumers did not like them as they were too rigid. I think product regulation would only have limited benefit and would curb the entrepreneurial side of it.”

The fuss the Government has made over Fred Goodwin’s payoff and pension also indicates that the Government no longer sees executive pay as outside its remit.

Warren believes the FSA will impose constraints on the remuneration of bankers and other financial services staff. But he warns: “If the Government does start interfering in remuneration matters, there is going to be an almighty mess.”

It is unlikely that we will have to wait until after the next election for Government action on financial regulation.

Chancellor Alastair Darling recently wrote a letter to European Union finance ministers giving his support to the creation of a new body that would be able to set best standards for regulation and name and shame countries that did not meet these standards. He did, however, oppose the creation of a super-regulator with the power to intervene on a national level.

This was shortly followed up by Prime Minister Gordon Brown’s speech to a joint session of the US Congress during his trip to Washington last week. Among the many points he made on dealing with the financial crisis were several clear mentions of the need for greater regulation of finance in general and banking in particular.

Brown said: “We have learned through this world downturn that markets should be free but never value-free that the risks people take should never be separated from the responsibilities they meet.

“We need to understand what went wrong in this crisis, that the very financial instruments that were designed to diversify risk across the banking system instead spread contagion across the globe. And today’s financial institutions are so interwoven that a bad bank anywhere is a threat to good banks everywhere.”

As a remedy, Brown proposed a global new deal, with countries working together to ensure this cannot happen again, using, in part, global regulation.

He said: “So that the whole of the worldwide banking system serves our prosperity rather than risks it, let us agree rules and standards for accountability, transparency, and reward that will mean an end to the excesses and will apply to every bank, everywhere, and all the time.”

Brown was using his speech and visit to Washington to drum up support for initiatives he aims to introduce at the G20 summit due to be held in London in early April.

These sentiments were backed up by Lord Mandelson in a speech to City dignitaries at Mansion House only hours after Brown’s address.

Mandelson said: “The Basel rules need to be revised and we need to renew the case for global accounting standards. We need new approaches to regulation on risk-taking and the rewards attached to it.

“The financial system is now global while regulation and oversight remain national and local. We used to talk about light touch, now it’s going to be about the right touch. What needs to happen in London at the G20 Summit is the first iteration of a new grand bargain that finally adapts the machinery of global economic governance to a new global economy.”

More regulation is on the way.

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