The FSA has faced a significant level of criticism over the past few years, particularly in the wake of the financial crisis.
Its critics have accused the FSA of focusing too ardently on customer-facing outcomes and principle-based initiatives and, in doing so, losing sight of the prudential ramifications and the macro-economic position.
But is a complete overhaul of our current regulatory system justified? Or is the Conservative party’s intention to move the responsibility for supervision of the financial services industry to the Bank of England simply a window-dressing exercise?
The FSA’s focus on consumer protection has arguably been to the detriment of its other four objectives.
For example, it has at least made significant steps in providing the tools for financial education of customers, although the benefits of these efforts have not been felt in all areas.
Also, while the money made clear website is probably not on the favourites’ lists of the average person, the FSA did run advertising campaigns to promote the website and what can it do if the public prefers Facebook?
In recent months, we have seen the FSA tighten the reins on supervision. This shift is now evidenced in the extended powers given to the FSA in the Financial Services Act 2010 which received Royal Assent on April 8.
The act brings credible deterrence into focus, increasing the FSA’s powers, for example, to impose hefty fines.
It is not possible to tell at this stage if any tangible benefits will result from this legislation in terms of the day-to-day supervisory process or whether it has just been forced through Parliament as part of the so-called wash-up before the election.
Last week, the FSA imposed large fines and bans on Northern Rock’s former deputy chief executive and its former managing credit director. Arguably, if the FSA had taken this heightened approach to supervision at a much earlier stage, it may have been able to identify earlier some of Northern Rock’s failings and intervened.
Any largescale reform could see a significant transitional period during which it will surely be near impossible to work towards recovery when the focus is on building and adjusting to a new system of regulation
If the Conservatives win power in the election, they plan to do away with the FSA and the tripartite system which currently forms the basis of financial services regulation in the UK, and redistribute the powers to the Bank of England and to a new consumer protection agency. Since these intentions were announced, the FSA has revealed its own plan to create a specialist joint consumer protection committee with the Office of Fair Trading and the Financial Ombudsman Service, bringing our current regulatory regime closer to the alternative regime that has been proposed.
As the FSA has been disparaged for its failure to probe banking models, it could be reasoned that, as a more economically focused institution, the Bank of England would be better placed to achieve this level of understanding.
On the other hand, it is likely that the staff making up the new Bank of England regulatory workforce will be formed, in large part, from former FSA employees. Certainly, a large proportion of the FSA comprises those who worked for the regulators in place prior to the Financial Service and Markets Act 2000 coming into force.
Is it then really fair to assume that the Bank of England will have more expertise to succeed where the FSA has failed?
The Bank of England already has defined functions and to expand its remit risks diluting its effectiveness in either role (which ironically was one of the previous drivers behind the regulator moving from the Bank of England to the FSA).
It is questionable whether it is possible to create such a thing as a fail-free financial environment regulated by the ideal regulatory body.
Regimes of the past were not able to prevent the collapse of Barings or BCCI and it is not clear how current proposals for reform would address the problems that have brought about the crisis. The concerns that we currently have under the FSA’s system would not disappear under Bank of England regulation.
We must also question exactly how placing regulatory powers in the hands of the Bank of England will actually improve the fair treatment of consumers.
In reality, whether customers are truly treated fairly by firms, depends almost entirely on the attitude of the senior managers and not the overarching principles and rules set by the regulator. The proposed restructuring of the regulatory system alone would not achieve this.
At a time when efforts should be ploughed into rebuilding the industry, the last thing that is needed is upheaval of the body that should be supervising this work.
Any large-scale reform could see a significant transitional period during which it will surely be near impossible to work towards recovery when the focus is on building and adjusting to a new system of regulation.
It is hard to see whether the huge financial and practical implications are really justified.
There is clearly no quick fix to the system that is in place and although there will always be failures in a free market economy, the FSA could still be accused of taking its eye off the ball on occasion.
Northern Rock was indeed guilty of borrowing short and lending long but could the FSA have anticipated the ultimate effect of this? The FSA could certainly have probed further in this case and across the board but we are looking with the benefit of hindsight.
There remain, however, serious concerns of whether reshaping the current regulatory regime will notably improve on the FSA’s efforts. Could this merely be shifting existing problems from one organisation to another? To misquote Shakespeare: “An FSA by any other name…”
Suzanne MacDonald is partner and head of financial services regulation at law firm TLT