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Would a new regulator be worth the upheaval?

Suzanne MacDonald is partner and head of financial services regulation at law firm TLT


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


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There are 7 comments at the moment, we would love to hear your opinion too.

  1. The Hippocratic Oath is an oath historically taken by doctors swearing to practice medicine ethically. If lawyers took a legal equivalent then they would not need to ask this question. There is a need for regulation but not a regulator that does not grant those it regulates basic human rights! It is because I lack these rights that this post must be made anonymously.

  2. Unlike Mr Anonymous I am not in fear of the vindictive regulators of whom there are a few.

    The problems lie not with the name or form of the regulator itself but with the regulators employed within it.

    After two and a half decades I cannot see what benefit consumers would derive from yet more upheaval and extra cost in order to satisfy some political point scoring pretenders to the throne.

  3. To annonymous at 3.36 I say get real.
    Doctors have been allowed to do whatever they like for years without challenge. They can invent a new procedure and kill you trying out and that is legal and nobody will challenge it. Just look how hard and rare it is that Doctors get struck off for malpractice. They don’t even have a proper cpd system.

    The article is entorely fair and correct. No system stops people being crooked and no system will prevent collapses – if you want then go back to sticking your money under the matress. There is a risk in any business transaction – people need to recognise and accept that.

  4. We don’t need to tare the system down and start again we just need the regulator to be accountable for some of its flaws and shortcomings. There needs to be reasonable fees and levies charged,

    The FSAs objectives of market confidence, public awareness, financial stability, consumer protection, the reduction of financial crime should actually be followed not just have lip service paid to it.

    Hire less arrogant and more competent people, I am shocked by the amount of people I have been in contact with who were totally clueless, that also includes former employees poached to the financial services industry, there are a handful of very clever people and then a shower of ex public school boys and girls filling the void. Try filling up and using your regional offices more, there lots of talent out there but if all you do is invest in London the inbreeds are all you are going to get – people with names like Jankly Pankehurst – Strollop,

    There is due to be a ramp up in FSA enforcement action, probably for the best but again please make sure the idiots are kept on a leash. Put one competent person in charge at least…..

    So anyway my point is reform not revolt, restructure not revolutions. Cut out the deadwood make it work for the industry… don’t see the other regulated industries crying out for the head of for example OFFCOM!

  5. Isn’t asking “is getting rid of the incompetent FSA worth the upheaval” the same as asking “is it worth having an election just to get rid of this incompetent government”
    There is only one answer and I don’t care how much upheaval there is.
    Good riddance to them both

  6. “Would a new regulator etc….?”

    Yes. Next question please.

    Incidentally things have changed in the medical profession since Cronin wrote “The Citadel”

  7. Maybe we could have separate regulators for insurers and intermediaries…I’m working on a name for the latter – it could start ‘Financial Intermediaries Managers and Brokers…’ I’ll get the rest shortly.

    Are we going around in circles here. Every new regulator costs millions to set up and none of them have been much use. The solution is actually to stick with the FSA but make it accountable. The only way you can do this is to allow legal action to be taken against it by those it regulates. Once this basic human right is re-introduced the FSA would then have to work within the law and act fairly.

    My suspicion is that this would sharpen their minds and improve regulation for all outcomes.

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