Is London Fit for Purpose Financial Regulation

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Is London Fit for Purpose?Financial Regulation

• by
• George Alford FCICSA
• Beachcroft Regulatory Consulting

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Declarations of Interest

• Non Executive Director Investec PLC
• Non Executive Director Absolutely Training
  (Holdings) Ltd
• Visiting Professor London Metropolitan University
• Formerly
• Senior Advisor (Grey Panther) Financial Services
  Authority

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Tripartite

• Modern History starts from 1997 and the
  independence of the Bank of England to set
  interest rates, whilst the Financial Services
  Authority was established to regulate the whole
  financial services sector
• The real winner was HM Treasury which split its
  historic rival and appoints the key management to
  both the other entities

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FSA and CSR

• Any CR activity we undertake must support our
  purpose as set out in the FSMA (Financial
  Services and Markets Act). It must help us
  achieve our Statutory Objectives or enable us to
  become a better regulator by reinforcing The
  Principles of Good Regulation

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Financial Service Authority Objectives

• Market confidence
• Consumer Protection
• Public Awareness
• Reduction of Financial Crime

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FSA Principles of good regulation

• Efficiency and Economy
• Role of Management
• Proportionality
• Innovation
• International Character
• Competition

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Bank of England objectives

• Control of inflation
• Also has the function of providing liquidity but
  under HMT influence
• Contrast with the Federal Reserves wider brief.

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FSA tensions

• Tripartite untested (at least for financial
  crisis)
• Prudential v Consumer objectives
• Principles v Rules debate
• Regulate firms and individuals
• integrity, prudence treating customers
  fairly in the principles but no use of CSR words
  until recently about themselves

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So what actually happened when the system came
under pressure?

• Two problems Global Liquidity and Northern Rock
• Neither of them well forecast by authorities even
  though market was signalling concern
• Northern Rock share price dropped from11.00 to
  2.00 between January 2007 and July 2007
• Yet in August senior players were using terms
  like unforeseeable and unprecedented
• Key media issue in September 2007 was election
  speculation not financial system

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Poor performance by the authorities

• FSA --- own internal audit
• Bank of England --- changed policy on providing
  liquidity when crisis grew
• HMT --- under investigation from Europe for
  improper state subsidies to Northern Rock
• Key problem is Treasury hegemony not matched by
  process, responsibility, accountability or skills.

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Outcomes

• FSA seriously weakened. Of its four objectives
  that for stability was seen as a Bank issue and
  those about consumers (voters) were seen as HMT
  issues.
• FSA held responsible for inadequate analysis.
  Press has focussed on failures on Northern Rock.
  Failure on Liquidity more serious

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Hierachy

• When crisis hits there is a hierachy of interests
• The overall stability of the financial system
  takes priority
• Bank depositors take priority over other forms of
  customer
• Shareholders pay the price of risk taking
• General social issues not formally included in
  objectives, such as employment or sustainability,
  depend on politicians for intervention
• but
• Politicians depend on votes

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Corporate Structures

• Public Sector
• Publicly quoted
• Privately Owned
• Partnership
• Mutual
• Regulators assume everyone behaves like a
  publicly quoted company

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Predictions

• Londons pre-eminence as the financial centre
  will decline
• There will be no significant bank failures
  because government is now committed to preventing
  them
• Investment banks have become systemic thus
  rewarding moral hazard (the Governor was right)
• Many non doms will leave
• House prices will fall
• CSR will continue to be seen by many as a form of
  regulation, a rule not a principle.

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