Derivatives specialists in
London were today digesting the news of a radically changed UK
regulatory structure, due to be introduced by 2012.
The Financial Services
Authority, not always loved or respected by market participants
since its foundation in December 2001, will be abolished
– but the reforms are likely to give derivatives firms
at least two regulators to deal with, in its place.
Meanwhile, a commission of
enquiry will examine whether banks need deeper structural
reforms, such as break-ups or a split between commercial and
"We’re now going to
have to work within a new structure," said Anthony Belchambers,
chief executive of the Futures and Options Association. "The
timing is not great – obviously the FSA along with the
SEC is one of the more influential voices in the international
arena. With all the regulatory upheaval in the EU and the US we
do question whether now is the right time for a change of this
nature. That said, it is stated policy," he added, indicating
that the industry would have to concentrate on working well
with the new regime.
George Osborne, chancellor of
the exchequer, announced the measures on Wednesday night in his
speech at the Mansion House, where he said: "At the heart of
the crisis was a rapid and unsustainable increase in debt that
our macroeconomic and regulatory system utterly failed to
identify let alone prevent. Inflation targeting succeeded in
anchoring inflation expectations, but the very design of the
policy framework meant that responding to an explosion in
balance sheets, asset prices and macro imbalances was
The FSA, formed in December 2001
as the UK’s first unified financial regulator,
will be broken into two parts. Some of the staff will go into a
new Prudential Regulatory Authority, to be formed as part of
the Bank of England. This will be responsible for
'microprudential’ regulation of financial firms
including banks, investment banks, building societies and
Led by Sir Hector Sants, now the
FSA chief executive, it will report to another new organ of the
Bank, an independent Financial Policy Committee, charged with
'macroprudential’ regulation – ensuring
that systemic risks such as credit and asset price bubbles do
not build up in the economy.
Most of the other FSA staff are
likely to move into a separate Consumer Protection and Markets
Authority, which will "regulate the conduct of every authorised
financial firm providing services to consumers," as well as
being responsible for "ensuring the good conduct of business in
the UK’s retail and wholesale financial
A third new agency will bring
together all the groups that at present fight white collar
crime across many departments.
The reforms are expected to take
place in a phased and measured way, over the next two years.
However, they could involve significant disruption for
derivatives firms, and could potentially cause confusion. The
multiplication of regulators could mean firms having to cope
with more reports and more inspections.
Belchambers said: "Our concern
is about making sure we don’t have change for its
own sake. After all, the FSA is a very different institution
from what it was before the crisis. It makes sense to build on
the FSA’s strengths and achievements of recent
years and maintain that momentum."
Some market participants believe
parts of the agency have become much more adept in supervising
financial markets recently.
In his speech, Osborne paid
tribute to the FSA’s staff, but was scathing about
its overall effectiveness, saying: "The FSA became a narrow
regulator, almost entirely focussed on rules based
This was a somewhat surprising
criticism, considering that the FSA was most associated in the
years before the crisis with the phrase "light touch
regulation" – even though senior staff rejected that
term. They preferred the concept of "principles-based
regulation", something that the UK was held to have pioneered.
It was common at that time for financial firms to praise the
FSA’s principles-based approach, contrasting it
with the more heavily legalistic approach of US regulators,
especially since the Enron scandal of 2001.
Belchambers believes the FSA has
improved markedly in the past two years. "The
FSA’s whole supervisory approach is much more
focused on risk, particularly people risk, which is the root
cause of nearly every crisis – as opposed to product
risk – and on wholesale markets, governance and
prudential regulation. Change is now inevitable, but we can at
least argue for as much continuity as possible during this
period of transition."
Over the coming weeks and
months, market participants will have to get to grips with how
the new structure is actually going to change their working
lives. It is not yet clear precisely where the financial
markets division of the FSA will sit and who will run it,
though it seems likely to fall under the CPMA.
"The name of the new Consumer
Protection and Markets Authority does give us some concern,"
Belchambers said, "insofar as a more consumerist approach may
impact on wholesale markets and services. It could generate
tensions between wholesale and retail and higher costs for all
market participants. As with insurance, every form of
protection comes at a price. If the regulation of wholesale
markets becomes driven by consumer protectionism, higher cost
– and it will be yet another 'pass on’
cost – could be the inevitable consequence."
Jon Hay +44 207 779 8372