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City firms welcome survival of the Financial Services Authority - Times Online
City firms welcome survival of the Financial Services Authority
An almost audible sigh of relief swept through the corridors of banking and regulation departments in City law firms when the new Government jettisoned proposals to scrap the Financial Services Authority (FSA), one of the totems of the new Labour years and a personal creation of Gordon Brown.
As polling day loomed in these normally blue stomping grounds, specialist lawyers viewed a Conservative majority with trepidation — and are now grateful that the Tory plan is being leavened by a dose of Liberal Democrat thinking.
The decision not to abolish the authority was a by-product of post-election wrangling between the two parties — the Tories’ manifesto had suggested that all regulatory responsibilities would be transferred to an enhanced Bank of England, but the Lib Dem finance team has forced them to row back from that draconian position.
Jacqui Hatfield, a regulatory partner at Reed Smith, says that the original Conservative proposals had the whiff of vindictive posturing. “When the Tories said that they were going to abolish the FSA there was a dreadful sinking feeling among the City law firms. It didn’t instil confidence at all.
“It was the one proposal where they filled in the detail and it seemed like a political backlash — Gordon Brown brought in the FSA and they were going to do away with it. It seemed driven by party political reasons with no real benefit in practice.” Even so, she is surprised that they have stepped away from their proposals. “They had been very sure about it,” she says. “It was a massive comedown.”
But City practitioners are grateful for the compromise. Clive Cunningham, a regulatory partner at Taylor Wessing, says: “There is a compelling logic for tightening up the link between those who supervise the systemic risks and those who regulate the individual banks.”
However, he too maintains that total abolition would have been misguided. “Having both [regulatory functions] in the Bank of England pre-1997 was a big strength of that system, but simply moving the nameplates round again — as the Conservatives were proposing pre-coalition — isn’t an answer.
“It always seemed over-simplistic: first, because banks are more complicated animals than they used to be and,second, because one of the big benefits of setting up the FSA was having prudential regulation together with conduct-of-business regulation under a single regulator.”
While the Tories’ radical plans have been sidelined, change is still afoot as some of the FSA’s powers are to be handed back to the Bank of England.
Cunningham says that “an interesting feature” of the coalition policy is that the bank will oversee microprudential regulation. “It is not clear what that means in practice,” he says, “but a key ingredient will be whether oversight means having the power to direct the FSA to take action in relation to any particular bank.”
For example, those working in the sector and their advisers will have a keen eye on whether the Bank of England will be able to order the FSA to rein in a specific bank’s activities or increase its capital buffer. “Who will have their hands on the lever?” asks Cunningham. Hatfield anticipates more of a partnership between the two regulators. “I don’t think that the FSA will be subordinate to the Bank of England. The authority will feed into the bank regarding micro-supervision, and the bank will feed into the FSA regarding the macro side. The two will talk to each other.”
But some City lawyers have sounded warnings over the Government’s uncertainty about the FSA’s future role. Before the election, it had been mooted that if it were disbanded, its enforcement responsibilities would be moved to a new national body incorporating the Serious Fraud Office and other law enforcement agencies.
Those plans for a super City fraud buster are now on hold. Jeremy Summers, a business crime and regulation partner at Russell Jones & Walker, warns: “If it is to be shelved that might be a serious setback in the UK’s future anti-fraud capability.”
There is other evidence of coalition politics affecting financial services. Tory and Lib Dem compromise over the structure of banks, as well as their regulation, also looms, with the Conservatives favouring the “Volker rule” proposals in the present US Financial Regulation Bill.
That approach would restrict banks from making certain speculative investments in risky hedge funds that were not on behalf of their customers. In contrast, the Liberal Democrats also favour a US model, albeit one based on much older legislation — the 1932 Glass-Steagall Act — that would much more clearly separate retail and investment banks.
The new Government has given itself and the banks a year’s breathing space while it watches the US legislative process and considers its own position. But ultimately, Hatfield predicts, opinion between the Conservatives and Lib Dems will narrow “because they’ve both got the same sort of aims”.
City firms welcome survival of the Financial Services Authority
An almost audible sigh of relief swept through the corridors of banking and regulation departments in City law firms when the new Government jettisoned proposals to scrap the Financial Services Authority (FSA), one of the totems of the new Labour years and a personal creation of Gordon Brown.
As polling day loomed in these normally blue stomping grounds, specialist lawyers viewed a Conservative majority with trepidation — and are now grateful that the Tory plan is being leavened by a dose of Liberal Democrat thinking.
The decision not to abolish the authority was a by-product of post-election wrangling between the two parties — the Tories’ manifesto had suggested that all regulatory responsibilities would be transferred to an enhanced Bank of England, but the Lib Dem finance team has forced them to row back from that draconian position.
Jacqui Hatfield, a regulatory partner at Reed Smith, says that the original Conservative proposals had the whiff of vindictive posturing. “When the Tories said that they were going to abolish the FSA there was a dreadful sinking feeling among the City law firms. It didn’t instil confidence at all.
“It was the one proposal where they filled in the detail and it seemed like a political backlash — Gordon Brown brought in the FSA and they were going to do away with it. It seemed driven by party political reasons with no real benefit in practice.” Even so, she is surprised that they have stepped away from their proposals. “They had been very sure about it,” she says. “It was a massive comedown.”
But City practitioners are grateful for the compromise. Clive Cunningham, a regulatory partner at Taylor Wessing, says: “There is a compelling logic for tightening up the link between those who supervise the systemic risks and those who regulate the individual banks.”
However, he too maintains that total abolition would have been misguided. “Having both [regulatory functions] in the Bank of England pre-1997 was a big strength of that system, but simply moving the nameplates round again — as the Conservatives were proposing pre-coalition — isn’t an answer.
“It always seemed over-simplistic: first, because banks are more complicated animals than they used to be and,second, because one of the big benefits of setting up the FSA was having prudential regulation together with conduct-of-business regulation under a single regulator.”
While the Tories’ radical plans have been sidelined, change is still afoot as some of the FSA’s powers are to be handed back to the Bank of England.
Cunningham says that “an interesting feature” of the coalition policy is that the bank will oversee microprudential regulation. “It is not clear what that means in practice,” he says, “but a key ingredient will be whether oversight means having the power to direct the FSA to take action in relation to any particular bank.”
For example, those working in the sector and their advisers will have a keen eye on whether the Bank of England will be able to order the FSA to rein in a specific bank’s activities or increase its capital buffer. “Who will have their hands on the lever?” asks Cunningham. Hatfield anticipates more of a partnership between the two regulators. “I don’t think that the FSA will be subordinate to the Bank of England. The authority will feed into the bank regarding micro-supervision, and the bank will feed into the FSA regarding the macro side. The two will talk to each other.”
But some City lawyers have sounded warnings over the Government’s uncertainty about the FSA’s future role. Before the election, it had been mooted that if it were disbanded, its enforcement responsibilities would be moved to a new national body incorporating the Serious Fraud Office and other law enforcement agencies.
Those plans for a super City fraud buster are now on hold. Jeremy Summers, a business crime and regulation partner at Russell Jones & Walker, warns: “If it is to be shelved that might be a serious setback in the UK’s future anti-fraud capability.”
There is other evidence of coalition politics affecting financial services. Tory and Lib Dem compromise over the structure of banks, as well as their regulation, also looms, with the Conservatives favouring the “Volker rule” proposals in the present US Financial Regulation Bill.
That approach would restrict banks from making certain speculative investments in risky hedge funds that were not on behalf of their customers. In contrast, the Liberal Democrats also favour a US model, albeit one based on much older legislation — the 1932 Glass-Steagall Act — that would much more clearly separate retail and investment banks.
The new Government has given itself and the banks a year’s breathing space while it watches the US legislative process and considers its own position. But ultimately, Hatfield predicts, opinion between the Conservatives and Lib Dems will narrow “because they’ve both got the same sort of aims”.
