The UK’s banking regulation is at the forefront of political attention once again, as the Chancellor, George Osborne, is in pow-wow with a Treasury Select Committee to progress the government’s regulatory plans.
As we know only too well, the Financial Services Authority (FSA) took some of the rap for the string of banking failures that came close to collapsing the entire Western world’s banking system. And when it came to analysing the reasons for the failure of the current regulatory regime, the government decided it needed a scapegoat — er, I mean, needed to restructure the FSA to ensure that such a thing can never happen again.
The key failure was seen as a lax approach to regulating the banks themselves, leaving it pretty much up to them to work our whether their practices and investment products made good sense, rather than having the FSA’s people closely scrutinise every new chopped and diced sub-prime mortgage-based derivative that each bank happened to think was their latest and greatest hot cake.
As we now know, this self-regulation actually amounted to no real regulation at all, and the real estate derivative bubble was based on little more than lots of poor people who couldn’t pay their mortgages. And subsequent debts upon debts based on the back of it all turned out bad.
The new banking regulator
So that’s the bit that’s being taken away from the FSA, regulation of the banking and finance industry, and it’s being handed to a new body called the Prudential Regulation Authority(PRA). Well, I say new body, but it will comprise around 25% of the FSA’s current people, so really it’s a bit of the same old body but with a new name.
Though to be fair, it will have a new directive too, to regulate in a more direct hands-on manner. And having an organisation with just one prime responsibility should hopefully result in better focus.
The PRA will be directly responsible to the Bank of England and will be chaired by Mervyn King, with Hector Sants taking on the role of chief executive. It will approach its responsibilities in several ways.
There will be new regulations covering capital structures and liquidity, which should hopefully rein in excessive leverage and strengthen the banks’ ability to withstand the kind of capital withdrawal that brought down Northern Rock.
And there are going to be more direct supervisory actions, and a better focus on handling crises when they do happen — the PRA won’t be trying to totally prevent failures, but to put in place better procedures for minimizing the pain when they do happen.
What’s left becomes the FCA
The other new body, which really is just what’s left of the FSA with a new name, is to be called the Financial Conduct Authority (FCA). And it will carry on with the same business of investigating fraud and tackling boiler room scammers and all the other assorted crooks who spend their days trying to part honest folk from their hard-earned savings.
Essentially it’s going to be business as usual at the FCA, but there is expected to be more of a forthright and pro-active culture — and that’s something we’ve already been seeing from the last days of the FSA in its current form, in the welcome shape of new records in fines and imprisonment.
There is one new power to be wielded by the FCA, and that is to oversee and promote choice and competition in the financial product market. To that end, the FCA will be able to examine the design of such products and place its own requirements on them, and restrict the sales and promotions of any that it deems inappropriate — having both temporary bans and permanent bans amongst its chief weaponry.
Of course, this all has to go through the usual parliamentary procedures before it comes into effect, and there are likely to be various tweaks, but it’s unlikely there will be any major change of this plan now.
Will it all work?
The FCA’s role seems relatively uncontroversial, with it essentially carrying on with the same old FSA approach to the bad guys which we have seen does get results. There will be some doubts, though, concerning its veto powers over the design of financial products, so we shall have to wait and see how effectively it flexes that particular muscle.
But the big unknown is the PRA and it’s new approach to banking regulation. While many will welcome the closer scrutiny, and while more stringent capital requirements should lower the chances of serious liquidity squeezes, a lot of people will be asking whether the new body will be any better at foreseeing looming crises than the banks themselves were.
Still, we’ll find out soon enough, when the next crisis hits.