IT’S over. The Financial Services Authority (FSA) has been replaced by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), both operating under the supervision of the Bank of England.
But in reality, the creation of this new twin peaks system of financial regulation does nothing to address the real issue brought about by the financial crisis: the lack of quality in regulatory supervision. And the FSA was not so broken that it could not be fixed – without the trauma of UK firms having to adapt to a reinvention of the system of regulation.
The drumbeat of the government in 1997 was that a super-regulator needed to be created because the Bank of England was too focused on prudential supervision to the detriment of its oversight of the conduct of individual firms. The thinking was that the system under the FSA would be gap-proof. Now we are told the FSA should be abolished because it failed to adequately discharge its obligations and that the supervisory function should be brought back to the Bank of England.
But there is no guarantee that a new structure will bring about better results. There is still ample room for significant issues to fall between the two stools in the new structure, especially given the respective agendas and composition of the PRA and the FCA. Indeed, there is no reason why, over time, the policy agenda at one regulator will not diverge in some measure from that of the other.
And for the financial industry, the changes provide real challenges. The arbitrary intervention powers of the regulators enable them to halt product sales and distribution, even if there has been no enforcement action. Equally, the cost and effort of adapting to the approach of the new regulatory bodies will be burdensome on market participants at the worst possible time – especially when viewed against the slow economic recovery in the UK.
The industry is still struggling to come to terms with the events of 2007-08, and economic growth is particularly sluggish. Add to this the plethora of EU regulatory measures which the industry has had to take on board since the financial crisis started, and it is difficult not to sympathise with firms that are trying to cope with implementation on the one hand, while attempting to get on with the day-to-day business of lending on the other.
For all practical purposes, not much has changed for the finance industry since before the Easter break, as the substantive FSA rules will continue to apply. The rules have merely been split, in terms of who enforces them, between the two new regulators. Firms will, however, have to comply with nuanced rule differences, and will have to implement systems, controls and processes to respond to the new framework, including minor changes to documentation.
Ultimately, it is the quality of regulatory oversight that makes a difference, and not the structure of the system. It seems very unlikely that the new regime is going to be any more successful than the last, unless the quality of supervision improves substantially.
John Ahern is a partner at Jones Day.