In February 2013, three years after he first announced that City watchdog the Financial Services Authority would eventually be abolished, chancellor George Osborne made a speech declaring that the FSA would close down in April – and laid blame for the stock market crash of 2008 squarely at its feet.
Few mourned its loss, except perhaps Gordon Brown who launched it in 2001, and even he backtracked in 2011 admitting that there was a “big mistake” in its design. But neither was there a warm welcome for its replacement bodies, the Prudential Regulation Authority (PRA), a subsidiary of the Bank of England that regulates organisations such as banks, investment firms and insurers, and the Financial Conduct Authority (FCA), a quasi-governmental agency that monitors retail, wholesale and the consumer side.
That Osborne had promised a “powerful new watchdog with real teeth”, wasn’t enough to convince everyone. As Robert Coe, founding partner of Wilder Coe, puts it, “I’m not sure that the government hasn’t just shuffled the cards a bit and thought of some new names.” Many others, particularly those in small- and medium-sized practices, will agree.
From their perspectives, there is still the same volume of regulation-related administrative work to plough through; the same number of loopholes for others with sufficient power and budgets to exploit; and the same perception that, in Coe’s words, “the regulations are there to complicate our lives, whilst the crooks still find ways around them.”
Yet Anil Stocker, a co-founder of Marketinvoice, an online SME finance company, disagrees. “Of course the PRA and FCA aren’t just the FSA with a different name and a bit of reshuffling,” he argues. He isn’t alone in his belief that the regulatory environment has “completely changed” since their introduction on 1 April.
Put simply, the PRA and FCA have powers that the FSA did not. Of particular value are the FCA’s product intervention powers to intervene in practices it objects to early on, rather than waiting for the outcome of court proceedings. “It’s still early days for both but the signs are that the approach of the FCA will represent the biggest change. It is taking a different approach by trying to be much more interventionist in areas like product design,” observes Iain Coke, ICAEW’s head of the Financial Services Faculty.
Stocker also points out that the PRA has developed an “incredibly powerful roadmap” for dealing with failure of systematic financial institutions, namely the bank bail-in legislation. “This allows the Bank in a very short period of time to restructure failing banks and prevent their failure from having widespread knock-on effects on the economy,” he explains.
The Financial Services Act 2012, which lays out the changes to financial industry regulation, has also been used by the government to broaden the scope of offences relating to financial deception. “The changes are a significant step towards the end of the UK’s transition from “light touch” financial services regulation to “judgement-based” regulation,” writes David Blair, associate director and head of financial regulation at international law firm Osborne Clarke, in his study on the topic.
What has yet to be fully implemented is regulation of new types of lenders, such as crowdfunding. From April 2014, the FCA will oversee firms operating platforms that organise loan-based or peer-to-peer lending. In addition, they already regulate some crowdfunding platforms where they allow the purchase of shares of bonds in start-up or young businesses. But some argue that more needs to be done.
“The challenge for some of these new innovative schemes is how to make them scalable while ensuring their depositors and investors properly understand the risks they take with the money they put in,” says Coke.
Indeed, those in favour of further regulation of these new types of lenders largely believe that the question of consumer protection is just as important – if not more important – than that of financial stability.
“This is the more significant regulatory priority for crowdfunding,” says Blair.
Coke also points out that, “some of the crowd funding providers are keen to join the regulated community as they see it would add to their respectability.”
Yet other members of the sector argue that unless the regulation is carefully thought through, it could have a diluting effect on the innovativeness of their businesses. As Stocker points out, “Our business would not have been able to get off the ground as quickly and in the manner that it did if we were faced with the same type of red tape and bureaucratic bottlenecks that have stifled other industries in the past.”
He adds, “In principle, regulation of the new alternative funding sector would be a positive development but great care needs to be taken to ensure that we do not curb the innovation and creativity that has been allowed to flourish in the last few years.”
Important though this is, there are more pressing wider matters at stake – namely, restoring trust in banks and financial institutions. Confidence in banks has plummeted to its lowest level in 30 years, according to the ONS’s annual Social Attitudes Survey. Today it stands at 19 per cent, compared to 90 per cent in the 1980s.
Osborne’s “big-teethed” powerful new watchdog is intended to restore some of this confidence but Coke argues that, “trust will only be restored when the financial sector regains a reputation for acting with integrity. This needs industry-led initiatives rather than a reliance on regulation to do it for them.”
Whatever further changes are needed, and however long it takes them to come into fruition, one question will remain: Will they prevent another financial disaster like the big crash of 2008?
Stocker is optimistic. “We can’t be sure that the new regulatory structure will always be effective in dealing with potential systematic risks within the financial services sector, but it definitely seems like a massive step in the right direction in trying to prevent similar setbacks that the world suffered five years ago,” he says.
However, Coe disagrees. “Not enough time has passed to assess the effectiveness (or otherwise) of the new bodies, he argues. He has a point; with just five months in the role and the seats at 25 North Colonnade barely cold, there is simply no way of telling.
He also warns, “There will always be the opportunity for a periodic crash, that is the nature of a free market economy – and something will eventually happen which finds its way around whatever regulations are in place.”
But Blair believes that even if a regulatory system that rules out financial disaster were a possibility, it wouldn’t necessarily be the best option. As he puts it, “To paraphrase Tennyson, it is better to have a vibrant financial services market in which scandals happen than to have a stagnant shrivelled economy.”
This piece first appeared on economia