UK: financial regulation after the crisis

The future shape of the regulatory framework rests on the outcome of the general election. The Conservative Party is committed to giving the Bank of England a greater role in the regulation of banks and abolishing the FSA: see here (pdf). In a speech delivered last week, Hector Sants, the chief executive of the Financial Services Authority, defended the actions made by the FSA to change its regulatory approach and stated:

My personal view is that the structure of regulation was not a major contributory factor in the crisis. Yes, there were deficiencies in the Tripartite system. But what matters here is that we have the right people making the right decisions, and the right policies and rules in place to support that process".

Mr Sants also identified several unresolved issues which he believed were not being adequately addressed or debated, including culture and investor responsibility, about which he observed:

Firstly, on the issue of culture and behaviour – dare I say it, ethics? Poor risk management was a key driver of the crisis. We need to answer the question of whether a regulator has a legitimate focus to intervene on the question of culture. This arguably requires both a view on the right culture and a mechanism for intervention. Answering yes to this question would undoubtedly significantly extend the FSA’s engagement with industry. My personal view is that if we really do wish to learn lessons from the past, we need to change not just the regulatory rules and supervisory approach, but also the culture and attitudes of both society as a whole, and the management of major financial firms. This will not be easy ... From the regulators’ perspective it is probably the case that seeking to set ourselves up as a judge of ethics and culture would not be feasible or acceptable. More realistic would be to relate the consequences of culture to regulatory outcomes. However, developing this line of thinking requires much further debate which I would welcome.

Secondly, which is linked to the first, is the question of investor/shareholder responsibility. Are they owners with owner’s responsibilities or investors who merely trade the shares with their obligation being to their investors? I suspect they will insist on remaining the latter. Thus while investors will resist taking on additional responsibility, they should recognise the value to them of challenging management to ensure their business plans are credible. With regard to investors, the other important point is whether they fully understood the investments they were buying. Adherence to the maxim ‘do not buy something that you do not understand’ is critical".