The problem with rules and regulation

As the Financial Services Bill makes its way through parliament in a bid to create a new framework for financial regulation in the UK, the debate over what that regulation should look like rumbles on. Despite the forthcoming reconstruction of the Financial Services Authority, it is still far from clear how this sector will be regulated. Before we even know how the revamped FSA will work, the British Bankers Association has been calling for a new watchdog to police the sector.

In preparation for its new role as the Financial Conduct Authority, the FSA has been inviting tenders for its skilled person’s panel. The FSA aims to have this panel in place by March, prior to its spilt into the Financial Conduct Authority and the Prudential Regulation Authority. These skilled persons will be called upon by the regulator as ‘external experts to undertake investigations in the banks’ should the need arise.

Such investigations have gone on in the past, usually conducted by the ‘Big Four’ accountancy firms, with lawyers expressing frustration that the tender process was opaque and that it was hard to convince the FSA that they had the skills required to perform the necessary tasks.

Although the tender process is no longer opaque and provision has been made for smaller companies as well as large, the key problem is that the FSA will apparently recruit the same skilled persons that got us into the banking crisis in the first place. This is largely because of an insistence on prioritising FSA Handbook experience, over expertise in the regulation, measurement and monitoring of responsible business practices. How do we know this? Well companies hoping to be selected to tender needed to demonstrate extensive experience of “APER BCOBS, COBS, DISP, ICOBS, PSR, SSADM” and many more. In other words, any fresh eyes to review the banks are not welcome!

What the financial services sector needs above all is expertise in business conduct and responsible management practices, not skilled persons with an in depth knowledge of the FSA Handbook. As John Kay has repeatedly said in the Financial Times, “The core problem is that the banks have no intention of abiding by the spirit, rather than the letter, of any regulatory rules. Indeed they have developed profitable business in regulatory arbitrage – selling instruments that avoid regulatory burdens”.

Rules must be direct and simple with a focus on ethical behaviour rather than compliance and box-ticking. If the FSA wants to ensure that future regulation successfully prevents or at least minimises unethical and irresponsible conduct, its tender process should prioritise the measurement and management of responsible business practices ahead of exhaustive experience of policing its own rulebook.

Published by Sally McGeachie – January 2013