No one could fairly accuse the Treasury of doing less than a thorough job in drafting its consultation paper on the UK’s proposed regulatory structure. Indeed the neatly titled “A New Approach to Financial Regulation: building a stronger system” helps most effectively to sharpen the focus on those areas where the proposition looks weakest, albeit also providing a fleeting glimpse of real confidence that two regulators are better than one.
Keen observers (aka the anoraks) will be familiar with the government’s determination to drop the legislative obligation, previously binding on the regulators, always to consider the impact of their actions on the competitiveness of the industry. Possibly a contributor to the causes of the crisis, this is now widely viewed as presenting a policy conflict that regulators are not well equipped handling. Although this was fully expected, two surprises emerge from it. Having understood the whole concept to have been ejected, it is interesting, then, to see the cultivation of competition emerge as a key statement in the objectives of the unborn FCA. HMT is noticeably reluctant to explain the logic of its decision, preferring to leave that challenge to the reader.
So my conclusion is this: competitiveness is about the UK industry competing with the rest of the world, outward-looking, the regulator not inhibiting the industry’s ability to compete; competition is about the UK consumer’s ability to choose from providers from across the world, non-protectionist, but no assurance of a level playing field either. They are not opposites, one does not exclude the other; we could have had both. Instead we are shifting from producer-focus to consumer-focus, from exporter to importer. Thus speaks the Treasury; the Foreign Office has no remit here.
But then, as you read on, the second surprise hits you: lurking among the many UK aspirations for the European Supervisory Authorities (ESAs) is a call for them to consider, more clearly than European institutions have hitherto, the need for “reforms……..supporting EU competitiveness in global financial markets”. How can we reasonably urge this on European regulators when it is no longer deemed appropriate for domestic consumption? If this is dangerous talk for UK regulators, why is it different when provided with a Continental accent? This may have been a renowned weakness of Europeans in the past, but when you join them, you can hardly expect to beat them.
And that’s not all. As you settle in on a Saturday evening with New Approach to FRBASS weighing gently on your knee, the realisation dawns on you that half of all the planning for the great divide deals with how best to ensure that the new bodies, the Prudential Regulatory Authority and the Financial Conduct Authority, work effectively together. When a firm is dual regulated, as many will be, how will the regulators handle the authorisation, the individual approvals, the new permissions, the supervision, the enforcement, the compensation and the waivers? How too will they produce consistent policy and properly represent in international fora the financial stability and consumer protection needs of this country? In its best-seller, HMT sets out to deal with all these tiresome questions. There will be no shortage of liaison and memoranda of understanding. Thousands of man-days will be devoted to it every year. But will it work? The sad truth is that, only when these elaborate arrangements break down, as they are occasionally bound to do, will the world ever notice what effort is required behind the scenes, except, of course, when called on to pay for it. Among the most important of these questions is how the UK will be most effectively represented on the directing boards of the new European regulators, but this is also the area in which the proposed solution is among the weakest, with still more memoranda of understanding promised. Whether it works or whether it does not, much of the effort of the new regulators will be focused on bridging the gap that the government is so keen to create.
Published in Financial Times on 7th march 2011
