Reading glasses

The paper comments on the Turner Review and DP09/2 in just 18 pages and makes some pretty strong statements about the effectiveness of the regulator and what the Institute recommends.

The paper opens by saying that the financial crisis was not a failure of regulation, but a failure of supervision. Adding more checklists or employing more regulators would not have prevented the crisis, although this is what the FSA is now proposing. The paper states that the FSA is not the right body and instead of being expanded, it should be scaled back to what it can actually achieve. It promotes the Bank of England to have a formal supervision role and that investment banking should be separated from retail banking. It also argues that where banks are bailed out by the government, the directors should be disqualified, as in bankruptcy.

Not pulling punches, the authors of the paper said the central problem is "the FSA's self-obsession and self-justification" and that the FSA "fails to distinguish between regulation - which in the event did not prevent the build-up of the crisis - and supervision which might have done, but was lacking". Ultimately, the FSA "fails to recognise that it is part of the problem". In a nutshell, "the FSA's failure to recognise the extent to which it was itself responsible for the financial crisis compromises its ability to draw lessons for the future".

The paper also recommends greater transparency of firms, supervision of substance not detail, the scope of the FSA's authority to be better defined and promulgated, separating retail from wholesale, improved capital ratios for the large banks, employment of principles-based supervisors, not rule-followers, and performance assessment of the FSA by Parliament.

The paper has an agenda but it is worth reading to ponder what you should be lobbying for.

Philip Ryley is head of financial services & markets of Michelmores