A model reputation

Though for some it may beggar belief, the Financial Services Authority enjoys something of a reputation for being one of the most sophisticated financial regulators in the world. The Northern Rock misadventure has taken some of the sheen off, of course, but the EU and the US are both understood to be looking with interest, if a bit more trepidation, at the FSA - a single regulatory body with a rather unique predilection for general principles over specific rules.

In the US, where regulators and rules abound, things could not be more different. The Securities and Exchange Commission holds sway over securities, while the Commodity Futures Trading Commission handles futures. More than 100 other regulators at the state level look after securities, insurance businesses and various other things for their various jurisdictions. And all of these things they do, according to Ben Goh, secretary of the Compliance Register, by dotting every “i” and crossing every “t” punctiliously.

“The SEC and FSA both recently visited a large hedge fund I know, but the contrast between the two approaches could not have been more obvious,” he says. “The SEC was focused on checking whether what the fund did fit exactly with all their rules, whereas the FSA looked more at what outcome they wanted to achieve. In the end, the hedge fund had to copy all the documents the SEC wanted onto a CD because, if they had printed hard copies, they would have needed a lorry.”

The US is considering a number of changes that might see it align more closely with the UK. One possible change mooted by US Treasury secretary Hank Paulson in his canvassing of the financial services industry would be for the US to follow the UK’s example and create a single regulator for securities and futures.

Meanwhile, US president George Bush and UK prime minister Gordon Brown have agreed to increase transatlantic co-operation on financial markets by setting up a joint working group, made up of regulatory gurus from Washington and London, that will ultimately develop plans to better monitor and regulate banking systems.

In addition, the SEC is mulling over the possibility of letting some foreign exchanges and broker-dealers, particularly those within the EU, to access US investors without registering with the agency first. If realised, these “mutual recognition” plans would represent quite an important change, as they would rely on the SEC’s acceptance of a foreign regulator’s standards and oversight ability.

According to Mr Goh, the US has also been talking about moving toward a more risk-based model like that employed by the FSA. The SEC, instead of poring endlessly over the minutiae of so many rules and regulations, will now begin to focus its attention on relative risk and the impact a given company might have on the greater economy were it to get into trouble.

“In other words, are we talking about an institution like Merrill Lynch, or are we talking about a much smaller outfit on the high street?” Mr Goh says. “That’s where they will now focus their attention rather than on the small guys. Principles-based regulation will eventually come to the US, but exactly when that is will depend on how it pans out in the UK.”