FSA bifurcation will intensify regulatory malaise
The bifurcation of the Financial Services Authority and transition to a ‘twin peaks’ regulatory model will not address the insidious effects of a “box-ticking culture” among the UK’s financial watchdogs and in fact is likely to increase bureaucracy and costs, a new report claims.
According to the study by the Adam Smith Institute, the reform of financial services regulation to create an independent conduct regulator and a prudential regulator that will sit within the Bank of England, will not promote competition and will rather breed conflict.
According to the report, the new system - which will see the FSA morph into the Financial Conduct Authority, while its prudential regulatory activities are transposed to the Prudential Regulation Authority - will also adopt the same “box-ticking culture” that has plagued the current regulator.
Furthermore, the report says that the Financial Ombudsman Service provides better consumer protection and can protect consumers “perfectly well” without another regulator “second-guessing it” and thus recommends switching the balance of power to the ombudsman.
The report states: “The PRA is conflicted between saving troubled firms and ensuring the health of the market, where occasional failures are inevitable. It should be cut down and become merely the sniffer dog for Bank of England regulators.”
The paper claims that regulation would be stronger if it was made simpler and broader, with regulators setting general rules and punishing transgressors.
It emphasises that punishing individual executives, rather than firms, would be more effective to guarantee honesty and compliance. It also says that auditors should also be prosecuted when the fail to spot wrongdoing.
Eamonn Butler, co-author of the report, said: “The Financial Services Authority was so busy ticking boxes that it did not even see the 2007-2008 bank crisis unfolding. Recently it was so busy ticking boxes that it did not see the Libor scandal brewing, despite clear warnings in the financial press.
“There is no evidence that George Osborne’s new regulators are going to be any different. In fact the new regulators will get under each other’s feet and make things worse.
“Our financial sector is vital, but Osborne’s plan will strangle it. We need more competition and transparency among banks and financial firms, not more bureaucratic regulation.
“We don’t need endless inquiries, we need clear rules and clear punishments when they are broken.”