FSA Chief Speaks On Future Regulation Of Financial Services Industry

by Robin Pilgrim, LawAndTax-News.com, London

23 June 2006

Speaking on Wednesday at The Smith Institute Breakfast Seminar, FSA Chairman Callum McCarthy outlined the challenges facing the Financial Services Authority in its future regulation of the UK's financial services industry.

"Last week, the House of Lords debated the future of London as a financial centre. About the present position of London as a financial centre, there is no doubt; it is quite simply the most international capital market centre in the world," he stated, continuing:

"Now there are many factors which contribute to this: the stable economy, taxation, concentration of skills and – a claim which is based not on my personal view but on repeated studies of practitioners including those of the Corporation – the fact that the regulatory regime in the UK is seen to be preferable to those elsewhere. The present picture is clearly attractive – but of course transient."

"As Baroness Valentine said in the debate last week "We cannot take any of these advantages for granted. The world is changing and we must anticipate and meet those challenges" – a sentiment I endorse completely. This morning I want to identify and examine just three of the regulatory challenges which we at the FSA are conscious of, and set out how we plan to deal with them."

He then went on to announce that:

"The first issue is one for the regulatory community as a whole, but, because of the international nature of London as a capital market centre is particularly important for the FSA: how do we across the world regulate the international financial institutions which are becoming of increasing importance, in a way which is not either at best burdensome (because of duplicative regulatory requirements from the various national regulators), and at worst contradictory."

"One answer to this, much favoured by some European banks, is quite simply to establish primacy for the regulator in the country of incorporation of the financial institution (the home regulator), and give that regulator the responsibility for overseeing the financial institution throughout the EU (if a European institution) or throughout the world. This answer – I don't think it merits the description "solution" – has the merit of simplicity and certainty."

"Unfortunately, it fails on most other tests – legal, practical, political. In its place, we need a real – ie practical and workable – answer – one which reflects the differing importance of different financial institutions, the differing legal powers of different regulators, the differing competence and resources of different regulators."

The FSA chief continued:

"The second issue is how succeed in making use of principles, rather than ever growing reliance on rules. The FSA will always have a combination of detailed rules and general principles. That is inevitable. But we are determined, for reasons well explained by John Tiner and much commented on by me, to first halt and then reverse the growth in rules and replace, whenever we can, detailed rules with general principles."

"This policy is applauded at a senior level, but often increasingly questioned as you approach the practical regulator:regulatee frontier: chief executives and chairmen approve, whereas general counsel and compliance officers are sceptical."

Mr McCarthy concluded:

"My third issue is how to maintain the focus of the FSA – both external understanding of what we do and don't do, and why; and the internal managerial concentration on a limited number of objectives, which we can measure and against which we can judge our progress."

"This is a discussion where the FSA is not the decision-maker. That is the prerogative of Ministers and Parliament, where the FSA will seek to discharge efficiently whatever statutory objectives and duties they give us."

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