FSA’s Turner report to change regulations
Larosiére report and G20 changes also on way
The Financial Services Authority (FSA) has published the Turner Review of global banking regulation. Responding to a request from the Chancellor of the Exchequer to review the events that led to the financial crisis and recommend reforms, Adair Turner, chairman of the UK regulatory body, identified three causes – macroeconomic imbalances, financial innovation of little social value and deficiencies in key bank capital and liquidity requirements – and suggested a number of remedies, including stronger guidance about business models and products (hopefully negating any more Northern Rocks or ‘novel’ securitisation instruments); counter-cyclical capital requirements so money is hoarded in good times for a downturn; and a greater emphasis on the importance of risk management. The EU Larosiére report and G20 meeting in London are also seeking to overhaul the global regulatory framework for financial services
Of course, the UK specific proposals in the Turner Review are all well and good, and some such as enhanced consumer protection of up to £50,000 for savings have already been enacted, but the report distinguishes between these national plans and those where international agreement, such as increased action on shadow banking and tax havens, will have to be achieved. The EU’s Larosiére report gives an indication of the international co-operation that’ll be needed, proposing a new early warning system overseen by the IMF, BIS and other bodies, greater European harmony, and the creation of a group to push for the convergence of international regulation (click here for more).
The G20 meeting in London, in April, is also making some recommendations about the future shape of worldwide financial regulation – added together all three initiatives could radically transform our sector. The G20 proposals (see here for more) involve pumping more than $1.1 trillion into the system, via giving nations access to $250 billion of currency reserves and a similar amount in credit for trade finance; $750 billion was also added to the IMF fund to help struggling countries recover, which should be good news for Eastern Europe. There was however, no new global financial stimulus plan. More pertinently for future regulation, promises were made that hedge funds will be regulated for the first time, international accounting standards would finally be set and enforced, and sanctions will be implemented against tax havens that do not share information. Tough new rules on global pay and bonuses to ensure there is 'no reward for failure', to use Gordon Brown's phrase, are also supposed to flow from the G20 meeting and a new Financial Stability Board, with a strengthened mandate, will replace the old stability forum. As ever with these summits, we await to see if these commitments are followed up and stringently enforced but it is clear that a new framework for the financial services industry is taking shape.
Turner Review
The financial crisis has challenged the intellectual assumptions on which previous regulatory approaches were built, and in particular the theory of rational and self-correcting markets, admitted Adair Turner in the FSA's Turner Review, which was published on 18 March. “The changes we recommend are profound and the banking system of the future will be different from that of the last decade. The world’s economy will be better served as a result,” he said.
Specific action to separate retail banking from the riskier business of investment banking was ruled out, but a stricter registration system for ratings agencies to limit conflicts of interest was proposed, as was action to ensure that remuneration policies discourage excessive risk-taking. Other supports for an enhanced risk management function were also highlighted, including more independence and greater pay parity with peers. Certain areas where the FSA’s Turner considered it premature to make recommendations but still wants to encourage debate, such as product regulation in the retail mortgage sector and wholesale arena covering credit default swaps, are mentioned in the report but any proposals will only come forward after consultations. The discussion paper accompanying the Turner Review, DP 09/2, is open for responses until 18 June 2009. More about the specific recommendations in the review can be found here on the the FSA website.
Responding to the Turner Review, Angela Knight of the British Bankers’ Association, said: “The detailed discussions that will flow from this report will be vital as we need to ensure the new framework is appropriate for small banks and larger institutions.” (for more on the BBA response please see FST's industry column, page 21, in the March-April09 edition or click here).
The Building Societies Association said it too looked forward to engaging constructively about the implementation of Turner’s proposals. “We welcome the readiness of the FSA to question past policies and actions,” says Brian Morris, head of savings policy at the BSA. But a warning was sounded when he added: “On product regulation it’s good to see the FSA has identified the drawbacks of regulating mortgage products; restrictions could further stifle lending.” Restrictions around Loan-to-Value or Loan-to-Income ratios may still come to pass though.
Other trade bodies and groups rushed to position themselves for the overhaul of the financial system that Turner proposes. Andrew Baker, chief executive of the Alternative Investment Management Association, for instance, said that he welcomed the report as “an impressive and comprehensive piece of work” [it is 126 pages long] and for “not making hedge funds the scapegoat for this crisis”. In response to the report’s call for regulators and central banks to gather better macro-prudential information on ‘shadow banking’ activities, which will potentially limit their future room for manoeuvre, he said the AIMA “completely supported this - in fact, on 24 February, we called for the disclosure of systemically significant information by hedge fund managers to their national regulators. We’ve also called for a global manager authorisation and supervision template on the FSA model.”
Adam Philips, acting chairman of the Financial Services Consumer Panel, was more cautious, saying Turner should be congratulated for his candid assessment of what went wrong, but that “for all its revealing content and excellent analysis, the Turner Review has not commented on the appalling way that banks treated their customers both before and during the crisis. The review suggests that the FSA has been biased towards conduct of business, rather than prudential regulation of the banks, but recent history, in terms of the bank charges row, and the selling of PPI and mortgages, show that the FSA cannot be allowed to think it has consumer-facing regulation under control.”
As can be seen, the battle lines about what type and how much regulation is appropriate, and what freedom of movement should be left up to the market, are already being drawn as the future regulation of the financial services industry post-credit crunch comes up for discussion.
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