S Kalyana Ramanathan / London March 19, 2009
The current global financial crisis has forced UK’s Financial Services Authority (FSA) to tighten its grip over the financial services sector, with some of the options being considered including monitoring the working of banks and other financial services players.
FSA in the UK, from a regulatory perspective, is the equivalent of such Indian regulatory bodies as the Securities and Exchange Board of India and the Reserve Bank of India, and can also be compared to the Securities Exchange Commission in the US. It is an independent, non-governmental body which has been given statutory powers under the Financial Services and Markets Act 2000.
The FSA published today the Turner Review, authored by Lord Adair Turner, chairman of the FSA, that has made recommendations on the ‘changes in regulation and future supervisory approach needed to create a more robust banking system.’
The Turner review has said in no ambiguous terms that the role of FSA must now be expanded to look at the business models, strategies and even risks and outcomes of banks, rather than just focus primarily on systems and processes. This will be a considerable departure from the ‘principle-based approach’ adopted by the regulator so far.
Lord Turner said, “The (current global) financial crisis has challenged the intellectual assumptions on which previous regulatory approaches were largely built and, in particular, the theory of rational and self-correcting markets. Much financial innovation has proved of little value, and market discipline of individual bank strategies has often proved ineffective.”
“The changes recommended 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 added.
The Turner Review comes less than a week after FSA’s CEO Hector Sants’ said that “...people should be very frightened of the FSA.”
At the time, Sants too had said that a “...principle-based approach must give way to outcomes-focused supervision. A principles-based approach does not work with individuals who have no principles.”
The Turner Review is a product of six months of work which was carried out at the behest of The Chancellor of the Exchequer in October 2008. The 126-page report covers a wide range of financial services players, including credit rating agencies and hedge funds, apart from banks. The Review broadly identifies three underlying causes of the crisis – macro-economic imbalances, financial innovation of little social value and important deficiencies in key bank capital and liquidity regulations.
“These were underpinned by an exaggerated faith in rational and self-correcting markets,” the reports said.
In addition, the Review highlights areas where it is has not recommended a specific action, but where wide-ranging options need to be considered, which include product regulation in retail (mortgage) and wholesale markets ( like Credit Default Swap).