An End to Light Touch Regulation in the UK?
By Robert V. Hadley and Philip J. Morgan
Last week, two leading UK newspapers reported interviews with the new Chairman of the FSA, Lord Adair Turner, in which he is said to have warned that the days of “soft-touch regulation” are over. He also spoke of the FSA’s plans to pump more resources, and to recruit high quality people from the private sector at considerable expense, into the regulation of systemically important institutions.
Earlier last week FSA Chief Executive Hector Sants struck a slightly different tone when he noted that the concept of “heightened supervision” - jargon for an FSA enhanced regulatory regime for banks where failure appears possible - was a last resort. He also said that the term “heightened supervision” was a colloquialism that reflects the fact that the FSA adopts a risk-based approach. Certain risks now being clear it is appropriate, and consistent with the FSA’s stated and historic approach, and nothing new, for supervision in relation to such risks to be “heightened.”
The new Chairman is plainly looking to stamp his authority in a very public way. Interviews with national newspapers are not a common occurrence for leaders at the FSA. And “light-touch regulation” has long been a mantra of FSA leaders, Mr Sants included. But does Lord Turner's intervention last week signal a real change of direction for the FSA?
Risk-based regulation, which continues to be at the heart of the FSA’s approach, and light-touch regulation run hand in hand - a business that presents a limited risk to the FSA’s statutory objectives can be regulated in a less hands-on fashion than higher risk businesses the failure of which may have systemic consequences. We suspect therefore that many people regulated by the FSA will notice little difference with the tougher stance signalled by Lord Turner.
On the other hand, it is clear that the FSA is currently far more focused, as a matter of necessity, on issues that can have consequences for the stability of the financial system as a whole. Lord Turner mentioned in particular FSA work in three areas:
(i) the capital adequacy regime for banks - in relation to which he noted that the current regime seems to encourage the banks to lend too much in the boom times and too little when times get tough;
(ii) liquidity - where the focus would be on whether the business model of financial institutions was solid enough in bad times as well as good; and
(iii) pay - although Lord Turner was clear that this area plays second fiddle to capital adequacy and liquidity
Also, it would appear that under Lord Turner's watch the FSA will be taking a renewed close look at the risks posed by hedge funds. For example, it was reported that he thinks that hedge funds, up to now beneficiaries of “light-touch regulation” in the UK, could evolve to pose a systemic risk, much as the Wall Street banks did during the past few decades.
The truth, it seems to us, is that whilst the FSA is set to get tougher with high-impact, systemically important firms, notably significant banks and insurance companies, much of the rest of the FSA’s work will probably carry on as before, at least for a while. Lord Turner himself summed up the balancing act as follows:
“There is no doubt the touch will be heavier… We have to make sure that it is intelligent and focussed on where the risks really are.”
It does remain interesting, though, that the new Chairman, unlike the last, does not seem minded to defend the concept of “light-touch regulation,” even choosing to refer to it by the more pejorative “soft-touch regulation.” It remains to be seen whether Mr. Sants will adjust his tone to be more in keeping with his new boss’s tough talking.
