Douglas Flint, Chairman HSBC along with a number of other senior bankers (FT 7th August) are said to be critical of the ways UK financial regulators are now operating.
Other press articles have also give the impression that the UK Government’s financial services regulatory requirements applicable now and being consulted on for the future, are detrimental to the City’s position as the world’s leading financial centre.
It seems a failure of execution of financial services regulatory arrangements in the UK during the last financial crisis has been interpreted as a failure of design and as a consequence the current framework has become over-engineered and appears to be at risk of becoming ever more so.
The regulatory arrangements present from before the last crisis should have picked up the impending crisis early enough for action to have been taken to avert the crisis. The balance sheet regulatory return (BSD3) would have shown that both RBS and HBOS needed to shore up their capital in the early 2000s.
Also the liquidity return (LR) would have shown that Northern Rock and others were heavily reliant on wholesale funding but had sufficient capital. Although Northern Rock was not provided liquidity by the Bank of England, the others must have been. Perhaps Northern Rock should have been supported in a like manner too?
The Labour party were right to create the Financial Services Authority. Separating prudential from conduct of business regulation can create competing governance requirements. Moreover, inadequate conduct of business controls can create operational risk which is considered a prudential risk. The FSA with its ‘common platform’ approach to governance, systems and controls seems to have recognised and correctly handled this interaction. There are strong arguments for integrated regulation in the City, which remains the world’s pre-eminent financial centre.
Returning prudential regulation to the Bank of England may prove to be unwise. It may be worth recalling that the Bank was in charge of supervision when Barings Bank, BCCI, Johnson Matthey Bankers and earlier the fringe banks, collapsed. These collapses took place during relatively benign financial conditions compared with the Global Banking Crisis of 2007-8. Care needs to be exercised to avoid a repetition of these previous problems.
For some bizarre reason the House of Commons Treasury Select Committee (TSC) does not seem interested in pursuing these matters. Not only have they not enquired fully into the causes of the financial system’ difficulties in the UK but they have not assessed significant deleterious consequences for the UK economy of the current and proposed regulatory arrangements.
Both the TSC and the Government also seem oblivious to the increasing scope of EU regulation, inimical to UK financial services business, issuing not only from the European Commission but also from the recently created European Financial Regulators: The European Banking Authority, The European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority.
The regulations emanating from these bodies can have a major negative impact on London with its greater range and scope of financial business but little impact on other European centres which have a more limited financial services business.
Perhaps we should acknowledge that the difficulties in the UK were due to a failure of execution and also bear in mind the need to preserve the pre-eminence of London as a financial centre when framing new legislation.
Ranil Perera is a director of Regulation and Risk Ltd, a financial services risk and regulatory compliance contracting firm