Posted on September 19, 2012 by

Is it time for financial services regulation to change course?

This morning the future leader of the Financial Conduct Authority (FCA), Martin Wheatley caught the headlines with his statement that when the FCA takes over some of the regulatory duties of the FSA next year, it will be prepared to “shoot first, ask questions later”. With this aggressive statement, little regard seems to be given to the proper functioning of a competitive, open market for financial services products. Little regard seems to have been given to due process or little regard seems to have been given to that old principle of ‘innocent until proven guilty’. 

The statement today from the FCA, follows from an equally aggressive approach to, and language about IT System failures from the FSA earlier this month. In this case the FSA demanded the names of individual senior managers who they could hold personally responsible in the case of IT failures, such as the one suffered by RBS recently.

It seems that UK Financial Services Regulators are willing to take an increasingly aggressive approach to regulation and wield the increasingly complex regulatory tools delivered by government and demanded by the public.

But how much safer is the financial services industry today as a result of this more robust regulatory approach? And indeed, is the wave of regulation that has already hit, and which will continue to wash over the industry for potentially years to come, the right approach?

Martin Wheatly appears to think so, as do many other global regulators and politicians. However maybe there is a better way. Maybe what we should be doing is looking to develop easier to understand, less complex regulation that doesn’t require an army of regulators, lawyers and consultants to implement, interpret and make sense of, and importantly, allows those in the financial services industry (and other industries suffering from the burden of overly complex regulation) to focus on delivering services to clients and creating real value.

Do I sound out of touch? Am I being a bit naive?

Some may think so and if that is the case, I guess that means Andy Haldane, Executive Director for Financial Stability at the Bank of England and Mahmoud Mohieldin, Group Managing Director at the World Bank could be similarly accused. Due to the fact that in recent weeks, both have suggested that rather than complexity, we need simplicity, and rather than quantity we need quality regulation.

Andy Haldane made an impressive speech at the Jackson Hole gathering of Central Bankers. This speech was based on his paper, The dog and the frisbee. In his speech, Mr Haldane made a number of points that both questioned the regulatory approach over the last 50 years, in many western countries where regulation has increased in quantity and complexity, and warned that the growing complexity of markets and banks can’t be controlled with increasingly complex regulations. Mr Haldane suggest that “Modern finance is complex, perhaps too complex…As you do not fight fire with fire, you do not fight complexity with complexity. Because complexity generates uncertainty, not risk, it requires a regulatory response grounded in simplicity, not complexity.”

In a similar vein, The World Bank released a report on the role of the state in finance. In this wide ranging report, one of the aspects studied was common traits found in countries hit hard by the credit crunch via those countries that were not hit as hard. The report found that those countries that were hit less hard had less complex but better enforced regulations.

So perhaps it is time that aggressive regulators, wielding increasingly complex regulations and risk models, give way to a regulatory environment that is designed for simplicity. Designed in such a way that the growing army of regulators, lawyers and consultants focused on implementing and interpreting complexity can retreat and focus on creating value. And in a world of ever-increasing access to information via the internet, perhaps is it worth us considering the benefits of designing simple regulation in such a way that consumer organisations such as can play a role in regulating the industry, alongside (or in place of) governmental bodies such as the FSA and soon the FCA and PRA.