Opinion: Just as it began to look safe, the FSA lost on penalties

The Mansion House speech is an important but generally sedate affair: the Chancellor giving his sober assessment of the state of the economy to a black-tie audience consisting of the City’s great and good.

Alex Bailin
Alex Bailin

But George Osborne’s maiden speech this year was an electric occasion. He must surely regard the reforms he announced there as nothing less than a coup.

Barely a week after the election, the media reported that the FSA would survive in a “shock coalition compromise”. This was undoubtedly a blow for Osborne, who had been hoping to give greater powers to the Bank of ­England, which he evidently trusted and respected more than the FSA. The proposed survival of the FSA as a single regulator for banks and insurers was immediately met with a broad sigh of relief from the City, which would much rather deal with a beast it knows, whatever its ­perceived failings.

But a month later, at Mansion House, Osborne unexpectedly announced the complete dismantling of the FSA in its current form. Day-to-day supervision of individual banks, and assessments of soundness will be transferred to a Prudential Regulatory Authority (PRA)

– a legally separate but subsidiary part of the Bank of England, which will replace the FSA in 2012 and is designed to prevent Northern Rock-type problems and another banking crisis.

But Osborne’s real coup is that the regulator of the banks will be Hector Sants, the FSA’s current chief executive, who had been intending to re-join private practice. Having Sants in the driving seat will alleviate some of the City’s apprehension at having to deal with a new, even more ­muscular, supervisory authority.

Lord Turner, the FSA’s current chair, will also stay on during the transitional phase to minimise turbulence from the changes, which will have just two years to bed down.
The remainder of the FSA’s functions are to be split between a Consumer Protection and Markets Authority (CPMA), responsible for investor protection, market supervision and regulation, and a new Economic Crime Agency (ECA), which will take over the FSA’s and other anti-fraud agencies’ prosecutorial functions.

The business crime sector’s response has been mixed: just as the FSA appeared to be gaining some credibility as a prosecutor it will be dismantled and merged with the SFO and OFT, which are widely perceived to have their own problems. The ECA will also have investigative powers.

It is not clear how the CPMA will begin to attack the different and complex aims of market integrity and cleanliness of the financial markets together with consumer protection. They do not raise obviously overlapping legal issues.

Applying the now classic coalition device to deal with a serious internal political disagreement, an independent commission will review the operation of the banking system and decide whether banks’ retail and investment activities must be legally separated (a point on which Osborne and Vince Cable cannot agree).

Lawyers will undoubtedly remain busy during and after the changes as clients need advice on the new regimes and how best to deal with their new regulatory masters. There are also big and unsettling unknowns. How will the new set-up integrate with the greater emphasis on pan-European regulation? What is the delineation between the PRA and CPMA? How will the ECA be funded? Will the CPMA or the ECA be responsible for prosecuting insider dealing?

So, having cheated death, the FSA has finally bitten the dust in the regulatory equivalent of a penalty shootout. As its staff face great uncertainty about their futures they may be pondering the lyrics from the Bob Dylan mural in the FSA’s impressive atrium. They may wonder if Osborne’s favourite is, “I know you are dissatisfied with your position and your place – don’t you understand it’s not my problem.”