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In recent years, the UK's approach to financial services regulation - in particular the creation of the Financial Services Authority (FSA) as the sole financial services regulator and the promotion of a more principles-based approach to regulation - has been much lauded. For some, however, the glitter of these concepts has dimmed in the fallout from the credit crisis.
So what is the future for these two pillars of UK regulation? Has the appetite for a principles-based approach to regulation lessened? Are the benefits of a single financial services regulator still apparent? How robust are both concepts when dealing with financial crises?
Not so long ago financial services regulators, regulatory commentators and politicians around the world were busy affirming that principles-based regulation was the future. Regulators were either urged to adopt such a model or were loudly stating their commitment to the cause.
Principles-based regulation - or the more trendy phrase, 'outcome-focused regulation' - became regulatory clichés, even if at times it wasn't clear that everyone meant the same thing when using those phrases. More principles-based regulation was touted as providing regulated firms with the flexibility to meet high-level regulatory objectives in a way that best suited their businesses, thereby encouraging a more thoughtful approach to compliance - contrasting with that regulatory pantomime villain, the rules-based 'tick-box' approach to compliance.
On the surface, principles-based regulation has weathered the crisis. The FSA's business plan reaffirmed its commitment to more principles-based regulation, arguing that "principles assume more importance and relevance in turbulent times".
The FSA's response to the self-critical internal report on the supervision of Northern Rock did not evidence any deviation from the approach, and in the UK at least relatively few voices have questioned the wisdom of the FSA's desire to continue in this direction. The orthodoxy is that detailed rules-based systems have not in the past prevented banking crises, and to use the Northern Rock affair to disparage principles-based regulation is misguided.
Overseas, however, perception counts for a lot and the FSA's travails have led some to question the wisdom of relying on high-level standards at the expense of prescriptive rules. The rush on the part of regulators to proclaim themselves standard bearers of principles-based regulation has eased. Anything that might be portrayed as deregulation is not fashionable. At a recent regulatory conference in the US, memories of the Paulson, Bloomberg and other reports that called for principles-based regulation in the US were forgotten, as a regulatory speaker said that while she could envisage principles framing requirements contained in rules, she could not see principles being used to set regulatory requirements.
Domestically, while the FSA's Northern Rock report did not lay the blame for regulatory failure on principles-based regulation, much in the report is central to the success of the FSA's approach. Principles-based regulation can only work if FSA staff have the experience and self-confidence needed to engage in challenging discussions with senior management of firms. For years firms have been saying to the FSA they do not have enough of these sorts of discussions with senior FSA staff.
The conclusions of the FSA report, at least in the case of Northern Rock, seem to bear this out. While the FSA has spent much time telling firms what it expects from them under a principles-based regime, it must also look hard at what firms should expect from their regulator.
On a broader level, what of the rise of the single financial services regulator? As Howard Davies, the FSA's first chairman, recently said: "Time was, way back in August 2007, when the unitary single authority was carrying all before it." While this model may not have been a UK invention, the FSA was regarded as the premier example of such an authority.
Some of the lustre has also been taken off this model. Specifically, there is concern over whether a regulator that is responsible for both the conduct of business and prudential issues can manage any conflicts that may arise between the two - conflicts that may be acute in times of financial strain.
Significantly, the recent Treasury blueprint for modernising regulation in the US, after surveying differing regulatory models, plumped for a variant of the 'twin peaks' model of regulation - although a more accurate description of what was actually proposed would be a 'three peaks' model - whereby one financial regulator is responsible for prudential regulation and a separate and distinct regulator handles business conduct and consumer protection issues.
Is the single financial regulator model a success? As Mao said when asked about the French Revolution, it is far too early to tell. It may be that there is no optimal regulatory model for all markets - there is probably room for several models. It does, however, appear that the promise offered by a single regulator has lost its allure for some.
• Carlos Conceicao is a partner at Clifford Chance