The watchdog needs a firm hand

Maeve Bromwich welcomes the Financial Services Authority, but says the risk of over-regulation by one unified body is very real. Maeve Bromwich is a partner-designate at Manches & Co.

The long-awaited launch of the new super regulator took place last month when Gordon Brown announced that Newro would be called the Financial Services Authority (FSA) - not to be confused with the Financial Services Act (also FSA) or the Securities and Futures Authority (SFA).

After such a long wait, the name of the new watchdog was somewhat of a damp squib. However, the aims of the FSA, as outlined by its chairman Howard Davies, are wide-reaching and, broadly speaking, encouraging. The idea is to have a one-stop service for financial services supervision under one umbrella.

The new regulator represents a merger between nine regulatory bodies. These are: the Building Societies Commission; the Friendly Societies Commission; the Insurance Directorate of the Department of Trade and Industry; the Registry of Friendly Societies; the SFA; the Securities and Investments Board; and the Supervision and Surveillance Division of the Bank of England.

The most obvious benefit of combining these bodies is the focus on a clearer and more integrated approach to financial regulation, as opposed to nine different bodies potentially taking nine different approaches.

The proposed rationalisation of the number and diversity of the rules will create less confusion both for investors and for those who are currently regulated. The future of the regulatory regime governing Lloyd's of London is still, however, uncertain.

The Government has not yet decided whether to change the way the insurance market is regulated. Lloyd's itself has proposed that it be overseen by the FSA and the Government is still considering the position. Lloyd's believes its proposals could be implemented without changing the Lloyd's Act which gives the market statutory powers to regulate its own affairs.

However, there are many who view the recent disastrous losses suffered by Lloyd's in the late 1980s and early 1990s as being a direct result of inadequate regulatory control, and the market has therefore been pressing for inclusion under the FSA umbrella.

While the proposal for a one-stop service for financial services supervision is to be welcomed, concerns have been expressed in a number of quarters. Given that full integration is not due to take place until the autumn of 1999, there are still fears that the regulators may spend so much time getting ready for full integration - what with numerous policy group meetings, getting-to-know-you meetings and new premises meetings, as well as meetings to consider and draft a major piece of legislation - that they could fail to regulate their respective industries effectively in the meantime. Further, there is concern that existing standards could also slip as a result of staff shortages.

There is a very real risk of over-regulation. A distinction must be maintained between the different types of regulation required for different markets. It might be that one unified regulatory body seeks to regulate all markets, be they wholesale or retail, in exactly the same way. This would be unnecessary and unwelcome.

The FSA has made it clear that it will look to the boards and senior management of regulated firms to ensure that its companies and its staff are compliant. In other words, the FSA proposes to continue the practice of the SFA, and latterly Imro, to hold senior management of companies personally responsible for the defaults of others in more junior roles.

It is clear that regulation is going to continue to be an increasing burden for companies and individuals undertaking investment business in this country and the legal profession will need to ensure that it is ready to meet the challenges and assist clients in these areas.