Breaking up is hard to do

Remember the Financial Services and Markets Bill (1998) which was designed to address "the fragmented structure which has developed for the regulation of financial services, with its unsatisfactory division of responsibility between several regulators"? Who was it who said that "this major package of financial reforms provides the solid foundations of a regulatory system that will last well into the 21st Century"? Well obviously not the current Chancellor, who was not even born when Neil Sedaka went to the top of the charts with "Breaking Up is Hard to Do". Much has changed in only 10 years since the creation of the Financial Services Authority. Although few would now seek to broadcast the benefits of this "world class" regulatory system, it would be unfortunate if the considerable advances in financial services regulation achieved under the aegis of a single regulator were to be lost in the system of creative regulatory tension proposed in the Treasury paper “A New Approach to Financial Regulation” published in July.

The proposal to create a Prudential Regulatory Authority (PRA) under the control of the Bank of England, a Consumer Protection and Markets Authority (CPMA) and Economic Crime Agency (ECA) will certainly lead to considerable disruption and uncertainty in the regulatory landscape. But it would be a mistake to assume that the major effect of the changes will be primarily administrative, imposing a burden on major firms in dealing with different regulators and the substitution of regulatory overlap in functions for the “underlap” which apparently contributed to the inadequacy of the regulatory approach to the banking crisis. The merit of a single regulatory regime is that it avoids, or at least internalises, demarcation problems and gives the single regulator no escape from responsibility. Those advantages are surrendered in these proposals, although conferring primacy on the PRA through powers to override the CPMA is an attempt to show who is in charge. But the opportunities for dispute will be legion. Take bank charges. Prudential regulators love them: a steady stream of income for providing straightforward banking services. Consumer and competition focused regulators often see things very differently.
 
Much will depend on the statutory objectives assigned to the new regulatory bodies. It will be interesting to see whether, in the new age of G20 global cooperation in setting standards, “maintaining the competitive position of the United Kingdom” can survive as a role for the prudential or market regulators. The primacy given to consumer protection in the title of the CPMA is unlikely to be accidental, so whether the consumer protection objective will continue to be moderated by the principle that consumers should take responsibility for their own decisions is of some interest. Firms conducting retail business were urged to be very afraid of the FSA, but the fear factor should be considerably heightened by the fact that the enthusiasm of the new CPMA to protect consumers may no longer be tempered by inconvenient considerations of market confidence and prudential concerns. The “desirability of facilitating financial innovation” is one of a number of statutory objectives which look rather different post AIG and Lehmans and may suffer a re-rating under the new regime.