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Friday, July 1, 2011

The FSA drops the S



In a sanctimonious move the 'S' is to come out of the FSA and it is to be replaced with the 'C'.  Yes it is going to happen. 

What was once the Financial Services Authority of the United Kingdom is to become the Financial Conduct Authority.  Believe it or not there is nothing "prudential" about it, that responsibility lies with the minister.


From serving to conducting, prudentially free the FSA will be, is the new motto for London however taking the shine off the spin, one is left with that kind of feeling that what is supposed to be novel, might just end up convoluted with a good measure from camp bureaucratic.

I must admit up front that I was generally an avid FSA supporter (sorry dear all, but I like them) and I found their past models and approaches on the Basel banking accord quite forward thinking.  Certainly the FSA Basel work was more insightful than the dribble many other regulators conjured up, which for what its worth was pretty much next to nothing in some cases.  This brings me to the first concern:

Where does all the good work go?
The FCA will not have explicit responsibility for financial stability. That will be the responsibility of the Bank of England, the FPC and the PRA | FSA Announcement, June 2011 Link Here ]
The FCA made no direct mention to handing over the design and enforcement of Basel and capital requirements in this release.  Of course it doesn't have to because the May 2011 publication tells us that the FSA and the PRA are working on the real gear together - Link Here.  I suppose on the down side, this joint relationship does give some good headroom for finger pointing opportunities in the future and on the up side; the BOE, the FSA, the FCA, the PRA, the FPC (gosh where are all these beasts coming from) will be one voice, yes?

Perhaps this is an oversight.  The choice to disband the FSA was originally predicated on the fact that the British banking sector failed during the financial crisis.  Let's not forget many other banking communities also collapsed and yet the heart of that debate lies at the centre of the Basel accord and capital effectiveness.

Given this recent publication, we are left feeling that the FSA is to become the FCA and will drop the Basel baton in the process. Yet, the PRA will be picking up and starting from zero. Have we transgressed in this metamorphosis of the FSA to the FCA from grout to naught, from the bond that held it all together to a rethink on how we actually work with a PRA FCP creature?

Let's assume nothing changes on the Basel front and the FCA continues on with the FSA's Basel work and the PRA looks over its shoulder. If that was the case the following statement would stand.
This operational objective will be central to the FCA's supervision of the institutions that provide market infrastructure and the crucial role they play in delivering capital and risk transfer mechanisms and creating confidence in the financial system. 
and  
The FCA will be a risk-based regulator and its risk framework will be the engine room of the business, providing support to the key activities, namely : supervision, policy, enforcement and authorization. FSA Announcement, June 2011  [ Link Here ]
However, the trick then is that the FCA hasn't really addressed what went wrong with the British Banking system in the first place. That job lies with the minister, the PRA - please don't be "Prudential" here.

Either way from the Basel perspective, the British Banking Community isn't provably any better off but we are all more confused.

May be I am missing something, please give me a compass as I did speed read the brief.

The naughty child syndrome
Work with me on this next piece, it is a tad painful:

[] The FCA will aim to shift balance towards tackling the root causes of problems, not just the symptoms.

[] The FCA will base its regulatory interventions on a deeper understanding of underlying commercial and behavioural drivers.

[] The FCA will tailor its approach and the use of its regulatory tools, to the particular risks in the sectors, firms and products that it regulates.

[] The FCA will intervene proactively to make markets more efficient and resilient, enhancing integrity and choice.

[] The FCA will ensure that market infrastructure is sound.

[] The FCA will engage more with consumers directly.

[] The FCA will publish more information about its views on the markets.

[] The FCA will recognize that necessary restrictions on disclosure exist in the UK.

[] The FCA will be accountable to government and parliament.

[] The FCA promises that punishment is due if it fails on the list of promises and it puts in lien its testicles for security << Sorry I added that last part.

There is equivalence to a disobedient child here, standing up bent over in school assembly with their panties around their ankles facing the world and chanting; I will not be naughty, I will not tell fibs, I will honour the United Kingdom's commitment to financial integrity, the FCA will make sure UK banks don't cost the tax payer - well not too much we hope, pray as there are some basket case banks we have to look after that no one knows what to do with. Please sir can I have another ... What are you guys saying here? 

The FSA was not accountable in the past but the FCA will be in the future? This is humiliation personified and I can imagine the FSA team pulling this material together and either laughing or crying, I am not sure which is worse.

The New Program
Enough of these antics, what does the framework actually look like?  

Compliments of the FCA, I think its the FCA and not the FSA, anyway; they have given us a road map for the not prudential regulation on conduct authority. We have to be serious this is not, 'not the nine o'clock news'.


Bring on box 6, I like that dotted line.  Are dotted lines contingent responsibilities or more on the optional end of the spectrum?

Back to Risk
The document states that the FSA is currently working on the details for the required risk model.

In particular, the FSA is examining how to develop a unified methodology which covers different  types of risk - retail conduct, wholesale conduct and prudential, and between firm risk and thematic risk.  This will be covered in future publications.

This I look forwards to reading, sincerely I mean this.  Perhaps the FSA isn't dead after all - take a deep breath. Hang on a second, what was all this FCA business about then and what does the PRA have to say about the FSA instructing the FCA to build more risk models? 

Don't get "prudential" on me now, you promised you wouldn't.

1 comment:

  1. Martin,

    Looks like you aren't the only one who has this opinion of the FSA becoming the FCA. It seems the FSA is moving the furniture around rather than tackling how to assess whether banks are measuring risk correctly.

    See the news article on bobsguide

    http://www.bobsguide.com//guide/news/2011/Jul/11/uk-banking-regulation-must-move-beyond-confusing-nonsense-say-industry-experts.html

    ReplyDelete