FSA Increases Regulation

U.K.'s Financial Services Authority tightens its regulatory grip.


The era of light-touch, principles-based regulation at the U.K.’s Financial Services Authority is over, soon to be replaced by a more intrusive, interventionist approach. But the FSA’s new tack will fall short of the strong-arm, rules-based enforcement practiced by the U.S.’s Securities and Exchange Commission. FSA chairman Lord Turner said at the March presentation of his report for the U.K. regulator on the global banking crisis.

The new regime will have “a much greater willingness to reach judgment about the overall risks the firms are running,” Turner told a gathering of journalists in London. “Intensive supervision” will increase scrutiny of large institutions — a clear departure from the light regulatory environment that helped London emerge as a major global financial hub. The flaws of the FSA’s previous course, Turner admitted in the report, were both philosophical (believing that markets were self-correcting) and practical (allowing regulators to direct their attention to individual institutions rather than to the sector as a whole). Systemwide risks will be the new focus, governed by strict rules on liquidity, a tactic observers say could provide a blueprint for regulators in other countries. “Dynamic capital adequacy requirements are a good starting point, since systemic problems arise when leverage mounts, and this is a way of dampening it,” says Sir Andrew Large, deputy governor of the Bank of England until 2006 and chairman of the FSA’s predecessor, the Securities and Investment Board. By introducing countercyclical buffers on capital reserves and enforcing accounting standards that represent potential future losses when times are good, the FSA aims to battle banks’ temptation to use excess leverage.