20 October 2011

FSA Lord Turner: We have a major opportunity to put in place a better system of financial regulation

In a speech at the Mansion House, the chairman of the Financial Services Authority (FSA), Lord Turner, said that the reform of the regulatory structure in the UK would help ensure better results than in the past, but also highlighted remaining uncertainties and issues which needed detailed consideration by Parliament and by society at large before legislation was passed into law.

He set out how the new authorities would undertake their roles and the powers they would need to deliver their objectives. He also recognised the constraints they faced and how they needed to be tackled and clearly explained to society.

Lord Turner highlighted the Financial Policy Committee (FPC) as the most important element to address the failures that led to the financial crisis – filling the gap previously left between a central bank and the micro-prudential regulator. He identified two issues that needed careful consideration:

• Forthcoming European regulation, particularly around maximum capital levels, had the potential to reduce the flexibility of the FPC to act according to the needs of the UK; and
• what can be expected on macro-prudential policy and whether that includes policies to tackle downswings in the economy as well the upswings.

Lord Turner said: “One thing which is crystal clear, but an area of significant concern, is that forthcoming European legislation must allow adequate flexibility for the national variation of macro-prudential tools. European capital adequacy regulation should enforce minimum standards across the European Union, but it should leave national authorities free to exceed and vary them above the minimum.The idea that securing the single market requires the harmonisation of maximum as well as minimum standards is simply wrong and potentially harmful.”

Lord Turner raised the question of whether the FPC should focus solely on financial stability or on the adequacy of credit supply to the real economy as an end in itself, important for macro-economic stability. This would imply making choices about the relative merits of different uses for bank balance sheets. He commented: “Political independence to take unpopular action, to ‘take away the punchbowl’, is not the challenge today – the party is not so much out of hand as cancelled. And the issue with which the shadow FPC has therefore been wrestling, reflected in the record of the September meeting, is whether macro-prudential policy has any role to play in helping stimulate credit supply and activity in the downswing.

“If credit supply is the focus, it will be difficult for the Committee to avoid making judgements about the relative importance of different uses of bank balance sheets. And if that is the focus, we may need to consider prudential tools which lean far more aggressively than in the past against the proliferation of intra-financial system complexity, the use of balance sheets to support inter-bank position-taking which has been such a striking feature of the last several decades.”

On the Prudential Regulation Authority (PRA) Lord Turner said that the new authority will build on the approaches to regulation and supervision the FSA has put in place over the last few years. He highlighted that there needed to be a clear understanding in society that the PRA’s approach would not be a zero failure approach, and argued that there was a real commitment to end the ‘too big to fail’ issue.

Lord Turner said: “We are committed, in the UK and globally, to putting a stop to ‘too big to fail’ status, with resolution tools which can deal smoothly with the failure of a bank, however large.  The International Financial Stability Board has presented for approval by the G20 in Cannes measures to ensure that effective resolution regimes are in place in all countries, and that bank-specific recovery and resolution plans are in place for the most systemically important banks.”

On the Financial Conduct Authority (FCA), Lord Turner emphasised that in relation to customer and investor protection, the FCA would need the powers and teeth to act early to intervene and prevent customer detriment from occurring. This new approach would provide a real benefit for consumers. However, he stressed that even in an ideal world, and with those powers, there will still be limits on what can be done and there can never be a no risk or no failure regime.

“In financial services the potential for the customer to be ripped off is simply far greater than in other sectors of the economy – and the consequences potentially more significant.

“The challenge for the Financial Conduct Authority will be how to counter that danger. Parliament will need to equip the FCA with new powers that will be needed to give the new approach effective teeth. For example, the powers if necessary to demand changes in product terms or even, in extremis, to ban a product in addition to strengthened powers to tackle misleading financial adverts and requiring their withdrawal if necessary. This new approach, underpinned by some new powers can, I am confident, make a difference.

“However, we also need a realistic understanding that no system of regulation can, or should, try to create a nil risk market environment. So even in the best designed system, problems will still emerge.”

Full speech

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