Avoiding regulatory overkill
Regulation of financial services tends to swing like a pendulum. Effective new regulation happens in the bottom one-third of the pendulum’s swing. The rest of the arc is spent burning energy, getting slower and eventually swinging back the way it came.
At each end of the pendulum’s swing, useless things can happen. At one end the regulators let the ball go completely – a situation similar to that which existed in the United States until last year – and at the other clamp down so hard they stifle competition and market growth.
As the regulation pendulum slows at the top of its swing, it wobbles uncertainly before swinging back down to the energetic pursuit of useful work.
Right now the UK regulator, the Financial Services Authority is wobbling at the top of its arc, very angry at the fact that the UK Government now owns two major banks – the Royal Bank of Scotland and Lloyds Banking Group – because the FSA let them run with scissors.
Now the FSA is at war, with CEO Hector Sants saying last week he wants to “strike fear” into the hearts of senior bank executives.
The FSA is going to completely change its approach to regulation, taking a “macro-prudential” approach that focuses on the wider picture rather than assessing the industry on an institution-by-institution basis. In other words, the FSA will no longer concentrate on dealing with the occasional ratbag, but rather will impose tougher rules and controls that force companies not to go near the edge of the precipice.
Mr Sants says “principles-based regulation” is ”Mr Sants warned UK financial services industries to expect an era of stricter controls.
“People should be frightened of the FSA,” he said.
Some of the rhetoric is doubtless a reaction to the UK media’s demand to know how the FSA didn’t know the banks were investing in dodgy but legal business.
But regulators like their rules applied across the board, and the insurance sector hasn’t been immune from the effects of the bank-led crisis.
Mr Sants’ comments worry Lloyd’s CEO Richard Ward, who told insuranceNEWS.com.au yesterday that the UK insurance market is concerned by the possibility of a regulatory campaign against the banks leaking into their territory for little reason.
“My real worry is the regulators are champing at the bit to flex their muscles and apply controls across the whole financial services sector rather than focusing on where the real problems are,” Mr Ward said.
“What atmosphere is that going to create? It’s a very adversarial approach and it goes against the concept of working together.
“I do worry that the insurance sector will get caught in that response, and I do worry about an over-reaction.”
Where the UK and other European regulators go, the Australian regulators are seldom far behind. Regulation is an international business these days, and the various regulatory organisations keep in close touch through such bodies as the International Association of Insurance Supervisors.
APRA is at a different part of the pendulum from its UK counterpart, and the concept of ruling by fear is unlikely to find favour in Australia.
It has forged close and constructive links with the industries it oversees, and its future agenda is being constructed in close consultation with the stakeholders.
The last time Australia saw a regulator severely disturbed was in 2001, when HIH collapsed and APRA was found to have been loitering around the top of the “useless” end of the pendulum’s swing. APRA reformed itself into a paragon of prudential regulation, setting stricter standards and controls for the local financial services sector. The controls were so strictly applied that the global financial crisis has had little effect on APRA’s financial services charges.
Hopefully the FSA’s verbal over-reaction to the causes of its present recession won’t find currency in Australia, where all that’s required is continual tinkering at the edges to maintain a healthy financial services system. But with the financial planning sector directly in ASIC’s sights, the dangers of cross-sector leakage are real.
At each end of the pendulum’s swing, useless things can happen. At one end the regulators let the ball go completely – a situation similar to that which existed in the United States until last year – and at the other clamp down so hard they stifle competition and market growth.
As the regulation pendulum slows at the top of its swing, it wobbles uncertainly before swinging back down to the energetic pursuit of useful work.
Right now the UK regulator, the Financial Services Authority is wobbling at the top of its arc, very angry at the fact that the UK Government now owns two major banks – the Royal Bank of Scotland and Lloyds Banking Group – because the FSA let them run with scissors.
Now the FSA is at war, with CEO Hector Sants saying last week he wants to “strike fear” into the hearts of senior bank executives.
The FSA is going to completely change its approach to regulation, taking a “macro-prudential” approach that focuses on the wider picture rather than assessing the industry on an institution-by-institution basis. In other words, the FSA will no longer concentrate on dealing with the occasional ratbag, but rather will impose tougher rules and controls that force companies not to go near the edge of the precipice.
Mr Sants says “principles-based regulation” is ”Mr Sants warned UK financial services industries to expect an era of stricter controls.
“People should be frightened of the FSA,” he said.
Some of the rhetoric is doubtless a reaction to the UK media’s demand to know how the FSA didn’t know the banks were investing in dodgy but legal business.
But regulators like their rules applied across the board, and the insurance sector hasn’t been immune from the effects of the bank-led crisis.
Mr Sants’ comments worry Lloyd’s CEO Richard Ward, who told insuranceNEWS.com.au yesterday that the UK insurance market is concerned by the possibility of a regulatory campaign against the banks leaking into their territory for little reason.
“My real worry is the regulators are champing at the bit to flex their muscles and apply controls across the whole financial services sector rather than focusing on where the real problems are,” Mr Ward said.
“What atmosphere is that going to create? It’s a very adversarial approach and it goes against the concept of working together.
“I do worry that the insurance sector will get caught in that response, and I do worry about an over-reaction.”
Where the UK and other European regulators go, the Australian regulators are seldom far behind. Regulation is an international business these days, and the various regulatory organisations keep in close touch through such bodies as the International Association of Insurance Supervisors.
APRA is at a different part of the pendulum from its UK counterpart, and the concept of ruling by fear is unlikely to find favour in Australia.
It has forged close and constructive links with the industries it oversees, and its future agenda is being constructed in close consultation with the stakeholders.
The last time Australia saw a regulator severely disturbed was in 2001, when HIH collapsed and APRA was found to have been loitering around the top of the “useless” end of the pendulum’s swing. APRA reformed itself into a paragon of prudential regulation, setting stricter standards and controls for the local financial services sector. The controls were so strictly applied that the global financial crisis has had little effect on APRA’s financial services charges.
Hopefully the FSA’s verbal over-reaction to the causes of its present recession won’t find currency in Australia, where all that’s required is continual tinkering at the edges to maintain a healthy financial services system. But with the financial planning sector directly in ASIC’s sights, the dangers of cross-sector leakage are real.