RegulationCorporate GovernanceFSA: work to rule

FSA: work to rule

On the frontline: the pressure's on the FSA to prove the worth of financial regulation

The last 12 months has seen the Financial Services Authority grapple with a
dilemma: how to balance its statutory expansion while operating in a less than
favourable climate as the government’s love affair with regulation evaporates.

Its annual report, published last week, suggests that the FSA, from its
gleaning, glass-fronted offices, has attempted to be more introspective and
raise its game in the face of increasing hostility and demands to reduce red
tape.

Sir Callum McCarthy, the watchdog’s recently knighted chairman, used his
opening statement to emphasise the authority’s commitment to using its powers
fairly. His message was one of conciliation, but acknowledged both the political
push to reduce regulatory burdens and the pressure to prove the real value of
the FSA.

With one eye on its political masters and the other on the growing number of
small businesses it now regulates, the FSA is already investigating the costs of
its regulation.

A study, apparently being produced by the consultancy arm of Deloitte, will
look into the financial burden it places on the companies it regulates, the
body’s cost and the cost compliance.

In a separate investigation it is also looking into its enforcement regime –
the subject of hostility from business.

The regulator appears to be responding to direct criticisms, some prompted by
its bitter tussle with Legal & General this year, which saw its original
fine of £1.1m for endowment misselling reduced to a mere £575,000.

This will also be an exercise in measuring perceptions, with McCarthy anxious
that the FSA is ‘seen’ to be making decisions swiftly, fairly and without
unnecessary costs.

But the FSA’s figures suggest it has already begun to be a bit more choosey
about the cases it takes on. Its regulatory decisions committee discontinued 14
cases in 2004/05 compared to none the previous year. It also took on fewer
enforcement cases, 77 compared to 86 in 2003/04.

The FSA also appears concerned about its image on the other side of its
services, and has engaged market research company NOP to monitor the
satisfaction of companies that have used some of its core services, such as
applying for waivers.

The FSA is acutely aware of the changing tide against regulation. The Hampton
Review, published with the 2005 Budget, set out ways to reduce ‘administrative
burdens’, and the FSA knows it must prove its effectiveness.

In the past 12 months, it has been working with the Henley Centre to develop
a way of presenting its impact on companies and markets. This is likely to be a
measurable framework and it will use the results to rebut any attempts to attack
its role.

Interestingly, the most potent attack has come from the very administration
that created the FSA and expanded its statutory. Prime minister Tony Blair
accused the regulator of ‘inhibiting efficient business’, leaving the regulator
wondering how it can continue to take on the government tasks of regulating
business while appearing to be strategic and value for money. Quite a balancing
act.

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