- George Osborne, head of the UK Treasury, proposed doing away with the FSA Wednesday—saying a communication breakdown worsened the financial crisis.
- The FSA's original mission was to minimize inefficiency, confusion, and regulatory costs for the industry and regulators alike.
- The proposed changes would merge it with the Bank of England, mostly intact, hopefully preserving efficiency gains and improving cooperation.
- This seemingly monumental change may, in fact, be the least market agitating—UK markets yawned to end the week.
The Bank of England (BoE) is an imposing stone building, complete with impressive columns and fine, filigreed stonework. The Financial Services Authority's (FSA) Canary Wharf headquarters is all glass, air, and light. The BoE is over 300 years old, the FSA is just 13—or rather the FSA was just 13 before this week's announcement the fledgling financial regulator faces an untimely demise and merger with ye olde central bank.
George Osborne, head of the UK Treasury, proposed doing away with the FSA Wednesday (as was widely expected). The proposal requires parliamentary approval, but with coalition backing, its passage appears likely.
The FSA, the UK's central financial services regulator, was first suggested in 1997 by recently deposed prime minister, Gordon Brown, then Chancellor of the Exchequer. The Brits weren't alone in their push to centralize—blurred distinctions between traditional business lines set off a significant round of regulatory centralization in many developed nations (except, notably, the US).
The FSA's original mission was to minimize inefficiency, confusion, and regulatory costs for the industry and regulators alike. By replacing no fewer than nine regulators, the Authority took strides in the right direction. But centralized financial regulation should improve not just consistency, but coordination and cooperation too. At its inception, lip service was paid to harmonious relations between the Bank of England, the Treasury, and the FSA but, in practice, proved difficult.
Osborne said a regulatory communication breakdown worsened the financial crisis. The institution with the most knowledge of the industry (the BoE) should likewise regulate it. Under Osborne's proposal, the government would transition the FSA's financial services regulatory apparatus (mostly intact) to the Bank of England. The merger would return the BoE's oversight of banks, originally stripped by the FSA, and add oversight of all other financial services firms. New independent consumer protection and enforcement agencies would also take shape—and all this by 2012.
The financial sector is a major economic engine for the British economy, and the looming regulatory shakeup isn't likely to change that. Rather, it could mean better regulation and reduced costs overall. Keeping the FSA's regulatory structure together under the BoE shouldn't hugely reverse gains in efficiency, while hopefully improving cooperation and coordination overall. Opponents argue regulation by a central monetary authority distracts it from its central monetary duties. But the Fed has regulated banks for decades, and though certainly no angel, monetary policy has improved on balance.
The UK is still rife with other arguably more disturbing regulatory prescriptions—including bank levies and compensation caps. Yet this seemingly monumental change may, in fact, be the least market agitating—indeed, UK stocks yawned at the news, rising +0.30% Thursday and edging off gains Friday (-0.06%).*
* Source: Bloomberg, FTSE 100