Setting up three new financial regulatory agencies from scratch is no mean feat, especially in the middle of a depressed market and major European regulatory overhaul. But out of the dust of the 2008 financial crisis will emerge in London three new market watchdogs – the Financial Policy Committee (FPC), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) – to replace the current structure.
Pending parliamentary approval, the new system will replace the currect financial Services Authority (FSA) and is due to be in place by early 2013. A new ‘twin peaks’ model will mean the FCA will regulate how authorised firms, exchanges, and trading platforms conduct business, and the PRA will be responsible for micro-prudential regulation.
But for the time being, firms have to deal with an FSA in the throes of transformation. Imogen Garner, a senior associate in Norton Rose’s financial services practice, says during this evolution, buy-siders have to be realistic about what they expect from the regulator.
At the moment, FSA staff are not only trying to handle their day-to-day workload, they are also dealing with the transition and preparing to implement new regulation and directives such as Europe’s Alternative Investment Fund Managers Directive, MiFID II and European market infrastructure regulation, as well as home grown changes like the Retail Distribution Review (RDR). At the same time, firms are seeing longer processing times for various applications and submissions.
But there has also been a marked cultural change at the watchdog. On surveillance and enforcement, the FSA hasn’t taken its eye off the ball. If anything, it has taken a tougher and more considered stance, meaning tougher scrutiny for firms.
The FSA has already warned firms to pull their socks up and stiffen their collar for inspection. Addressing the British Bankers’ Association last week, FSA chief Hector Sants put British firms on notice that they needed to “show a greater willingness to proactively comply with supervisory judgements”.
“We are suggesting that dragging their feet in complying with requests when it is obvious to all that the outcome is in the best interest of society as a whole is not a behaviour which should survive in the new world,” he told BBA members.
Sants says the regulator’s new approach will require greater resources and expertise – which will likely translate into higher compliance costs than the old pre-crisis reactive model.
Garner told me that in the future, when the regulator comes knocking at your door, expect to see more investigators with greater expertise and tougher questions than in the past. She has already seen it happen with some clients.
The FSA isn’t necessarily showing all its cards in the initial visit, and follow-ups have been more rigorous than investment firms have expected. Gone are the days of a casual tea and scones and a pleasant chat with a 'light-touch' supervisor to make sure everything’s ship shape. The regulator is rolling up its sleeves, lifting the bonnet working out exactly what makes your engine run.