01 May 2007

FT: FSA told streamlining needed

The Financial Services Authority is “rich in process” and needs to streamline its bureaucracy and focus more on achieving results, according to the first official review of the watchdog’s work.

The National Audit Office delivered a list of recommendations for the FSA on Monday as it published the findings of a review commissioned by the Treasury last summer. Overall it commended the watchdog, which is now seven years old, for managing a merger of 11 institutions and creating the world’s first unified financial services regulator.

But Sir John Bourn, head of the NAO, said: “The challenge for the FSA is now to move to the next level. It must do more to demonstrate its impact; to get a clearer understanding of how much its different activities cost; to streamline its processes and advice to benefit industry and consumers.” The review, however, acknowledged that the FSA was aware of these imperatives and working on them.

The weaknesses identified by the NAO will be noted by overseas regulators, including some in the US, which have come to see the FSA as a beacon of good practice. Its light touch approach and espousal of broad-based regulatory principles, as opposed to prescriptive rules, has been cited as one factor behind London’s success as a financial centre.

The NAO did not address the merits of principles-based regulation directly but issued a reminder that its success would hinge on recruiting the right calibre of staff. The regulator is going through upheaval as it seeks to replace box-ticking employees with those better qualified to interpret principles on issues such as market abuse and treating customers fairly.

Among the NAO’s specific comments, it cited the fact that a new system for assessing regulatory outcomes is based on 111 separate measurements as an example of over engineering. The most biting recommendations were on the fight against financial crime. It said the FSA should give it more weight in its day-to-day supervisory activity and called for a reassessment of the assumption that the highest-impact crimes would be perpetrated through the biggest institutions.

Carlos Conceicao, director of regulatory enforcement at Clifford Chance, the law firm, said: “Despite spending nearly 10% of its resources in this area, it is unclear whether the FSA is really landing any punches in the fight against financial crime.” Mr Conceicao, formerly an official in the FSA’s enforcement division, added: “It needs to set out very clearly what it wants to achieve in this area, and until it does so, it is impossible to judge properly whether the resource that goes into its work is money well spent.”

The FSA interpreted the review’s broad findings as validation of its own work and, specifically, as an endorsement of John Tiner’s achievements as chief executive. Mr Tiner steps down in July after four years and headhunters are interviewing potential successors. Mr Tiner himself brushed off the implication the regulator was overburdened with bureaucracy. “Its important we have processes and principles-based regulation will bring a new dynamism to them,” he said. “If we’d had inadequate processes I’d be more concerned.”

Stephen Haddrill, director general of the Association of British Insurers, said: “The NAO has confirmed that the FSA has been moving in the right direction, particularly in its work on financial education and the shift to principles-based regulation. This report is a further useful push in the direction of risk-based and outcome-focused regulation.”

The review was announced last June by Ed Balls, economic secretary to the Treasury, who was also an architect of the regulator. The FSA was set up by the Labour government in 2000 and oversees banking, insurance and the securities markets.

© Graham Bishop