“Confusing and complicated” and “an onslaught of regulatory nonsense” are not phrases often heard when discussing incoming financial regulation – but these were the comments made by Howard Davies, first chairman of the Financial Services Authority (FSA), and Jim O’Neill, chairman of Goldman Sachs Asset Management Division, when debating the potential impact of future regulatory changes.
In a keynote speech to delegates at SunGard’s City Day on 6 July in London, O’Neill said it was a “fanciful notion” that the financial crisis would never have happened if the right regulation had been in place. “At the core of the collapse was the idea that 300 million US people could own a home without having enough income,” he said.
He said that industry watchdogs are right to try and improve the way the financial services industry is monitored. However, it would not be possible to satisfy all requirements through the forthcoming “onslaught of regulatory nonsense”. He said that firms need to work together with regulators to ensure the stability of market infrastructures – and those that succeed will demonstrate the most adaptability and desire to change.
During his speech, Davies criticised the current tripartite regulatory system – which includes the FSA, the Bank of England (BoE) and the Treasury – but the changes will ensure this becomes “far more complicated and confusing”. The FSA is due to be phased out by 2012 and replaced by the Prudential Regulatory Authority (PRA), the Financial Conduct Authority (FCA) and the Financial Policy Committee (FPC). He added that the scale of these changes – or “rearrangement of the deckchairs” as he described the reform – was overly ambitious, particularly when the industry was still in a state of recovery following the financial crisis.
Davies went on to say that there will be three tiers of regulation affected by the changes – global, European and UK legislation, with the latter seeing a significant overhaul through the break-up of the FSA – politicians will have much greater involvement with the industry while the regulator’s “light touch” approach will be replaced by one more “intensive and intrusive”, he explained.
He added that the Basel III initiative is the most significant proposed reform – it requires financial institutions to have a tier one capital ratio of six percent – which could put significant strain on relations between national and European regulators as credit becomes scarcer and more expensive.
The swing of growth from developed to developing markets was the central theme of O’Neill’s address, perhaps unsurprisingly from the banker responsible for coining the Brics (Brazil, Russia, India and China) acronym. He described the financial collapse as a “North Atlantic crisis” rather than a global concern and said that it was “lazy“ to label it as such: “It is socially offensive to label these areas ‘emerging markets’, as economically, these territories are driving the world,” he said. He emphasised this by saying that by 2020, the economies of the Bric nations will be larger than the US.
The emerging markets were highlighted at one of the breakout sessions in the afternoon – Giles Bedford, partner at Beltone Financial, Martin Orji, managing director and chief executive officer (CEO) at Nex Rubica Capital, and Olivier Gueris, chief operating officer at the Qatar Exchange, emphasised the new investment opportunities in Egypt and the pan-Africa region. While other sessions covered the impact of new technologies on trading, the management of market data and ways in which the firms can combat insider trading, the main theme of much of the discussion came back to regulation and how the industry is reacting.
Earlier, Kathleen Traynor, director of regulation at the Futures and Options Association, outlined the various reforms aimed at the marketplace. She said that changes in Europe and in the global market are aimed at reducing risk, offering greater transparency to business practices and limiting impacts of the downturn. Traynor explained that “huge efforts are underway” by regulators to address these issues but the period of transfer is ongoing. The number of sessions and attendees at the event suggested that the dialogue surrounding these issues, like this transfer period, is definitely not over yet either.
By Jim Ottewill