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Regulation: Improving on the FSA

There was no chance that the UK’s Financial Services Authority would emerge from the recent financial crisis without a fundamental overhaul of its culture, objectives and procedures. But did it need to be scrapped altogether? And if it did, will the new model work any better? Dawn Cowie reports.

SINCE THE DEMISE of the UK’s Financial Services Authority was announced by the coalition government in July, the banking industry seems to have developed a sudden affection for the institution that it has loved to hate for the past 13 years.

There is no doubt that the financial crisis exposed big defects in the FSA’s supervision of the banks and financial markets, particularly its complete failure to spot systemic risks building. Its own internal audit of its supervision of mortgage bank Northern Rock is a damning indictment of its approach.

The report found that there had been a lack of engagement with the firm; insufficient checks by FSA management to ensure the quality of supervision; inadequate resources dedicated to the task; and a failure to use risk information effectively to inform its actions.

However, many in the industry argue that the Northern Rock report is an excellent example of how Hector Sants, the FSA’s chief executive, has done well in setting the new tone for UK regulation and engaging with banks on issues such as the new stress-testing regime. So is the scrapping of the organization justified?

“Having made the decision to restructure the FSA, they should do it as quickly as possible”

David Kenmir, PricewaterhouseCoopers

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