Q&A: The future of the FSA

Why change the architecture?

The proposal to give the Bank of England overall control makes sense. The existing structure has been shown to be weak on macro-prudential prudential regulation – the big picture stuff – and the FSA has shown little appetite for taking on that role. So something has to change at the top to prevent the same problems happening again.

It's a bit like building in an earthquake zone. The last earthquake didn't bring down the building, but it showed the structure was flawed. So it's no surprise that a new architect wants to try a new design, rather than just plaster over the cracks and carry on as before. Only time will tell whether the new structure proves any more resilient that the current one.

The one thing that jars slightly in the new structure is putting consumer protection and market supervision together, but the alternative would have been further fragmentation. On balance, keeping them under one roof is probably the better option.

What does this mean for the FSA?

Moving many of the functions of the FSA to a subsidiary of the Bank of England is as much about symbolism as anything else – it creates a clear pecking order. Part of the problem with the current structure is that it wasn't clear where the buck stopped – that will be less of an issue under the new regime.

The fact that Hector Sants will stay on will help to ensure continuity of strategy as well as reducing the disruptive effect on the organisation.

However, the truth is that many of the regulatory decisions will be made in Europe in the future, so even without these reforms, power was always going to move away from the FSA. You could say that the diminished role for the FSA is simply a reflection of this new reality.

Will it be disruptive?

It will take some time to unpick the legal and organisational structures put in place under the Financial Services and Markets Act 2000, but the news that Hector Sants will be staying on to oversee the transition and become first deputy governor and chief executive will be widely welcomed.

What does this mean for regulated firms?

It's important to remember that much of this is about planning for the worst-case scenario of another financial meltdown. What firms will be more interested in is the day-to-day relationship with their regulator, and whether these changes will affect FSA policy-making.

The answer is that there is no sign of any changes that will directly impact firms in the short term. We can expect the Retail Distribution Review, for example, to continue as planned. So firms shouldn't let these proposals distract them: their day-to-day relationship with the regulator, and the strategy that the FSA pursues, won't be changed as a result of this, at least not for a while.

Will this change be disruptive?

"The real concern was that staff at the FSA, particularly those at the coalface, face uncertainty about their roles and responsibilities, and potential recruits may be put off from joining. Having Hector Sants continuing at the helm will do a lot to steady the ship."

Will the Bank of England regulate differently?

The main reason for giving oversight to the Bank of England is to ensure that the big picture issues are picked up – ensuring firms are properly capitalised, not threatening the UK's financial stability, and that clients' money and assets are appropriately protected. It will leave what remains of the FSA, in its guise as the Consumer Protection and Markets Authority, to sweat the small stuff. I think the Bank it will leave the CPMA alone, as long as nothing it does jeopardises the main objectives of the Bank.

Will white-collar crime be dealt with more effectively?

The move to create a new Economic Crime Agency is another attempt to tackle the perennial problem of ensuring the effective prosecution of white-collar crime. The trick will be to ensure that expertise and best practice within the component parts of the new Agency is pooled, rather than remaining in silos. It will also be important to ensure that the new Agency is funded sufficiently to enable it to do its job effectively.

Will the Bank block mega-mergers?

It looks as though the larger banks and insurance companies will come under particularly close scrutiny. For example, it appears that the Bank of England will be given the powers to determine whether takeovers of major financial institutions should be permitted. This appears to be a response to RBS's ill-fated acquisition of ABN AMRO, which the FSA approved.

However, the basis on which these decisions are made is prescribed by a European directive, so while it will be the Bank making the decision, it will have to apply the same criteria as the FSA would. What matters is the calibre of the people making the decision. Any fool can be cautious; what's needed is good judgement and independence.

What about the European dimension?

The elephant in the room here is Europe. It is becoming clear that we are about to see a seismic shift in power from the UK and other individual member states to Europe when it comes to financial services regulation. In the future, many of the key decisions will be made through the new European Supervisory Authorities, with the UK regulators being no more than the implementation and enforcement arms of those European Authorities.

In some ways, that makes these proposals seem rather academic, but you could also argue that the current tripartite structure was designed for a different world, when the UK had far more autonomy in how it regulated financial services.

Mathew Rutter is financial services partner at law firm Beachcroft.

For more, click: Chancellor sets out future of financial regulation