Andrew Haldane who sits on the Financial Policy Committee and is the Executive Director for Financial Stability at the Bank of England has called for the simplification of the rule book, starting afresh. With a strategic review rather than the historic piece-meal approach that has generated a “steadily rising tide of red tape”.
Structured investment professionals the world over will be familiar with the increase in regulations over the last decade and before. Whilst a number of issues for the industry have arisen over this period that are well documented. There has clearly been a case for better regulation of certain areas, often more closely related to the sales process and client suitability rather than the products sold. That is not the same as more regulation, Mr Haldane’s questions focus on quality versus quantity.
As the world remembers Margaret Thatcher, there has been much discussion about her economic policies and their influence on the City of London as we know it. The most talked about is “Big Bang”, the liberalisation of financial services in the UK in 1986.
There were changes to the regulations under the Financial Services Act 1986 and reform of the London Stock Exchange membership and use of electronic, screen-based trading, which transformed the UK financial sector. They enabled overseas banks to expand in the UK and in particular American firms. The Government also removed restrictions on the movement of capital that paved the way for the growth of capital markets in London.
The Financial Service Act 1986 provided greater legal certainty for over-the-counter derivatives contracts, which had been challenged in the courts on the basis of gaming legislation. They came under the oversight of the newly created Securities and Futures Authority, a self regulating organisation. The US Government had passed legislation, most notably the Glass-Steagall Act, which made it more difficult for American banks to develop their securities and over-the-counter derivatives capabilities back home, so many established their operations here. As readers will know, the US has always had a strong listed derivatives market and legislators are clearly seeking to return to those roots. Whether you give credit to Salomon Bros, Goldman, Bankers Trust or the Swiss banks leveraging US expertise. The foundations for the growth of the retail warrants, structured notes and later retail structured products markets in Europe were laid in those days. Although home grown institutions deserve much of the credit for the evolution of our industry in their domestic markets.
It is ironic that it was the separation of banking activities in the US that indirectly led to the prime position now occupied by the City of London. Yet, politicians on both sides of the Atlantic are considering similar measures. Lets hope they get it right!
Otherwise, there is a risk for those countries that a new financial capital will emerge outside Europe and the US. Yet, according to Andrew Haldane, the groundbreaking Financial Services Act of 1986 contained 106 pages. In comparison, the 2012 Financial Services Act included 534 pages of content – an increase of over five-fold!
To be fair, the above comparison is not as straightforward as it looks. It must be recognised that the financial services sector has changed dramatically over that period. Both institutional and retail investors have access to a much wider choice of products today than 27 years ago. There have been a number of issues that have let down consumers in different sectors, including but not exclusively our own.
Mr. Haldane implies that simply increasing the volume and complexity of regulations does not increase compliance or protect consumers. It is better to be pro-active rather than re-active. He also highlights that this approach favours bigger organisations that are better resourced to address all of these regulations. He refers to a “steadily rising standing army of regulators and compliance officers.”
Andrew has been criticised by the new Governor of the Bank of England Mark Carney for oversimplifying certain issues such as capital ratios. It will be interesting to hear from Mr. Carney in due course. Interestingly, his comments come in the same week as Martin Wheatley (the new CEO of the FCA) made a speech on the “Human face of regulation” which included some controversial remarks about structured products which have been rebutted by the UK SPA. Hopefully, he understands that historically the UK SP market has much higher levels of disclosure and much lower levels of complexity, thanks in part to the FSA, than in Hong Kong. Less well reported was his Star Trekkie reference to the last regulatory system being “a little too Spock-like in its deliberations and decision making.” He went on to suggest that the FCA should have a “more pragmatic, sophisticated approach to regulation. To be a little more like Captain Kirk, perhaps a little less like Mister Spock.” Maybe he will be interested in Andrew Haldane’s views?
I appreciate that the challenge for regulators is not an easy one. Keeping up with financial innovation requires more people with greater expertise and resources are tight right now. The same is true of compliance departments. Yet, if investors are to reap the rewards of responsible innovation this challenge must be addressed.
At a time when regulators across the globe and in particular Europe, are calling for simpler products and greater transparency, Andrew Haldane may be right to ask them to look inwards as well as outwards.