FSA as a Regulatory Role Model
July 20, 2006
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Ajay Shah discusses the regulatory successes of the UK’s
Financial Services Authority (FSA) in an
article in the Financial Express and on his blog.
The discussion is related to the common law versus civil law
orientation that I blogged
about a few days ago.
So is the FSA more common law oriented than other securities
regulators? That depends on whom you compare it with. I would imagine
that Ajay Shah was comparing the FSA with the Indian regulators (the
Securities and Exchange Board of India and more importantly the Reserve
Bank of India) and perhaps also with the US Securities and Exchange
Commission. If these were his benchmarks, then Ajay Shah is
undoubtedly right. The conclusion would also remain valid if the
comparison is with the other super regulator that all UK
institutions have to contend with – the European Commission. By these
benchmarks, the FSA has been a success story that other regulators
could seek to emulate.
However, these reference points set the bar too low. I would put
forward three other reference points against which the FSA’s
performance looks much less impressive.
- The first and most obvious comparison would be
with the regulator across the border in Ireland which has established
itself as a global centre of excellence for hedge funds and other
alternative investment vehicles. Most people that I have talked to
agree that the IFSRA is one of the smartest and most flexible
securities regulators in the world. Before the formation of the IFSRA,
the Central Bank of Ireland also had a similar well deserved
reputation. In comparison to the IFSRA, the FSA comes across as much
more of a check-box or civil law oriented regulator.
- Another comparator is the plethora of
self regulatory organizations that existed prior to the formation of
the FSA. Most observers think that the formation of the FSA saw the
emergence of a more rule oriented regulation than what existed
earlier. A large part of the staff of the FSA came from the Bank of
England and brought with them a more heavy handed regulatory
style. The FSA of course had to operate within the limits of its
statute and this prevented an excessive civil law orientation.
- The last point of reference is the US SEC in its heyday. All
regulators are more flexible and competent in their youth. As they age,
they tend to ossify and lose their brilliance. Since the FSA is in its
early days of existence, a comparison with the Douglas or Landis
SEC would be appropriate. A comparison across such a long time gap is
problematic. Markets have become more complex and therefore there is a
case to be made for more complex regulations. Yet, as I read the
situation, the SEC of those days was probably smarter and more
flexible than the FSA of today. Though the SEC was a product of a civil law
era in US administration (the New Deal), Douglas made the SEC
the most successful and least civil law oriented of all the New Deal
I do have an uneasy feeling that both Ajay Shah and I are relying on
anecdotal evidence and an intuitive understanding of how the FSA and
other regulators function. There is a need for a more rigorous
academic evaluation based on measurable and quantifiable parameters.