Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

FSA as a Regulatory Role Model

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.

  1. 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.
  2. 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.
  3. 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.


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