The FSA’s First Ten Years

The Financial Services Authority is ten years old, and when it was first set up it was said that it was not created to ensure that no firm would ever go bust, and inevitably there would be the occasional regulatory failure.

First chairman Howard Davies said that its real ability would be to bring about some unlikely rescues from time to time. It might be likened, he said, to a goalkeeper – the last line of defence. His fear was for a major financial crisis in the first few years before people had time to understand the FSA’s true benefits. The FSA has come through the dot-com boom and bust, the millennium bug and the bear market, but the worst moment came with criticism for the collapse of split-capital investment trusts, although in fact regulation of trusts was not part of the FSA’s mandate.

The biggest problem for the FSA has surely been the recent Northern Rock crisis, and, bad though it has been, one major failure in ten years has not been a disastrous record.

The Government has pressed the FSA to introduce tougher rules for banks, though such regulation would probably come too late to save Northern Rock and any other bank in real trouble in the current credit crisis. Those problems were caused some years ago, and the people in charge at those banks should know what action they need to take right now.

Hastily passed regulation does not always work in reaction to crises and does not usually provide a forecast for the next bad situation. Proportionate risk-based regulation is one of the key attractions of the City compared with rival financial centres. A measured approach is better than panic-reaction and the FSA has proved to be a fairly reliable defence against financial problems in its first ten years.