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Regulatory changes "a shambles" says former FSA chairman

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The restructure of the UK's financial regulatory regime is "a bit of a shambles", according to Sir Howard Davies, director of the London School of Economics and first chairman of the Financial Services Authority.

In a well-received keynote address at SunGard's London City Day this week, Sir Howard singled out the decision to hand responsibility for combating insider dealing to a new police financial crime unit while oversight of listed companies is handled by another authority. pointing out that most insider dealing occurs at the time of a new listing, he said: "I think it's a shambles, because it is not properly grounded in an analysis of what went wrong."

Sir Howard's book The Financial Crisis - Who is to blame? looks at no less than 38 different theories of the causes of the financial crisis, "some of which are, frankly, implausible," he says.

His own explanation, as phrased for delivery to a group of SunGard users and staff, is relatively straightforward: "The technology of product innovation ran ahead of the technology of risk management."

Whatever the true cause, the upshot has been a change in the way regulations are framed, which will necessitate a different response from the industry. "The political framework regulators operate in has changed, and that changes the way they think," he said.

The upshot is that, in areas like product innovation, "it is now quite reasonable for regulators to question whether you've modelled your new instrument properly" before they allow it.

On the international level, Sir Howard said that there had been a failure of regulators in the crisis, in part caused by the fact that while there were plenty of international oversight bodies, there was no hierarchy or chain of command.

This has been changed, to some extent, by the introduction of the G20 to replace the G7 and the creation of the hard reporting lines down through the Financial Stability Board to the Basel Committee for banking, The International Organization of Securities Commissions (IOSCO), and the International Association of Insurance Supervisors.

In Europe, he pointed out that the European Systemic Risk Council (ESRC), to be chaired by the President of the European Central Bank, and the European System of Financial Supervisors (ESFS) decentralised network comprising of national supervisors, have not been established by treaty, and so don't have a truly pan-European status. Nevertheless, he said, "it is clear that the architects of this have in mind that it should evolve to become an overarching European regulatory body ... for now it is a halfway house, but it won't be in future".

The ramifications of new regulation were also addressed by another keynote speaker, Xavier Rolet, chief executive of the London Stock Exchange. "The regulatory and political financial oversight system is working in overdrive," he said, cautioning against creating the potential for regulatory arbitrage. "Regulatory over-reach will affect Western competitiveness - there are new capital bases in Asia, and regulatory arbitrage could drive a move to there."

Overall, however, he sees a move to international cooperation to prevent this: "A major outcome will be a slow, but reasonably sure emergence of a global regulatory framework," he said.

To protect the position of London, he said that that "the UK must maintain a strong voice in Europe, and not hesitate to propose rather than just react." The new ESMA will "promulgate regulation on the basis of a majority vote - the UK has 8% of that vote, but London represents 60% of production in financial services," Rolet said. "The UK must develop a strategy of response."

Source: Banking Technology

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