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 agencies.
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.