The Birth Of Regulation

As I touched upon before, things had to change, and were going to change. Here we were in the middle of the 80’s, with highlighted hair, HUGE mobile phones and massive. BATTERY packs!!!… (What WHERE you thinking!?) … bouffant and collars, flamboyance and pretentious champagne and Wine Bars. The term “Yuppie” was widely being used and fingers were pointing straight to Throgmorton Street in that sense. So herein begins a lot of change.

From a Regulatory point of view, it went approximately like this – Timeline of UK regulatory events:-

The 1980’s sees the introduction of the modern regulatory system; “Self-regulation within a Regulated Society”. This affects all Stockbrokers, asset managers, and there is statutory oversight of banks and insurers.

In 1986 we see the introduction of the Financial Services Act 1986 which marks a massive step change in the nature and extent of UK investment business regulation. Then, just as we are getting this into our systems, about 2 years later, in April 1988 we are looking at the introduction of a regulatory system that has investor protection as its main aim.

Although today, we take this as a MUST have, believe it or not, back then, that wasn’t seen as important. The Markets had confidence in themselves, yes, but sadly, this confidence was based on too few knowing too much and not enough transparency – which indirectly lead to failure of confidence in the system and hence the need to change/

The system was based on five self – regulating organisations (SROs); covering five different areas of financial services; futures broking and dealing, financial intermediation, investment management, life assurance broking and securities broking. These were:-

  • The Association of Futures Brokers and Dealers (AFBD), the Financial Intermediaries, Managers and Brokers Regulatory Association (FIMBRA), the Investment Management Regulatory Organisation (IMRO), the Life Assurance and Unit Trust Regulatory Organisation (LAUTRO), and The Securities Association (TSA).
  • The membership organisations were tasked with the creation, monitoring and enforcement of rules for their respective membership and are approved and overseen by the Securities and Investments Board (SIB), who was itself, a regulator with statutory powers.
  • The Banks and insurers are under statutory regulation by the Bank of England and the Department of Trade and Industry (DTI), respectively.

The 1990’s – As a band called D:REAM had their song titled “Things Can Only Get Better” played at the Labour Party Conference, the HUGE… hair! And massive… Egos… Have now by and large disappeared and we have moved on to a new decade – with NEW Labour at the helm and a new raft of legislative changes.

Self-regulation in the 1990’s became increasingly diluted, as a series of perceived regulatory failures led to a commitment to a unitary single-tier regulator. In April1990, the “New Settlement”, proposed under the auspices of second SIB Chairman, Sir David Walker, introduced a three-tier structure of standards imposed upon firms.

At the top tier, the Ten ‘Principles’ of business seek to present a universal statement of the expected standards, applying directly to the Conduct of (investment) Business and to the financial standing of all ‘Authorised Persons’. They are qualitative, high-level and frequently behavioural in their expression.
The second tier designates a number of ‘Core Rules’, binding upon SRO members in certain key areas, such as those relating to ‘financial resources’, ‘conduct of business’ and ‘client money’. (And haven’t we just seen how important this was! I am sure you can ALL think of numerous scandals covering these over the last few years!?). And the third tier were the SRO rules.

There were a series of perceived regulatory failures (not least the Maxwell pension funds scandal), that provided the context for the1993 Large Report. In stopping short of proposing the end of self-regulation, Andrew Large proposed more leadership by the SIB, while recognising that the objectives of regulation are not sufficiently clear and self-regulation can often be seen as too synonymous with self-interest.

Then we had the EU InvestmentServicesDirective1993 (ISD) imposing from the beginning of 1996 some additional capital and reporting requirements upon Managers on an EU-wide basis and so cuts further across self-regulation.

For Regulators, we saw organisationalmergersin1991 and1994 reduce the number of SRO to three. The Investment Management Regulatory Organisation (IMRO), and the Personal Investment Authority (PIA) were in place of the FIMBRA and the LAUTRO in 1994. Then the Securities and Futures Authority (SFA) replacing the AFBD and TSA in 1991. IMRO was the only surviving original body.

Following this we witnessed the first major failure if you like – that of the failureofBaringsBankin1995 and a change of political administrationin1997 which resulted in independent monetary policy making for the Bank of England, and a name-change of the SIB into the Financial Services Authority (FSA), ushering in the end of self-regulation.

So where does that lead us now?

Well, we leave behind the decade of decadence and flamboyance and move into a new MILLENIUM. With the bells of Big Ben hardly finished a new wrath of Regulatory change comes this way – not only from our own Regulator – but also from our Cousins in Europe!

The “new millennium” sees the introduction of a unitary regulatory structure and an era of what was known as ‘MPBR’ (More Principles-Based Regulation’). The legislative balance of power has to a large extent shifted to the EU, but the supervisory approaches remain national.

The FSA as introduced by the Financial Services and Markets Act 2000, (FSMA as it is widely known) oversees a statutory and unitary system for the regulation of investment business, banking and insurance in the UK. The FSA now has four statutory objectives supportedby a set of ‘Principles’ of good regulation.

The objectives were:

  • Market confidence (maintaining confidence in the UK financial system).
  • Public awareness (promoting public understanding of the financial system).
  • Consumer protection (securing an appropriate degree of protection for consumers).
  • Financial crime reduction (reducing the possibility of regulated businesses to be used for purposes connected with financial crime).

The supervisory culture at the FSA was often characterised by a series of overarching approaches and themes, such as what we touched upon earlier MPBR (‘more principles-based regulation’) and TCF (‘Treating Customers Fairly’.)

The FSA Handbook which has in it a set of rules to which regulated firms are subject, becomes increasingly prescribed by EU legislation. This is aided by the FSA’s move to the so- called ‘copy-out’ approach, transposing directives word for word, where possible, in order to avoid ‘gold-plating’. Whilst all this change is happening the FSA embarks on an ambitious recruitment drive, where it was actively seeking employees who had actually worked within Regulated Companies in an Approved Function, so that it can really “add value” and be seen to be more than a Government offshoot, but an actual Industry body made of not civil servants but ex traders, compliance officers, enforcement, exchange regulators and so on. The FSA grew significantly in size and cost through greater activity, and this had a knock on effect for the Financial Ombudsman Service and increasing calls on the Financial Services Compensation Scheme, fuelled by a growing number of consumer complaints especially around bank charges and payment protection insurance.

In order to be seen to be on top of things, the FSA also heavily increases its enforcement activity, especially on market issues and in terms of stepping up fine sizes. This was an inevitable reaction, given the criticism and heavily reported mis-selling of PPI and other regulated parts of people’s lives. Often being “mis-sold” without even realizing that they had bought something or that it’s of no use to them at all.

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