Monday, March 26, 2007

10 years of New Labour - Financial Services Regulation

In 1997 financial services regulation in Britain was a grand old mess. There were 10 separate regulators with often overlapping responsibilities. Increasing cross-acquisition in the financial world meant that some firms like HSBC and Lloyds TSB (which acquired Scottish Widows) were forced to deal with several regulators at once, who didn't talk to each other.

The regulators themselves weren't very competant, and a series of scandals undermined Britain's position as a financial centre - the collapse of Barings bank; the BCCI disaster; and the pensions miss-selling scandal, where dodgy pensions salesmen were helped along by a Tory government advert which showed a person in chains breaking them off, while a voice-over proclaimed that government was freeing people from joining company pension schemes, as though employers were somehow evil to want their employees to join a scheme where said employer was paying in about 10% of pay on the employee's behalf.

The announcement that a new integrated financial regulator would be created, came just two weeks after the May 1997 election victory. As the FT says,

Aside from the creation of an independent central bank, the most decisive step of his years in office from a City perspective has been the setting up of a super-regulator, the Financial Services Authority.

Mr Brown was heavily involved in this, down to the detail of choosing its name. When first proposed in October 1997 the FSA caused a good deal of nervousness in the City, based on its potential to become a bureaucratic juggernaut.

Some would claim it is that today – or, at least, that the FSA can be ineffectual or interfering in detail. But the more important point – one that does much to account for London’s rise on the international financial scene – is that the FSA has become the champion of so-called light touch regulation.

This became particularly relevant with the passing of the Sarbanes-Oxley Act in the US, which drew attention to the shortcomings of the more heavy-handed and rules-based US system of regulation. Hence the remarkable fact that London, not New York, was last year the world’s most popular home for new company listings. And the listings authority, of course, is the FSA.

Some in the City have also resented Mr Brown’s propensity to draft in his chosen helpers to tackle City issues, such as Paul Myners on institutional investment and Sir Derek Higgs on non-executive directors. In some cases the results were initially criticised as political correctness but, on corporate governance, the overall result has played in the City’s favour. The Combined Code, introduced in 1998 after the earlier Cadbury, Greenbury and Hampel reports and revised in 2003 in the light of Higgs, is a notable example of principles-based, light-touch regulation. Companies must either comply with the code or explain why they are not doing so. The leeway this gives has been one reason for London’s popularity among foreign companies looking to come to the market.

The FSA works in that it is successfully protecting investors from the disasters seen in the 1990's, while at the same time not stifling business. The government has also strengthened shareholders rights by legislating so that from 2002, shareholders of firms registered in the UK have a non-binding annual vote on executive pay. In practice, no company has ever ignored the results of the vote, which has seen pay-deals scuppered, notably the excessive pay-package of Jean-Pierre Garnier, GlaxoSmithKline's chief executive, in 2003 after shareholders voted against it. Following the UK's example, Australia, the Netherlands and Sweden legislated to allow shareholders a vote and there is pressure building for the USA to do the same, with a bill working it's way through the House of Representatives.

The result of integrated, principles-based, light-touch regulation, combined with sensible legislation on the rights of shareholders, has transformed London into the world's premier financial services centre. A large part of the credit for that goes to New Labour.

Previous articles in this series:
Economic Growth since 1997
10 Years of New Labour - Employment

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