The need for change

(i)   The need for change

15.   Chapter 1 of the CP sets out the background, asks some general questions about the CP's proposals - such as whether they are necessary and proportionate, could be improved etc - and argues in favour of fundamental change.  But the BSA believes that, however many procedures are put in place, there is unlikely to be a serious regulatory bulwark against financial instability unless the Authorities are fully committed to carrying out competently their existing functions in seeking to avert such financial instability.  Indeed, paragraph 3.13 of the CP states that –

"The interventions and powers that are already available to the FSA are wide-ranging. In order to support the reforms outlined in this document the Authorities judge that the FSA requires a small number of additional powers."

16.   This begged the question why those powers were not exercised, at an earlier stage, in relation to Northern Rock, and whether additional mechanisms were really necessary.  It is now clear that the FSA itself believes that it badly mishandled its supervision of the expansion of Northern Rock's business model and lack of back-up credit 4.

17.   It is imperative that the failings of the Authorities in relation to the Northern Rock episode are fully recognised and addressed as appropriate.  The tools proposed in the CP might be helpful if difficulties arose in future, but would be unlikely to get to the root of the problem if regulatory deficiencies like those in relation to Northern Rock, or of equivalent significance, were to be repeated.

18.   The FSA has promised to address the failings.  It is important to wait and see whether it can successfully – and proportionately - deal with these matters as it plans to do, before introducing new, far-reaching measures such as the 'special resolution regime' (see below).  The BSA recognises that the extent of the FSA's success in its remedial activities will be a matter of judgment, but it is nonetheless appropriate to make a proper assessment at the relevant time.

19.   It would be unwise to introduce large-scale legislation in haste for a number of reasons –

• as noted, the outcomes of the FSA's work in improving its regulatory activities are awaited and more far-reaching measures should be unnecessary if the FSA carries out it regulatory responsibilities effectively in future
• the next stability problem, if one arises, could be completely different from the Northern Rock situation
• complicated and wide-ranging legislation could have unintended consequences and be detrimental to the continued effective operation of the banking system; they could, possibly, even be destabilising, especially in a difficult market.