Turn is Vision

Chris Cummings - Director General - 22nd January 2009 - 17:29

Last night Lord Adair Turner, FSA Chairman, delivered a speech at an event hosted by the Economist magazine. The speech had been billed as dealing with the uncertain future of regulatory structures and providing a long term solution to the problems that led to the credit crunch. It was certainly a brave and forward looking speech.
 
Lord Turner well deserves his reputation as being one of the brightest people on the pitch today. His analysis of global, regulatory and market issues that led to the credit crunch both rang true and was well delivered. He shares an ability, with the most-gifted of teachers, to lift an audience to a new level of insight, easily and with panache. Though there was little new in his analysis of the causes of the crunch, his willingness to admit that FSA had made mistakes was refreshing. This is of course, always easier not having been there when the mistakes were made! His views that finance ministers, regulators and academics on a global scale had got much wrong struck the right chord with the audience, even if they were a little taken aback by his view that, even if FSA had acted better, their ability to prevent Northern Rock's demise would have been minuscule. There were global forces with global impacts at work. As he pointed out "banks may be international in life but they are national in death".
 
The new world proposed by Adair has many things to commend it. One of my personal great concerns was why the usual, traditional, stabilisers had failed to operate... why the calming hand of an authority had not been laid softly bit firmly on the arm of an exuberant firm to draw them back in. Turner presents us with a world where this happens -partly by structural design, partly by a clearer role for authorities, and partly by capital requirements that act in a counter-cyclical manner: more is set aside in the good times to be drawn against during the bad. The extent of these additional requirements may come as a surprise to many.
 
At a time when FSA needed to present a view of its own position in a post-credit crunch world, Turner did an admirable job and earned his stipend on the strength of this speech. His grasp of the issues and ease with which he delivered the argument showed him to be ideally suited to the role.
 
This, is the future as seen by Turner:
 

• Regulators will take new approaches to capital adequacy, ensuring more capital is held against risky trading strategies and counter-cyclical capital requirements to build up more adequate buffers during good economic times, which can be drawn on in bad;
• A new liquidity regime focused not just on individual firms’ liquidity but also on market-wide risk. This was particularly pleasing as we had been calling for a greater focus on, and proper measurement of, liquidity and its impact on the system
•  Ensuring that financial activity is regulated according to its economic substance, not its legal form. As Turner said, if it swims like a duck and quacks like a duck... then it's a bank. Banks (full, near and shadow - and those with "bank-like" activities) will subject to capital requirements unlike those seen before.

 
 
During the Q&A session we discussed future regulatory structures. Turner suggested more structurally sound global regulatory institutions are needed - with even a suggestion of a treaty-based entity like the WTO for financial services capable of introducing global regulations.
 
The impact for members seems clear. We have been saying for sometime now that the focus of regulation is moving toward prizing well capitalised, structurally robust firms that can demonstrate clear risk management strategies. Turner's views last night are a clear commitment to that as a direction of travel.  This speech will change the regulatory landscape upon which our members operate. Its impacts will be felt by the largest firms first and change their corporate strategies, risk appetite, capital management priorities, investment strategies, product and service design, and, ultimately how they wish to deal with the advisory profession.
 
This speech has set a new agenda that will be more important to market structures than the RDR has been for the retail investment market.