Will the Turner Report carry as much weight abroad as it does at home?
What is most interesting about Lord Adair Turner's banking regulation report is the acknowledgement that his measures will make banks less profitable. But given that the key British banks are now owned by the tax-payer, is the chairman of the FSA's report as radical a shake-up as expected?
The FSA's attempts to manage the co-ordination between the banks and regulators is supported by Lord Turner, who believes that the FSA must now be "more intrusive and more systemic" in its approach to the regulation of banks. Although the industry knew that this was coming, it hardly makes comfortable reading for bankers used to a free reign. It may, however, encourage non-banking functions to be spun-off and carried out in non-banking entities.
Lord Turner cannot miss a dig at Sir Fred Goodwin, mentioning as he does the difficulties for non-executives facing powerful chief executives with aggressive growth strategies. But it is surprising that he asks for more time to consider whether the FSA should get involved in product regulation, such as limiting Loan To Value limits on mortgages. At this stage, the FSA should really have some view on this matter. What more information does it require?
His views on European control were ambiguous to say the least. Lord Turner said we either need "more Europe or less, just not the current amount". On the one hand, he wants a single European supervisor of supervisors. His paper suggests that a more powerful European regulator is needed, rather than a more powerful supervisory talking-shop. But politically, the UK remains far removed from backing a single European regulator, unlike some influential industry associations such as the ABI.
Lord Turner also suggests home countries should be allowed to require branches to be turned into subsidiaries so that they can be regulated at a local level, however this is completely contrary to the EU co-operative model, and would threaten to undermine the single market in the eyes of many European countries. So he seems to want both more and less Europe, and that is probably not a sustainable way forward. It is interesting that Lord Turner does not back the de Larosiere report recommendation that three single supervisors of supervisors, with powers to direct action by national regulators, should be established.
Lord Turner accepts that short selling is not a market abuse issue, but may be of importance in relation to the maintenance of "orderly markets and financial stability", presumably suggesting the FSA should be given new powers in relation to short selling.
The conclusions on hedge funds in the report are surprising. The report says, "hedge funds in general are not today bank-like in their activities ... and are not therefore at present performing a maturity transformation function". Turner explains that hedge funds could, however, evolve (rather like investment banks did from the 1980's onwards) to play a more important role, and therefore that hedge fund activities should be kept under review so that regulation can be introduced if needed. Many politicians have been clamoring for full regulation of hedge funds now. They will view Lord Turner's judgement as light-handed. The political reaction to this semi-proposal will be closely watched.
Rob Moulton is head of Nabarro's Financial Services Regulation Group
Posted 20 March 2009 : Director.co.uk
