Outlook: The FSA

IT'S ODD that an organisation whose creation when announced a little more than a year ago was generally welcomed as a bold and necessary reform is now the object of such a wall of hostile comment and rhetoric. That organisation is, of course, the Financial Services Authority.

When Gordon Brown revealed that he was splitting banking supervision from the Bank of England and consolidating it with other forms of financial regulation into a single City regulator, there were plenty of warnings about the potential for an overbearing and oppressive bureaucracy, and of the dangers of combining retail with wholesale regulation of financial services, but on the whole the proposal was well received.

Commentators concentrated more on the positive - the advantages of a one stop shop system of regulation which mirrored the blurring of edges between different parts of the financial services industry - than the negative.

So what's happened to change the position? The truth is that the underlying position may not have changed very much, that broadly City practitioners are still reasonably positive, but certainly since the Financial Services Bill was published in the summer, the negative has had the bigger share of column inches.

Concern lies in four areas. First, the new authority's proposed disciplinary powers and procedures are cricitised as potentially oppressive and unjust, that the FSA by acting as investigator, prosecutor, judge and jury could infringe basic human rights and laws of natural justice.

The second area of concern is the FSA's perceived lack of accountability, either to Government and parliament, which are responsible for its creation, or to the City, which is funding the whole exercise. Third is a resurfacing of worry about whether combining wholesale and retail regulation is an appropriate structure, given how different the needs of investors are in these two markets, and the consequent safeguards required. And finally there is the general concern about excessive cost and red tape, and the effect this might have on the competitiveness of the City.

All these concerns need to be addressed in some shape or form, but whether they justify root and branch reform of the Bill is another matter. In each case there is another side to the coin. Take the proposed disciplinary powers. In point of fact they are no different from the powers of existing financial regulators, but bundled together in one overmighty regulator they admittedly seem a lot more daunting. On the other hand, is it not just a little curious that so much attention is being focused on the interests of regulated firms and individuals when the whole point of financial regulation is to defend the interests of investors and depositors. These things are obviously a question of balance, but certainly the FSA needs extensive powers of redress on behalf of these people.

As it is the FSA has already committed itself to a clear separation of those investigating alleged breaches and those responsible for disciplinary proceedings, but it may be that the Bill will need to be reformed to meet the requirements of the European Convention on Human Rights.

Perhaps more serious are the allegations of lack of accountability and excessive red tape. The FSA does have statutory objectives to pursue and there are a series of general duties, such as to consult with practitioners on costs, which must be observed; it is required to report to parliament and the board dominated by non executives and the executive will be further constrained by a practitioners forum, which already boasts some top drawer City names. To go further would mean giving ministers and or practitioners direct powers of intervention, which in turn would run counter to the idea of independent regulation.

On red tape, there is scant evidence of this so far, or certainly there seems no additional burden other than a great outpouring of consultation documents to respond to. Since one of the FSA's proposed statutory obligations is to take account of the competitiveness of financial markets, there should actually be an inbuilt bias against it. And the City would hardly thank the FSA for failure to consult.

Nonetheless, there is obviously a danger that the FSA's very considerable powers could be abused, even if there is not much reason for thinking they will be. One possible solution is to be more prescriptive in the legislation, to lay out in considerable detail what the FSA can and cannot do. On the other hand, this would make the FSA rigid, inflexible and arguably incapable of evolution or of rapid response to changed circumstance.

In any case, it is not at all apparent the FSA does need to be reigned in. Many consumer groups think the heavy emphasis in the legislation on caveat emptor inappropriate, that it represents a rolling back of regulation which is not in the interests of ordinary savers.

In the end, the best safeguard against abuse is the City itself. It is plainly not in the FSA's interests to kill off the goose that lays the golden egg, quite literally in the FSA's case because the City pays its costs. By the same token, as Howard Davies, chairman of the FSA has remarked, it is very much in the interests of financial institutions to have a system of regulation whose costs have to be justified principally to those who pay them.