The financial crisis has demonstrated the need for new regulatory approaches and more intense supervision of financial service providers, writes James Denton.
This has sparked a raft of new legislation from governments internationally as they attempt to ensure no such crisis happens again. Such regulation has consequences for wealthy families and their family offices who will need to comply with the new rules on reporting and governance.
In the UK, the new coalition government last week signalled the break up of the FSA, the body that previously regulated financial services and markets. Briefly this has led to the creation of a Financial Policy Committee within the Bank of England to look after many prudential aspects and also a new Consumer Protection and Markets Authority, which will have a strong focus on the retail sector and on market conduct issues in wholesale products.
In effect, the government has decided to abolish the existing tripartite regulatory system made up of the Treasury, the Bank of England and the FSA in favour of handing regulatory power to the Bank.
Such upheaval will not affect the Financial Service and Markets Act 2000, which is concerned with the regulation of financial services and markets in the UK. Under Section 19 of the Act any person who carries on a regulated activity in the UK must be authorised by the FSA (or its replacement) or be exempt. A breach of Section 19 may be a criminal offence and punishable on indictment by a maximum term of two years in prison and/or a fine.
Consequently a family office has to establish whether its proposed business requires it to apply for authorisation to carry on regulated activities. For most family offices this would typically include selling investments, arranging deals in investments or advising on investments.
Clearly there are PR advantages to being authorised but more importantly for a business there is a discipline and rigour in order to comply with rules, such as financial reporting and governance, and there is recognition that the persons controlling the business are fit and proper to carry out their respective roles.
The downside is principally the cost of compliance. This cost is not only in terms of applying for authorisation but also the ongoing cost in terms of audit, compliance monitoring and financial reporting. It is therefore critical to determine whether there is firstly the need to be authorised and if so whether the benefits outweigh the disadvantages.
The changes in the UK regulatory structure are symptomatic of changes taking place worldwide. The cocktail of the financial crisis, greater complexity of consumer circumstances and needs, the broader trend of globalisation and a much more deeply integrated Europe present great challenges for not only the financial services industry but also for regulators and consumers.
The desired outcomes for these groups are not separate – rather they are one. Everyone has to acknowledge a shared stake in the financial future and create a regulatory framework that is durable but adapts to the inevitability of change. It has to deliver consumer protection but also allow innovation and diversity of business models. It has to deal with local needs while recognising obligations in international financial markets.
At domestic, European and international level the primary focus over the recent years has been on the prudential aspect of financial regulation – restoring stability and confidence in the system and making sure consumers' deposits are safe. It is to be expected that the new European Supervisory Authorities will have an important role to play.
Through the creation of a single rule book (and seeing those rules are uniformly applied) they are designed to ensure better and more consistent outcomes for consumers across Europe and, while national authorities with their close proximity to local markets will retain the principal supervisory roles, the co-ordination function – the ESAs – will greatly improve the oversight of cross-border European firms.
Much of the focus in setting up the ESAs has inevitably been on the prudential aspects, but it has to be remembered that there are important conduct-related investor protection issues to take into account. More detail concerning the operation of the ESAs will be coming out in 2010 and will be of interest to family offices in different European jurisdictions as there is now finally a move to a more consistent approach to supervision and regulation.