The Financial Services Authority (FSA) is getting tougher on rule breakers as it chairman Lord Turner confesses that the regulator was “seduced” in the past. 

 

Facing the Treasury Select committee, Turner warned that unless lessons were learned and taken on board, there is no guarantee another global financial meltdown can be avoided."Everyone was seduced by the long boom,” he admitted. “We were often led astray in the past by complicated mathematical rules. Regulators failed to notice the inherent weakness in that position."

 

He added; "History tells us that it could happen again. In the long term we have to try to stop society falling in love with another dominant intellectual theory."

 

 

Turner cited his concern that high-risk activities in some parts of the financial sector might pose a major threat to the economy. "Highly leveraged behaviour needs to be regulated better, regardless of whether the bank takes retail deposits or not," he warned. 

For its part, the FSA is proposing new measures to safeguard against such an eventuality, including suggesting the formation of what Turner called a “macro prudential committee”. This would essentially be a combination of a talking shop and a brains trust in which economists with "maverick positions and conflicting points of view" would be encouraged to air their views. 

 

The FSA will also be looking at whether to strengthen regulation of new financial products aimed at the consumer in a bid to reduce the number of consumers who have been misled over investments. "We have had lots of settlements and money paid out," he said. "This is not good for consumers or the industry."

 

Turner also claimed that the cost of the financial crisis may be much less than was initially feared and argued that it had been worth spending the levels that went into bailing out the banks. "Discussion of about the costs of this crisis often focuses on the costs of public rescue – exceptional central bank liquidity support, Treasury funding guarantees, and equity injections,” he said. "But these overt costs, while significant, may turn out to be small relative to the overall costs of financial instability. Central bank liquidity support is provided at market or penal rates and may turn out to be profitable: guarantees are provided for a fee and may well not be called, and the equity stakes may rise in value in future."

 

Meanwhile the FSA is taking a tougher stance and impose heftier fines on companies and individuals that break its rules in a bid to put in place a "credible deterrence" to change industry behaviour.

 

Fines are more closely linked to income and based on:

"We imposed record fines in 2009, but this new approach further amplifies the deterrent effect of our penalties and sends a powerful message to firms which makes it clear that non-compliant behaviour will not be tolerated," said Margaret Cole, FSA director of enforcement and financial crime.

 

"Despite industry opposition we have decided to implement these proposals as we believe enforcement penalties are a powerful tool to help change behaviour in the industry. As well as delivering increased levels of fines, we believe that our new framework offers substantially more clarity and transparency around the penalty-setting process and will reap rewards in terms of an increase in compliant behaviour."