Regulation: learn how to walk again, before you try to run

There have been calls this month from the European Union for the creation of a pan-European regulatory body to help solve the current financial crisis and prevent future issues. This is a deceptively easy thing to call for in the current climate, but it neither makes it easy to implement, nor indeed is there much evidence that it would be any more effective than the current regulators. It also ignores or suppresses the differences there are in the structure and approach with the European markets. For example, I was struck recently by the contrast in approach and culture between the London and Paris operations of the same asset manager as I completed a project with them last month. Also having worked in Germany and Holland in the past, had exposure to Eastern Europe and worked on specific pan-European regulatory projects such as the Euro and MiFID, the notion that a “one size fits all” super-national regulator across all European countries is practical, let alone likely to be effective or indeed even implemented on a timely basis is unlikely.

Instead I think that a more pragmatic solution is to concentrate on rebuilding confidence in the individual country regulators - the equivalent of learning to walk again. For example, the UK Financial Services Authority who, despite recent performance, have been one of the more effective European regulators admitted this month that they need to change significantly before they can be “fit for purpose” in regulating the changed market landscape.

In terms of some of the common ground for developing regulation, regulators on both sides of the Atlantic are looking to extend their reach to gain significantly more transparency on the operations and exposures of hedge funds. Rather than being for the usual investor protection reasons - it is argued that direct investors in hedge funds should be able to assess the risks for themselves – this increased monitoring is intended as protection for the financial system itself. For more on this topic, there is a discussion on the potential for US regulation of hedge funds available from Bloomberg TV via this link. There is also a push for greater emphasis on capital adequacy, liquidity and operational risk. The FSA are setting out to address these areas, including more recent clarity on Liquidity Risk through their consultation process on the new requirements due for implementation in October this year.

In summary, there is more benefit in addressing these more specific areas for both investors, financial firms and markets in general than by diverting effort into a “one size fits all” super-regulator across all European countries. In short - learn how to walk again, before you even try to run.

* A version of this blog appeared origionally in the MPI Europe monthly bulletin