IMF/Bank of Israel Financial Sector Conference ISRAEL’S CAPITAL MARKET REFORMS: SUPERVISORY APPROACHES AND MANAGING CHANGE Perspectives on regulatory reform – the UK experience By Michael Foot Chairman of Promontory Financial Group (UK) Ltd
Why did UK change? • Change in the industry • Desire for clarity of function to each agency • Bringing “muscle”/numbers to bear • Cost effective • Consistency across competing industries
Efficiency gains • Large economies of scale • Weight of numbers in areas like IT • Focus on regulatory issues only(esp. important for banking supervisors) • Freedom from “history”, public sector pay limits etc RESULT: Fee increases kept down to inflation despite wages growth
Incentives for firms • Large conglomerates got the “best deal” and were keen from the start. • Smaller specialist firms much more wary • Sectors were promised no cross subsidisation between sectors • Firms were given real governance control • Issues like Basel II proved the value of the new model
Incentives for staff • Wider career opportunities • Better pay and prospects • Important to identify who you want to keep and who to lose • Need to offer flexible & varied career paths But there were problems and regulator will never match private sector pay or anonymity
Incentives for others § For consumers - Tangible simplification of the system - Capacity to deal with consumer issues/information etc § For Government - Must be convinced accountability still possible despite independence
Lessons on management & staff • Top management chosen early; 3 out 4 “stuck around to finish the job” • Create something new – not duplicate the old • Get buy-in from the staff you want to keep • Share good & bad news early & openly
Lessons on setting goals Need for: • Clarity on final structure & objectives • Realism don’t walk before you can run • Governance must combine operational independence with accountability • Enough & “independent” finance • Enough time
The biggest problems - 1 1. Changing culture is never easy 2. Management must run the “old” and build the new. This needs support & luck 3. Things always take longer than you hope 4. Stakeholders get impatient 5. Transition costs money
Role of the central bank Financial stability role underpinned by: • Cross membership of Boards • Formal tripartite system of BOE, FSA, HMT (which covered conflicts of interest) • Extensive practical co-operation under tripartite arrangements • Secondments of staff • Policy co-ordination
Problem areas When there is conflict: monetary policy vs financial stability prudential vs consumer/investor needs Especially where an issue may be systemic (Barings vs Northern Rock) Where regulatory standards differ greatly between sectors. Home/host tensions remain
Potential macro problems always exist • How they are resolved will depend upon country’s history and politics In the UK the Government is clearly the final arbiter, at least while we are out of the Euro zone……
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