Wealth managers are set to face increasingly aggressive regulatory enforcement and intervention in areas that were previously untouched, former chairman of the Financial Services Authority (FSA) Howard Davies has warned.
Speaking at an event for global family offices, Davies (pictured), a former deputy governor of the Bank of England, said he had been surprised by how fast financial regulators had implemented new controls following the onset of the credit crisis in 2008.
The UK’s Financial Conduct Authority (FCA) was ‘already taking much more aggressive enforcement’, he said. ‘The pendulum has swung with violence. Before, you could do anything unless the regulator told you not to, now you can’t do anything unless the regulator tells you that you can.’
Davies warned: ‘There will be more regulatory creep, getting into more areas.’
With this in mind, he outlined the amplified role and growing importance of national regulators, which could mean global regulatory standards are overlooked in some cases.
‘We are seeing a Balkanisation of regulation, which wasn’t expected post-2008. Countries are very suspicious of [one another’s financial] regulator… and I expect a breakdown of regional and global arrangements, so national regulation will prevail.’
As a result, he anticipates the financial system will become ‘less efficient’, and warns capital could become trapped in certain jurisdictions, making it difficult for institutions there to raise capital at the same cost.
‘In my view, [this means] the cost of credit supplied by banks will be more expensive, and banks will find it more difficult to manage their own balance sheets. But at the same time, central banks are scared of credit expansion through non-regulated institutions, such as shadow banking.’
Davies also took issue with recent comments made by International Monetary Fund managing director Christine Lagarde about systemic risk.
She warned that the banking industry has made little progress and the ‘too big to fail problem’ among the world’s largest financial institutions remains unresolved, as banking reform has not made enough progress.
Davies questioned the IMF’s position in making such comments as it does not hold a regulatory role.