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The Rationale for a Single National Financial Services Regulator

The single statutory regulator for financial services which is being established in the UK (the Financial Services Authority, "FSA") will be the broadest financial regulator in the world, combining prudential, conduct of business and market conduct regulation across the full range of financial services, including banking, securities, investment management and insurance. A few other countries already have single financial services regulators, but the FSA will be the first in a major international financial centre. This paper considers the rationale for establishing a single national financial services regulator. The institutional structure of financial services regulation is important because of the impact of the efficiency and effectiveness of this regulation on the direct and indirect costs of regulation and on the success of regulation in meeting its statutory objectives. To what extent should the structure of financial regulation be driven by the functions which financial services firms undertake, reflecting market developments in the financial services industry? Is there a first-best institutional arrangement which is independent of these market developments, arising perhaps from economies of scale and scope in undertaking financial regulation, or from some underlying logic linking the structure of regulation with the objectives of regulation or with the institutional arrangements for monetary policy and for addressing systemic risk? Are there also implications here for the structure of regulation internationally, not just within national borders? Although the structure of financial regulation must depend in part on what is being regulated and why it is being regulated, this paper takes as given the rationale for financial services regulation as set out in Davies (1998a), Goodhart et al (1998) and Llewellyn (1999). This is not to deny the crucial importance of determining the rationale for intervention - and indeed the key interrelationships between this rationale and the choice of the tools of supervision - but this is too large a subject to cover within this paper.