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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. IMF/Bank of Israel Financial Sector Conference. Why did UK change?. Change in the industry

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IMF/Bank of Israel Financial Sector Conference

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  1. ISRAEL’S CAPITAL MARKET REFORMS:SUPERVISORY APPROACHES AND MANAGING CHANGEPerspectives on regulatory reform – the UK experienceBy Michael FootChairman of Promontory Financial Group (UK) Ltd IMF/Bank of IsraelFinancial Sector Conference

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. The biggest problems - 1 • Changing culture is never easy • Management must run the “old” and build the new. This needs support & luck • Things always take longer than you hope • Stakeholders get impatient • Transition costs money

  10. 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

  11. 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

  12. Potential macro problems always exist • How they are resolved will depend upon country’s history and politicsIn the UK the Government is clearly the final arbiter, at least while we are out of the Euro zone……

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