Before the onset of the financial crisis, market regulation was regarded by many City lawyers as a dry and marginal area of work. While huge M&A deals grabbed headlines, ensuring that clients and their activities were in compliance with industry rules was seen as a necessary but dull part of the process. In charge of policing these rules was the Financial Services Authority (FSA), a judicial body set up by government but operating independently of it. Pre-2008, the FSA was known for its "light-touch" approach, and was lauded for focusing on general principles rather than strict commandments and for favouring co-operation with regulated firms over confrontation, in contrast to what was seen as the somewhat heavy-handed attitude of its US and European counterparts.
Divide and rule
However, the seismic impact of the financial crisis in the UK led to increased scrutiny of how the financial services industry is regulated, amid claims that over-lax monitoring allowed it to happen. Even an FSA-authored report into the failure of the Royal Bank of Scotland, one of the most significant casualties of the crisis in the UK, identifies significant failings in the way in which the regulator monitored the bank in the years running up to its 2008 government bailout.
A key result of these criticisms is a significant toughening in the FSA's attitude. "When times are good", commented Tim Dolan, a partner at City law firm Pinsent Masons and leader of the firm's financial services regulation team, "the pressure is on regulators to be seen as simply efficient and not too burdensome. When times are tough, when there's a crisis, the political dimension swings the other way and you have pressure on regulators to be seen to be effective and deterring people from [certain] types of behaviour." The FSA is increasingly pursuing breaches of the rules as criminal prosecutions rather than using the less serious civil law options, more cases are being brought and higher penalties imposed, and the definition of what constitutes an offence has broadened considerably. For instance, the FSA's 2010 prosecution of Winterflood Securities in connection with an illegal trading scheme imposed penalties for "unintentional market abuse" - their failure to investigate signs that other parties were breaking the rules rather than deliberately stepping out of line themselves.
The crisis has also prompted structural change for the FSA. By 2013, the FSA's three main functions - regulating market participants' financial stability, regulating their market interactions, and monitoring systemic risks across the market as a whole - will be split between three different bodies. The shake-up looks set to mean that regulation will get even tougher. Hector Sants, chief executive of the FSA, said earlier this year in the Financial Times that regulated firms should notice a difference in approach from the beginning of April onwards when the split became operationally effective. Close scrutiny by two now separate sets of regulators will turn the heat up even further on the City organisations that fall under the FSA's ambit.
The new-style regulatory bodies are certainly showing their teeth at the moment. Currently in the spotlight is the