FINANCIAL TIMES: FSA sounds warning of threat from international regulation: “Also pending before the tribunal is the case of Sir Philip Watts, former chairman of Royal Dutch/Shell, who claims he was "identified and prejudiced" when the FSA fined the oil company £17m for its conduct during the debacle over the size of its reserves.” (ShellNews.net) 19 Jan 05

By Peter Thal Larsen and Deborah Hargreaves

Published: January 19 2005

The financial watchdog has warned that British financial groups could face significant risks from the volume of regulation by international bodies, particularly the European Union.

In its annual review of the risks facing consumers and businesses, the Financial Services Authority has highlighted the potential burden of implementing new regulations and standards.

"Firms that fail to apply adequate resources to dealing with reforms may be exposed to legal and regulatory risks, as well as potentially missing out on business opportunities." The warning comes amid growing complaints about the volume of regulation being imposed under the Financial Services Action Plan - the European Commission's attempt to harmonise the rules governing financial firms across the EU.

While the FSA's warning also mentions the adoption of international accounting standards and the introduction of new capital adequacy rules for banks, it singles out EU regulation.

For example, it points to the Markets in Financial Instruments Directive, which aims to set EU-wide standards for investment business, as a "key challenge" for both the FSA and the financial services industry for 2005 and 2006.

Callum McCarthy, FSA chairman, said much of what the agency had to do in the coming year was driven by the introduction of international regulations.

The FSA's warning is part of a comprehensive list of risks facing consumers and providers of financial services in 2005. The 90-page document covers a wide range of potential concerns, from consumers' over-exposure to property prices and unsecured loans, to risks faced by the financial markets from the explosion of hedge funds.

Mr McCarthy stressed that the economic outlook for firms and consumers appeared to be relatively benign. Nevertheless, as consumers took on greater responsibility for pensions and long-term financial planning, they might be ill-equipped to choose the most appropriate products. At the same time, firms faced risks from the growing complexity of the financial markets.

"It is important that firms allow for these uncertainties in their plans and that the current environment does not lead to complacency," said Mr McCarthy.

The growing impact of international regulation is highlighted by the FSA's decision to publish an international regulatory outlook alongside the study of risks. Bankers and lawyers in London are concerned about the impact of EU regulations on its position as an international financial centre. "The weight of legislation is extreme," said Michael Kent, partner in the financial markets group at Linklaters, the law firm. "It's having quite a dramatic impact on the City."

Richard Saunders, chairman of the UK's Investment Management Association, said: "Dealing with the flood of directives coming out of Europe has been an immense task and, to a large extent, we've been in damage limitation mode trying to limit their impact."

This week Charles McCreevy, the commissioner in charge of the EU's internal market, acknowledged in an interview with the Financial Times that the plan had produced a "mountain of legislation", and said he had been "convinced by the argument of regulatory fatigue".

The FSA has previously expressed concern that a failure to implement the directives consistently could lead to a protectionist approach in some states.

HOW THE FINANCIAL SERVICES AND MARKETS TRIBUNAL WORKS The Financial Services and Markets Tribunal is an independent review body that hears appeals against FSA judgments in public, writes Andrea Felsted. It is part of the courts system. Companies or individuals can refer decisions made by the FSA's regulatory decisions committee to the tribunal, which hears the case afresh. The tribunal can uphold the FSA's decision or it can direct the FSA to drop the action or to take a different course. It can also recommend changes to the FSA's regulatory procedures. Until Legal & General challenged the £1.1m fine it received for the alleged mis-selling of endowment mortgages, the most high-profile challenge to an FSA decision heard by the tribunal was that of Paul "The Plumber" Davidson, who appealed against a £750,000 fine over a spread bet. Also pending before the tribunal is the case of Sir Philip Watts, former chairman of Royal Dutch/Shell, who claims he was "identified and prejudiced" when the FSA fined the oil company £17m for its conduct during the debacle over the size of its reserves.