1.3 Regulation and regulatory failures pre-FSA
Perhaps inevitably, the changing structure of the industry resulted in changes to the regulatory arrangements. Prior to 2001, the industry had a number of different regulators for the various sectors – banks, building societies and insurance firms – with additional regulatory arrangements for other financial firms such as the broking firms. These regulators sought to ensure the proper running of business by firms in their sector and oversee the financial solidity of those conducting business in the financial services markets.
The liberalisation of financial services and the reality of financial services firms diversifying their activities made it increasingly difficult to maintain separate regulatory regimes. Increasingly, the largest firms could not be pigeon-holed into a particular sector. Consolidation of regulation under one authority therefore made sense.
The first change that occurred during this revolution in regulation came with the Financial Services Act 1986, which brought the hitherto largely independent and self-governing Stock Exchange into a broad regulatory framework. Legislation defined the basic regulatory framework, with the detailed rules being determined and administered by a number of practitioner-led (i.e. industry-based) associations, each of which was a specialist in a specific financial services sector.
The 1986 Act was also prompted by a series of high-profile scams in the 1980s that left personal investors out of pocket. Indeed, the need for public protection from financial scams continued to be highlighted by episodes even after the introduction of the 1986 Act.
Of all the financial scams in the 1980s that pointed to the inadequacies of financial services regulation in the UK, the Barlow Clowes episode was arguably the ‘lowlight’. This financial firm offered investors the chance to make good returns through investments in low-risk UK government securities (gilts). The inconsistency between high returns and low risk seemed lost on investors who piled money into the firm – but also, seemingly, on the government’s Department of Trade and Industry (DTI), which regulated Barlow Clowes and other such firms at that time. Unsurprisingly, when the firm was belatedly closed down in 1988, it became clear that its investors had been subjected to fraud, with the discovery of a financial ‘black hole’ of some £110 million. Barlow Clowes had used misleading statements to attract investors’ money. Peter Clowes was jailed for 10 years, having spent more than £100 million of investors’ money on an exotic lifestyle of private jets, homes, cars and a luxury yacht.
(Note: The co-founder of Barlow Clowes, Elizabeth Barlow, had no involvement in the scam, having left the firm many years earlier.)
Specifically, it was the collapse of the investment firm Norton Warburg in 1980 that had led to the Conservative government commissioning a report on investor protection, led by Professor Gower. The Gower Report of 1984 paved the way for the establishment of the Securities and Investment Board (SIB), which then had the responsibility for the regulation of investment services. The SIB was also given the power to regulate the sale of long-term insurance products. In October 1997, the SIB’s name was changed to the Financial Services Authority (FSA).