UK - Pensions experts say moves by the Financial Services Authority to tighten its supervision and risk management of UK financial services firms should improve the long-term confidence of institutional investors following the Northern Rock debacle.

The board of directors of the UK's financial services regulator today held its hands up and admitted the body had failed to ensure its surveillance of Northern Rock activity and its business model was good enough prior to last summer's credit crisis, so FSA management is now implementing additional requirements and staff to try and counter any potential problems in the long-term.

Hector Sants, chief executive of the FSA, acknowledged the FSA's supervision of Northern Rock "was not carried out to a standard that was acceptable", though argued whether it could have prevented the subsequent funding problems and run on the bank by retail savers was "impossible to judge", and added new standards would not lead to a "no failure regime".

As a result of the internal audit conducted at the FSA - which revealed the supervision of Northern Rock was in fact lower than that of banks with stronger business models -
the regulatory authority will now attempt to increase its supervision staff, seek more direct supervision and contact with "high-impact firms" such as banks and those most likely to affect the retail consumer, as well as focus more on the liquidity of companies and regularly review the principles-based supervision of such firms to ensure procedures are being properly adhered to.

The move will not directly impact the regulation of UK pension funds, but Richard Murphy, partner at UK consultancy Lane, Clark & Peacock, described the FSA's admittance of what went wrong and moves to improve risk-based or ‘principles-based' regulation as "helpful" to pension fund experts and trustees.

"There is a tough balance between keeping the regulatory costs under control and keeping financial institutions out of the bear trap. The biggest concern is they reduce risks and target the problems here but they head away from spotting the next crisis. They will have to pay and fill the [employment] gaps, and the risk-based model is one that is strongly preferable to a rules-based one, which people will exploit," said Murphy.

"My view is this move helps pension funds, because they admit they took their eye off the ball at the critical time. But everyone is paying from this crisis, and it is a reminder of just how the risks are out there, even if trustees and companies are in the market for the long-term," he added.

Mark Brooks, spokesman for the UK's National Association of Pension Funds (NAPF), also commented the body approved of the FSA's decision to step up its supervisory activity, and described the move as "adding more horsepower to the existing engine rather than replacing it with a new one that could end up unbalancing the whole car".

And representing the fund management industry, Guy Sears, director of Wholesale business at the Investment Management Association, said: "IMA welcomes the statement made by Hector Sants concerning supervisory weaknesses in relation to Northern Rock. It is critical for the wellbeing of the markets that his comment suggesting we do not live in a "no failure" regime is not dismissed. Ultimately, the responsibly for the fate of any firm must remain with the board of directors.
 
"But the commitment to a rigorous review of one part of the FSA can only contribute to the restoration of confidence in the Tripartite Authorities; and supports the IMA's view that Government should persist with its high-level legislative proposals in this regard, even if the detailed implementation of some aspects ought to be considered over a longer period. Now is not the time to hurry up slowly."

The FSA, UK government and Bank of England were widely criticised for their handling of the affair when it was discovered last September Northern Rock required emergency funding to support the bank, and the bank eventually had to be nationalised.

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