Stay up to date with notifications from The Independent

Notifications can be managed in browser preferences.

Comment: Risk-ratings could turn out to be a nightmare

Thursday 10 April 1997 23:02 BST
Comments

There's plainly a difference of opinion between the Securities and Investments Board (SIB) and the Securities and Futures Authority (SFA) over whether to risk-assess City investment banks and stockbrokers. The SFA sees risk assessment as a way of lightening the regulatory load on low-risk firms with adequate internal controls, allowing scarce resources to be concentrated on the cases that really need it.

By contrast the SFA's parent body, the SIB sees dangers in such an approach. It would clearly be very damaging for any firm to receive an adverse rating. As Andrew Large, the SIB's chairman, has pointed out, the effect might be similar to an adverse credit assessment on a bank, causing a run on deposits. Firms in receipt of a favourable rating, on the other hand, would be tempted to use it as a marketing tool.

The SFA arguably has too much power already. There has been a notable increase in recent years in the volume of complaints among City firms about supposedly oppressive regulation. The introduction of a publicly disclosed rating system would give the SFA the power to play God, to make or break companies and livelihoods. Obviously the City needs to be effectively regulated, but that cannot be right.

The SFA is already far too commonly used as a competitive tool in the City. If you don't like what your rival is doing, it is all too easy to stop it with a call to the SFA. Quite frequently the effect is to stifle perfectly legitimate innovation. The imposition of a rating system would be a much more sinister development, for it should be customers and clients, not big-brother regulators, who decide on whether a company is worth doing business with. What are the criteria the SFA is planning to use, and will there be channels of appeal? The whole thing sounds like a nightmare, and in truth is unlikely to be of much assistance to anyone.

Join our commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

Comments

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in