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Lord Turner, chairman of the Financial Services Authority (FSA), recently addressed the root causes of the current global financial crisis and set out the implications for regulation and the future shape of the financial system in a lecture in the City.

Lord Turner also outlined the issues that he would deal with in his review of the regulation and supervision of the banking system, to be published in March.

In The Economist’s inaugural City Lecture, Lord Turner said he believed the “originate and distribute” model of financing lending had a role to play in the future, but needed to be reformed, with less complexity and opacity. He added that over the last decade the scale of proprietary trading had created risks and that financial innovation had in many cases delivered minimal economic value and had increased the dangers of financial instability.

Lord Turner also outlined three key long-term regulatory initiatives to reduce the probability and severity of future financial crises:

• New approaches to capital adequacy, entailing more capital held against risky trading strategies and counter-cyclical capital requirements to build up adequate buffers during good economic times, which can be drawn on in bad;
• A new liquidity regime focused not just on individual firms’ liquidity but also on market-wide risk; and
• Ensuring that financial activity is regulated according to its economic substance not its legal form.

Lord Turner said that these themes would be outlined more fully in the Turner Report which will set out the changes the FSA has already made, those where there are proposals in principle but need consultation, and those where the regulator has defined objectives but needs to play a role in achieving international agreement.

Notes for editors

1. Lord Turner’s lecture
2. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
3. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.