The light touch of the FSA

In what has been an explosive fortnight for the UK private equity industry, the response to the FSA’s feedback paper has been somewhat muted.

Whereas the government appears to be determined to take a hard line on the issue of private equity, the FSA, in contrast, is taking a lighter approach to regulating it.

According to the FSA, the feedback it has received from its discussion paper, “Private Equity – A discussion of risk and regulatory engagement”, confirmed that it had correctly identified the main areas of risk.

The FSA claims the paper “had correctly identified and prioritised those risks and that the proposed regulatory approach to dealing with them was appropriate and effective”.

The key areas of regulatory focus going forward will relate to market abuse and conflicts of interest, with an alternative investment supervision team conducting and overseeing further work in these areas.

Private equity firms will also be required to report on committed capital as well as drawn down capital. And the FSA will be conducting a “fact-finding exercise” to clarify the risks inherent in dealing with financial distress and default in a heavily traded corporate name.

Charlie Geffen, head of private equity at law firm Ashurst, says: “This is exactly what I expected and consistent with the statutory remit of the FSA. The role of the FSA is to maintain the integrity and stability of the capital markets. Regulation is not the way to go; it is instead sensible to collect information and make people think.”

In addition, the FSA will be conducting a biannual survey on banks exposures to leveraged buyouts.

According to Volkhardt Kruse, head of leveraged syndication at Dresdner Kleinwort: “The market consensus is that the impact on banks will be slight. Much of the loan market is now driven through the institutions – relative to this bank, exposure has not grown. It is widely accepted, therefore, that this shouldn’t be a problem.”

Geffen agrees, saying: “They are not clamping down on excessive leverage, they are not regulating it; they just want access to information, that is what they are good at – light touch regulation rather than telling people how to behave.

“They need information to be better informed,” he adds. “Now, the banks have to collect information and give it to the regulators. This has the most impact within the organisation. Senior executives have access to it and are focused on it. It is a method of making sure its available and raising awareness of the situation.”

With regards to continued regulatory focus on market abuse and conflicts of interest, Geffen argues: “Market abuse and conflict of interest are at the heart of what the FSA is about. They are not necessarily saying there is a problem; it is rather that they have never done a private equity report like this before and it is important for them to know what is happening.”

Hector Sants, the FSA’s managing director of wholesale business, says: “The feedback we have received to the November paper has confirmed that the current approach to supervising this market is broadly appropriate.

“However, we remain committed to working with firms to ensure that our supervisory capability continues to remain highly focused on the key regulatory issues. When considering this document, it is important to understand that we have restricted ourselves to addressing those issues that fall within the FSA’s remit.”