In last year’s annual report for the FSC I wrote: “2007 proved to be one of the most financially tumultuous in recent years. The credit crunch, Northern Rock, oil price hikes and falling house prices in many countries left the financial industry, consumers and regulators battered to one extent or another.  2008 is unlikely to see any major relief.”

That comment was nothing if not an understatement. 2008 saw the demise, merger or effective nationalisation of vast elements of the UK’s and other centres’ finance industry. The crisis spread to other sectors of the economy as high street store chains, such as Woolworths, ceased to exist. At least oil prices came down.

I have just finished writing the CEO’s report for this year’s annual report (which will shortly be available on our website). In my six years of writing these reports, I have generally tried to avoid the hyperbole and self congratulatory back slapping contained in a number of the annual reports of other regulators that cross my desk. That is even truer in this year’s. The reality is that, as an international body, regulators as a whole failed. It doesn’t matter whether we failed as individual supervisors, the global regulatory system itself failed and every regulator must bear responsibility for this.  The question is where do we go from here?

Firstly, as I said in last years report, it is important to remember that our supervisory framework is not designed to ensure that any given institution cannot fail.  Rather, it remains a balance between seeking to mitigate risk while fostering innovation and competition (which by definition involve risk). We have finite funding and our allocation of resource must therefore be on a risk-based and proportionate basis.

Yet, there is a world of difference between allowing individual institutions to fail and the near systemic collapse of the financial sector as a whole. Regulators failed because we failed to properly identify the true risks, some allowed their independence to be compromised by government and industry pressure. Regulators were independent in name but not in philosophy or action. This must change.

A number of international initiatives have been actioned. Some are led by the EU, others by international standard setters. No doubt some new obligations imposed upon us will be onerous. During this process we will strive to remind those setting the new requirements that more does not equate to better. Yes, some additional safeguards must be introduced but regulatory failure also came from lack of understanding of the risks being taken by elements of the finance industry.

Unfortunately as part of this drive the phrase “light regulatory touch” has become a term of abuse. According to some regulators the industry must be “afraid” of us. Sorry, but I just don’t buy into this. There is nothing wrong with a light touch. You can have a light touch but still be aware of, and action, the risks the finance sector faces.  Supervision should still be by consent, the vast majority of the finance centre is as keen on a well supervised industry as we are. Now is not the time for demons, scapegoats or supervision by testosterone. 

It is also important, in this time of crisis, that there is no regulatory over reaction and we should approach regulatory changes with caution, in other words we must continue to adopt the principle “first do no harm”. The proposed directive on alternative investment fund managers, as currently drafted, appears to be an example, at least partially of that over reaction.

By virtue of a number of factors, Gibraltar remains largely unaffected to date. However complacency would be deadly. Proposed changes to EU requirements and international standards will necessitate additional work by the Commission and obligations on the finance industry. Similarly, our revised risk assessment process is designed to ensure the Commission remains fit for purpose. Furthermore, we have yet to see what the impact of the proposed new regulatory structure for Europe will have on us.

As a Commission we are fortunate. The Government has defended our independence both in word and spirit and this has been recognised by the IMF. The finance industry, regulator and government have a long tradition of teamwork and cooperation. We are well placed to come out of the global recession with a stronger, bigger sector than before. However such an opportunity will not be given to us, we must work for it.