Shaking it up or stirring it up?

The problem is all to do with the motivation of organisations. It is all to do with the conflict between objectives and ego. If the world’s corporate giants all became environmentally friendly companies overnight, neither Greenpeace nor Friends of the Earth would fold up and go away.

They have become organisations, and organisations have motivations and egos which retain power long after any objectives have been achieved.

The same is true of regulators. They will never stand back and say their job is done. The more they are successful, the more they will find for themselves to regulate. The net will always widen.

The regulators’ job is to regulate and, if they have any eye on an empire to build, they will expand their territory remorselessly.

So observers in the world of corporate governance are watching the Financial Services Authority very carefully at the moment. Its founding chairman, Sir Howard Davies, stands down in the autumn, and another man from the world of regulation, Callum McCarthy, steps into his shoes. At the same time, a new CEO will take up post. The financial and corporate world will be watching closely to see what will happen.

The FSA is a strange organisation. It is strange not because of what it actually does. It is strange because of what people think that it does.

In reality, it regulates the financial services industry. But the perception of the outside world is very different. The wider corporate governance world thinks it ought to be an all-embracing body, like the American Securities and Exchange Commission. This gap between what it is and what people think it perhaps ought to cause all manner of grief. (For one thing, the FSA regulates the banks; the SEC leaves that work to the Federal Reserve.)

In actual fact, the FSA has done a very good job.

When it was set up, there were no fewer than 10 regulatory organisations regulating odd chunks of the financial services industry. Some were good.

Some were hopeless. Some were lean machines. Others were sprawling bureaucracies.

Practitioners were finding their offices vanishing in a rising tide of paper and regulatory bumf. Across the first five years of the FSA, much of this was sorted out and the merging together of all those competing bodies has gone well.

It also decided at an early stage that the way it should go about its regulatory efforts should be a risk-based approach – it made no sense for people to be spending time regulating for the sake of regulating. The important issue was to put as much of the resources as possible at the point where the regulation could make a difference.

Now that the FSA has come to maturity it will be tested on its ability to run a risk-based approach across a long period of time and be judged on the results.

This part of the FSA philosophy will not change when new faces take the helm. The whole concept of risk-based regulation is, as the Americans would put it, the way to go. It embeds a reasonably rigorous discipline within the organisation. It reduces cost. And above all else it means that, in theory, there is a solid process in situ which, when critics are applying hindsight with a trowel when some disaster occurs, can be rolled out and displayed with credibility. But the FSA will also be looking to reinvent itself after a long period of sorting out its philosophy.

This is where the new FSA, which will start to emerge later this year under a new chairman and a CEO, will be seen to change. Organisations with new chiefs always do something different, if only to show the world that they are there and worth the cash they are being paid. They do, after all, want to make a name for themselves.

But they will find themselves faced by a changing market and a gap in expectations. Back in 1999 and 2000, the financial services market was booming. Now it is under severe financial pressure. The world of fund management is shrinking rapidly. The pressures are to lower costs all round, both within the financial services firms and within the regulator.

When the market is sinking, the regulator cannot be seen to be pushing up costs by what will be called ‘meddling’. But at the same time, the outside world will be screaming about what are seen as past failures, like the Equitable Life collapse and the split-capital trusts farrago.

By autumn, the FSA will have to defend itself against accusations of meddling too much and being asleep on the job, simultaneously. It is an unenviable position to have to defend.