Lloyd's Maritime and Commercial Law Quarterly

Professor Francis D Rose

Document

Reasonable expectations, (un)reasonable assumptions, and banking regulation

Peter Cartwright *

This article examines the approach of the United Kingdom’s Financial Services Authority (FSA) to the question of whether consumers should expect that the banks with which they deal may be allowed to fail. The FSA argues that consumers should expect that in a competitive market financial firms (including banks) may fail. This is viewed by the FSA as a necessary part of market discipline, as well as being required by the Financial Services and Markets Act 2000 (FSMA). This article argues that the FSA’s approach is built upon assumptions that can be questioned, and that it is sometimes legitimate for consumers to expect banks to be saved .

I. INTRODUCTION

The creation of the Financial Services Authority (“FSA”) has made a major impact upon the financial services industry in the UK. In its publication Reasonable Expectations: Regulation in a non-zero failure world (hereafter “ Reasonable Expectations ”)1 the FSA explains the thinking behind what it describes as its “non-zero failure regime”2 . This article looks at the basis of Reasonable Expectations and argues that, while the broad

* Professor of Consumer Protection Law, University of Nottingham. I am grateful to Andrew Campbell of the University of Leeds for comments on an earlier draft. I am responsible for what follows.

The following abbreviations are used in the footnotes:

Asser: T Asser, Legal Aspects of the Regulatory Treatment of Banks in Distress (Washington, 2001);

Cranston: R Cranston, Principles of Banking Law , 2nd edn (OUP, Oxford, 2002);

Cruickshank: Competition in UK Banking (March 2000) (the Cruickshank Report);

Davies: H Davies, “Why Regulate?” (Henry Thornton Lecture, City University Business School, 4 November 1998);

FSA: Financial Services Authority;

FSMA: Financial Services and Markets Act 2000;

Goodhart: C A E Goodhart, The Central Bank and the Banking System (Basingstoke, 1995);

Hupkes: E Hupkes, The Legal Aspects of Bank Insolvency (The Hague, 2000);

Llewellyn: D Llewellyn, The Economic Rationale for Financial Regulation (FSA Occasional Paper No. 1, 1999);

LOLR: Lender of Last Resort;