Greater regulatory control will be exerted over the activities of credit ratings agencies and hedge funds as the FSA acknowledges their contribution to the current global financial crisis.
"Ratings agencies competing for the business of rating innovative new structures may not have ensured that commercial objectives did not influence judgements of whether the instruments were capable of being rated effectively."
It said legislation is currently being drawn up by the EU to address these issues and is likely to enter into force in summer 2009.
As it stands, credit ratings agencies will be registered and financial regulators such as the FSA will play a supervisory role, co-ordinated at European level via colleges. It will ensure appropriate structures and procedures are in place to manage conflicts of interest and to reinforce analyst independence.
On hedge funds, Turner expressed concern the vehicles could escape the capital and liquidity requirements demanded of the banking sector if they became more 'bank-like' in the future.
The report says although hedge fund managers are FSA-authorised, the hedge funds themselves are not currently subject to prudential regulations affecting their capital adequacy or liquidity. This reflects the fact hedge funds in general are not today 'bank-like in their activities' but it is possible this may change in future years, according to the report.
It also highlights the impact hedge funds could have on wider markets: "...hedge fund activity in aggregate can have an important pro-cyclical systemic impact. The simultaneous attempt by many hedge funds to deleverage and meet investor redemptions may well have played an important role over the last six months in depressing securities prices in a self-fulfilling cycle."
As a result, the FSA calls on regulators and central banks to gather much more extensive information on hedge fund activities and to consider the implications of this on overall micro-prudential risks.It also wants regulators to have the power to apply appropriate prudential regulation to hedge funds or any other category of investment intermediary 'if at any time they judge their activities have become bank-like in nature or systemic in importance'.IFAonline
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