UPDATE 1-Fresh look needed at financial rules -FSA's Sants

Mon Feb 23, 2009 1:15pm GMT

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By Sudip Kar-Gupta and Huw Jones

PARIS Feb 23 (Reuters) - A fresh look at the financial market architecture in light of the current crisis is warranted but a global approach was needed, Britain's top financial market regulator said on Monday.

"There is clearly a strong case to be made for changes to the rules," Hector Sants, chief executive of the Financial Services Authority, told a conference on regulation. Regulators from across the world are holding intense talks on how to make a financial system that knows no border safer amid the worst market crisis in over 80 years.

Reforming the rules without reforming wider issues such as corporate governance would be to no avail, Sants said.

There was also a need to fairly and uniformly apply financial rules, Sants said.

"They have to be global in nature and they have to be flexible," he added.

Sants told Reuters that consumer confidence in Britain towards the UK's banks, many of whom have posted huge losses due to the crisis, was improving.

However, he said there were still areas where financial regulation could improve.

There were a series of "shortcomings" in the Basel II rules that banks apply to calculate how much capital to set aside to cover risks, he added, echoing sharp criticism from his Dutch counterpart at the same conference.

There was also a lack of clear understanding about "shadow banking" and this area should be brought under general supervisory oversight, Sants said.

The shadow banking system is made up of non-banking institutions which act like banks using credit derivatives as well as money funds, and special investment vehicles.

There was also a need to ensure proper coordination between local and global supervisors of a financial institution.

Global leaders are aiming to set up colleges of supervisors for all major cross-border financial institutions to involve all relevant supervisors in a bid to share information and spot problems earlier.

"Fragmented supervision of individual firms does not allow a clear understanding of the risks," Sants said.

Gaps also existed in macro prudential oversight in Europe and around the world, he added, referring to spotting system wide problems.

He also backed having a consistent global framework for regulating the short selling of shares.

National regulators in Europe came under fire for their piecemeal approach to introducing short-selling curbs in a market where trading shares from different countries is integrated. (Reporting by Sudip Kar-Gupta and Huw Jones; editing by Chris Pizzey)