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The Financial Services Authority (FSA) has today published a discussion paper on the impact that the growth in the private equity market has had on the UK's wholesale markets and how the FSA is meeting the challenges this poses.
The FSA believes that the private equity market is an increasingly important component of international capital markets and makes a key contribution to the efficiency of these markets. However, recent market developments have prompted the FSA to consider whether it currently exercises an appropriate level of regulatory engagement with the sector.
The FSA is seeking feedback from the industry and public policy makers on whether it has correctly identified the risks posed by the growth private equity market and the suitability of its regulatory approach in addressing these risks.
Hector Sants, FSA Wholesale Markets and Institutions Managing Director, said:
"We believe private equity can significantly enhance capital market efficiency by widening the availability of capital, increasing the effectiveness of company valuations, identifying companies with growth potential and facilitating their transformation.
"The growing movement of capital from the public to the private equity market over the last few years poses challenges, not just for the FSA, but for all regulators charged with oversight of international capital markets.
"Too much regulation can be detrimental to capital market efficiency, but too little regulation can damage market confidence. So we are asking industry and policy makers to engage with us in ensuring that the UK maintains an appropriate approach to regulating the private equity industry."
The FSA will establish an alternative investments centre of expertise by integrating private equity firms and supervision staff into the existing hedge fund managers supervision team and will continue its proactive monitoring of institutional leverage and credit markets.
Given the growth in this market the FSA has been increasing its engagement and understanding of the sector, and as part of this work has recently completed a survey on the leveraged loan market which was also used to feed into the recent European Central Bank survey.
The paper also outlines some potential additional data gathering which may be undertaken, proposals for increased co-operation with trade associations and targeted thematic work.
