The UK’s Financial Services Authority 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 says it 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.

“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,” said Hector Sants, FSA Wholesale Markets and Institutions managing director.

However, he added, “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,” Sants said.

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.

The regulator said it 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, it added.