David Prosser: Watchdog is baring its teeth at last

Outlook: Time may be running out for this regulator to prove it is up to the job

There won't be many people who don't like the idea of naughty bankers and dodgy financial advisers getting stiffer punishments when they come up in front of the beak. So you won't read much in the way of criticism of the larger fines for misbehaviour announced by the Financial Services Authority yesterday.

The increases are the latest stage in the FSA's attempt to transform itself from a light-touch, softly-softly regulator – the one that allowed Northern Rock to collapse under its nose – to a rough, tough watchdog with bark and bite for our post-banking crisis times.

The new penalties must also be seen in the context of the ongoing regulatory turf war. Senior folk at the FSA are very concerned that much of the regulator's power will be stripped away by reform of the rules – if not under this Government, then when a Conservative administration arrives.

We all believe in punishment that fits the crime. And it's true that some of the fines handed out to huge financial services companies and wealthy individuals have, in the past, been a bit of a joke. Think parking ticket for Cristiano Ronaldo.

Still, the point of penalties is not just to properly punish breaches of the regulatory rulebook. Deterrent is a much more fundamental objective.

In fact, the biggest deterrent of all in the reputation-obsessed financial services sector is public admonishment. In this regard, the FSA, having pioneered "naming and shaming" of miscreants, deserves credit – before it came along, many cases were simply sorted out behind closed doors with a slap on the wrist.

Whether increasing the fines payable by those the FSA catches out will deter more people from lying, cheating and even stealing is another matter. The starting point in the mental process of would-be rogues is not so much "What will happen if I get caught?", but "Will I get caught?"

Ensuring there is a good enough chance of detection not to bother risking a transgression is what the FSA should be focusing on now. Increasing fines will make no difference if people think they will never have to pay them.

There is some evidence that the regulator – more than 10 years after it was created – is finally beginning to be more effective. There has been a belated crackdown on the payment protection insurance racket, for example, as well as a rise in the number of dodgy mortgage brokers who have been banned. But the FSA is not yet the sort of organisation that gives those it polices sweaty palms ahead of an inspection visit. It doesn't have the sort of aura that its opposite number in the US, the Securities and Exchange Commission, once enjoyed.

We will soon discover, in its much-trailed White Paper, what the Treasury has in mind for the FSA. That should also flush out the Tories' proposals. Time may be running out for this regulator to prove it is up to the job.