Financial Regulation International, April 2012 – Stephen Gilchrist discusses the Financial Conduct Authority

Better Luck Next time - The Financial Conduct Authority

The Financial Services Authority (FSA) was the dream child of the incoming Labour government in 1997- the ultimate answer to City regulation.

Previously (as TV mini series would have it), it was Margaret Thatcher's own financial offspring, the Securities and Investment Board (SIB) that was the great white hope of financial regulation which was to deal with the rapid changes affecting the financial services industry in the early 1980s. It died young.

In 1997 Gordon Brown, then Chancellor, described the division of authority between the SIB on the one hand, and a series of self-regulating authorities on the other, as "inefficient, confusing for investors and lacking accountability and a clear allocation of responsibilities". The cure -all, one stop shop was to be the FSA.

Now the FSA meet its early demise after only a decade or so, not having covered itself in glory, to say the least. The financial crisis (for which read bank debacle), and the PPI and endowment miselling issues (being just two examples) have caused the FSA to suffer terminal ill health.

In June 2010, the government announced that it intended to replace the FSA with two new successor bodies: the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). A third regulatory body, the Financial Policy Committee (FPC), would also be created to monitor the stability of the financial system on a macro level, but would not have direct regulatory oversight of any particular types of firms. Interestingly The original name of the FCA was to be the Consumer Protection and Markets Authority (CPMA). This was changed after the Treasury Select Committee pressured the government by pointing out that this name could mislead consumers!

And so, a triplet offspring of FSA, the FCA, arises from the ashes (or is that a mixed metaphor?). In the words of Chair of the Treasury Committee, Andrew Tyrie MP: "The creation of the FCA is an opportunity to create something much better.

[but] if we are not careful, the FCA will become the poor relation among the new institutions. But it is the one that will matter most to millions of consumers."

And so, in July 2010 HM Treasury opened a public consultation on its proposals for "A new approach to financial regulation" with the expression of hope that the new Financial Conduct Authority (FCA), would ensure that business is conducted in such a way that advances the interests of all users and participants of theUKfinancial sector.

In September 2011, The Treasury Committee announced an inquiry into the Financial Conduct Authority and the government's draft Bill

Among the questions posed were:

  • Are the objectives of the Financial Conduct Authority clear and appropriate?
  • Does the FCA's approach to regulation, as outlined in the Financial Services Authority's June 2011 document, represent an improvement on that of the FSA?
  • To whom should the FCA be accountable? Are the lines of accountability clear?
  • Are the powers of the FCA suitable? Will the exercise of FCA powers be subject to appropriate scrutiny? How should the FCA be interacting with industry as well as using its intervention powers?
  • How should the FCA be interacting with other domestic regulators and agents? How should the FCA be interacting with international regulators?

Well, the Treasury Committee finally reported in January 2012 with some serious criticism of government proposals:

The Report set out a number of key recommendations. Amongst those are:

"c FCA should have an additional primary objective "to promote effective competition for the benefit of consumers" .

"c The strategic objective to "protect and enhance confidence in theUK financial system" should be removed in order to simplify the FCA's objectives

"c Further consideration should be given to how the FCA, and its mandate and powers, should differentiate between retail and wholesale consumers

"c FCA accountability, transparency and scrutiny should be strengthened

"c The FPC, and not the PRA, should hold the power of veto over FCA decisions - the legislation should detail the circumstances in which the veto may be used

"c With a thematic approach, policy should be aligned with industry realities

"c The legislation should provide for far more extensive cost-benefit analysis and consultation and the regulators should make such assessments more meaningful

"c FCA should seek to improve communication between the regulator and regulated firms

"c Product intervention powers should be sparingly used, after careful consideration of the merits

"c The FSA should consult on its more detailed proposals for more proactive intervention

"c Further consultation on the proposed power for early publication of warning notices

"c The merits and costs of a scheme for pre-approval of financial products should be reviewed; FCA should reconsider the scope for differentiating between more complex products, and simple products that can be preapproved

"c The Government must clarify whether it intends the FCA to play a role as a price regulator - if so, the case for this should be made and consulted on.

On 28th February 2012 the Committee published a further short report identifying four areas where there appeared to be confusion, defects or other weaknesses in the Government's approach to reform of the Financial Conduct Authority (FCA) with Tyrie, commenting:

"The Committee remains deeply concerned that this legislation is being rushed.

The structure and objectives of the FCA will sit at the heart of this new regulatory system. Unless sufficient time is given to getting these reforms right, we could end up, once again, with a defective regulatory framework."

Areas of Concern

On accountability

The Committee has called for the accountability of the FCA to be enhanced in four main areas:

  • The board of the FCA should publish full board minutes of each meeting
  • The CEO of the FCA should be subject to pre-appointment scrutiny by the Treasury Committee
  • The FCA board should be responsible for responding to requests for factual information and papers from Parliament
  • Parliament, through the Treasury Committee, should be able to request retrospective reviews of the FCA's work

As Tyrie commented: "The FCA has been given huge powers. It is not enough, as the Government has proposed, merely to match the weak, pre-existing accountability arrangements of the FSA"|"

On the objectives of the FCA

The Committee remained concerned about the effect that an overarching objective is likely to have on the operation of the FCA. Indeed, the Government appears confused about whether it wants to impose a strategic objective or a "mission statement." These are not the same thing: ""|A mission statement should have no place in primary legislation.."

On the PRA veto over the FCA

The Committee believes the Financial Policy Committee (FPC) - rather than the Prudential Regulation Authority (PRA) as suggested by the Government - should be granted a veto over the FCA in areas relating to financial stability: ""Financial stability is the responsibility of the FPC. If anyone is to wield a veto over the FCA, it should therefore be the FPC and not the PRA".

On cost-benefit analysis

The Committee has called on the Government to include in the Financial Services Bill requirements for far more extensive cost-benefit analysis to take place and for greater consultation with firms, representative bodies and panels prior to the introduction of new regulations: ""Regulatory and cost burdens on the financial services sector often seem to rise inexorably. It is consumers who have to foot the bill for these costs"|"

Whilst it is important, indeed essential, to promote public confidence the financial services industry it is also vital to ensure that firms operating within the industry , especially smaller firms, do not feel overwhelmed by costly and time-consuming regulatory burdens.

We shall see.


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