Separation issues: Industry rubbishes MPs’ calls to break up the FCA


Regulatory experts have dismissed suggestions by MPs to break up the FCA and create a separate enforcement regulator, saying it would only serve to hike costs for advisers.

The Treasury committee last week called for a review into the potential separation of the enforcement division from the FCA and the Prudential Regulation Authority. Such a move would  end the twin peaks structure set up in 2013 and introduce a third enforcement-only regulator overseeing the financial services industry.

But concerns have been raised about exactly what shape the new organisation would take, and who it would report to. MPs have also been accused of courting public favour by calling for a standalone enforcement regulator to police the industry.

Jumping the gun?

The Treasury committee’s recommendation was included as part of its review of an independent report into the collapse of HBOS.

Given that it was the FSA that was responsible for enforcement when HBOS was bailed out during the financial crisis, lawyers are concerned moves to annex enforcement from the current regulators are based on inadequacies at the FSA without giving new rules implemented by the FCA time to bed in.

Clarke Willmott solicitor Laura Hazell says the independent report, carried out by Andrew Green QC, does not take into account the improvements the FCA and PRA have already made.

In July 2015 the FCA and PRA introduced final rules for the senior managers regime for banks – making senior individuals within those organisations accountable for their decisions. Both organisations have also collected significant fines for foreign exchange and Libor manipulation since they were set up.

Hazell says: “The Green report relates to something that happened in 2007. The criticisms are quite right but all of the conduct and failings referred to are pre-FCA and PRA. There has already been a significant change to improve things and these thoughts about separating an enforcement body are designed for public perception.

“That is something Treasury committee chairman Andrew Tyrie keeps repeating. He says ‘we need to bolster perception of the FCA enforcement functions, we need to win public confidence’.”

Since 1 April 2013 when the FCA was set up, it has collected £2.73bn in fines while the PRA has collected £19.8m. The FCA’s enforcement division currently has around 600 staff and does the bulk of the enforcement work of the two regulators, with some investigations carried out jointly.

Previous PRA enforcement action has related to firms’ IT system failures, inappropriate outsourcing processes, and firms not properly reporting their capital levels. For its part, the FCA has criminal, civil and regulatory powers.

Pinsent Masons senior associate Michael Ruck considers the separation issue is more relevant for the PRA and its enforcement abilities.

He says: “Currently, the vast majority of their enforcement work goes through the FCA’s enforcement division. They have grown the team at the PRA a little bit but, in reality, the investigations are done by the FCA enforcement division with oversight from the PRA and the smaller PRA team.”

The FCA is against a separation of the enforcement division saying it would make it a less effective regulator, as well as highlighting difficulties with the “practical and legal” issues of a split.

Speaking at a Treasury committee hearing last month, PRA chief executive Sam Woods was also against a separate enforcement regulator.

Woods told MPs: “I would be reluctant to see the entire enforcement function departing the regulators. That is because, in our pursuit of safety, standards and policy on protection, we have a suite of tools. My predecessor, Andrew [Bailey], was very clear that he didn’t think the PRA should be generally enforcement-led, and I agree, but it is important that we have that tool available to us; first, so we can use it sometimes; and secondly, in order to focus minds. I would be reluctant to see that go.”

King & Wood Mallesons partner Tim Dolan views a potential slice-up of the regulators as “odd” given the FCA and PRA are not enforcement-led organisations.

He says: “The concern is if you have a separate enforcement regulator, you have a body whose role in life is to take action rather than to try to help firms get the best outcome. My concern is we will have a body that will only recognise its performance by the scale of activity it takes each year and whether or not that activity has increased year-on-year.

“Fining firms is not the be-all and end-all of enforcement. It is often a matter of working with other parts of the regulator – supervision, even authorisation, sometimes to get the outcome that is best for the firm, for the individuals at the firm, and for consumers.”

It is also unclear whether a separate enforcement regulator could be truly independent.

Hazell predicts a separate body would likely just mean an internal reshuffle of existing enforcement staff, ultimately resulting in an extra layer of bureaucracy.

She says: “If the Government was to hive off those departments and make them separate it would just give another layer of reporting and communication. The FCA would carry on with all its other duties but then would have to report what it finds to this new separate entity. You are duplicating costs and time.”

Dolan assumes the roles that would move to the new regulator would include investigators, enforcement lawyers and those responsible for working with overseas regulators.

He says: “It is unclear if a separate regulator would report to the FCA and PRA or is accountable to the wider financial services industry.”

4 Pump Court financial services barrister Peter Hamilton considers the most appropriate reporting line for a new enforcement regulator would be the Treasury.

He says: “If it is to be independent, presumably the word independent means independent of the current regulators. Therefore, the enforcement division can’t just be pushed to a different building with a different head, it would need to be much more independent than that. I’m not sure there is anywhere else to go but report directly to the Treasury. It would, in essence, be a Government department.”

Apfa director general Chris Hannant adds the FCA and PRA are jointly more expensive than the FSA was and points out advisers hardly need the extra cost a third regulator would impose.

Hannant says Apfa has a “scepticism of reorganisation”, saying these exercises “waste money,  take time and distract people from doing their jobs.”

A joint FCA/PRA consultation on changes to enforcement procedures following the Green Report and a 2014 Treasury review closed last month. A policy statement will follow in due course.

Adviser views

Facts & Figures Financial Planning


Simon Webster

At the moment one of the problems with regulation is there doesn’t seem to be an effective communication between the FCA and the Financial Ombudsman Service. You can follow FCA rules but still fall foul of the ombudsman.

Breaking up the FCA to create a separate enforcement division is likely to add to this problem – creating more cracks in the system.

Philip J Milton & Company

Managing director

Philip Milton

I don’t think the enforcement division should be separated out from the FCA. This is just an excuse for more quangos and more highly paid individuals. The FCA already has an enforcement division, but it does seem somewhat inadequate. Rather than make this a separate body I would simply like to see it act more firmly and more effectively.

How MPs want to reform regulation

This is not the first time a separate enforcement body has been suggested. The Treasury committee references a 2013 Parliamentary Commission on Banking Standards report that recommended enforcement be moved into a separate statutory body. This was later rejected by a Treasury-led review.

It argues a “re-examination” of separation is warranted because when the FSA was in operation the relationship between enforcement and supervision was problematic.

The Treasury committee puts the collapse of HBOS down to prudential failings. It says it is not right that the bulk of enforcement staff sit within the FCA, which does not play a role in the prudential oversight of banks. It therefore says an independent enforcement body should sit “equidistant” between the FCA and the Prudential Regulation Authority.

It considers a separate organisation would bolster the perception that enforcement is independent and calls the current system where the same regulator supervises, applies and prosecutes the law “outdated”. It says confidence in the impartiality of regulatory enforcement decisions could increase and that enforcement staff could “objectively scrutinise” supervisors’ actions.

Finally, it says having three regulators – the FCA, the PRA and an enforcement regulator – would give the organisations better “clarity on their objectives”. It says an FCA with fewer objectives alongside a separate enforcement body would result in better accountability and outcomes.

It concludes by saying: “The case for structural separation has merit. The Treasury committee expects the Treasury to appoint an independent reviewer to re-examine the case for a separate enforcement body.”