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Peter Hamilton: New financial regulator must be held to account

As the Financial Services Bill makes its way through Parliament, the accountability of the financial regulators, or their lack of appropriate accountability, has become a recurring issue in the reform of the regulatory system.

The issue of accountability is connected to the related issues of the unrestrained power of the FCA and of the Government refusing to listen.

This time last year, in an article for Money Marketing regarding the FSA and its failures of regulation in relation to Equitable Life, Northern Rock and HBOS, I drew attention to the FSA’s lack of proper accountability to the Government or Parliament. Many others have made the same point.

In response to widespread disquiet, particularly among IFAs, there was a debate in the House of Commons on the FSA’s retail distribution review. This was followed by the Treasury select committee carrying out a thorough investigation into the performance of the FSA in relation to the RDR.

It was revealing to watch the senior officials from the FSA being grilled by the committee but it was shocking then to see how the FSA, in a display of arrogance, brushed aside the committee’s call for there to be a delay in the introduction of the new RDR rules. The FSA has since apologised for its unseemly haste.

On the other hand, after the outcry following the FSA’s 16-line report on the failure of RBS, which was published on December 2, 2010, the Treasury committee prevailed upon the FSA to produce a proper report.

That 450-page report, published almost exactly a year later, was substantial. In relation to the RBS report, the committee was able to use its position and influence to bring about an important change in the FSA’s attitude but on the recommended delay to the commencement of the RDR rules, its views were peremptorily brushed aside.

None of this amounts to true accountability. The FSA’s response to the committee was based on its assessment of the balance of political power between the committee and itself. What is needed is a change in the law that requires the FCA, when it takes over from the FSA, to answer to the committee – and so to Parliament – for its actions and failures.

Even that would not equal the way in which ministers have to appear before Parliament to answer for their departments but it would be a significant advance on the current position where the FSA feels able to brush the views of the committee aside.

The question of the accountability of the FCA was raised by the Treasury committee in its recent report on the FCA published on January 10, 2012. In that report, the committee rightly said that as the recent financial crisis has shown, the appropriate regulation of the financial sector is important for everybody.

It said: “It was therefore crucial that the regulators not only have the correct remit and powers but are also seen, in the public interest, to be fully held to account for their actions. By challenging the regulator to explain the reasons for its decisions, the quality of those decisions is likely to improve. Better accountability of the FCA can therefore do much more than boost public confidence in the regulator – it can improve the quality of regulation.”

The evidence the committee received was also supplemented by “a wealth of private criticisms of the culture and regulatory approach of the FSA made in private briefings. These people have said they are reluctant to put their names to criticisms of the FSA on the grounds that it might prejudice their working relationship with the regulator but the scale and substance of the criticisms makes it improbable that they do not reflect an underlying problem”.

The committee referred to the FSA’s peremptory rejection of the former’s recommendations regarding the RDR. It then added that “the fact that a non-elected public body would so hastily dismiss recommendations from a Parliamentary committee raises concerns about the accountability and culture of the FSA”.

Those concerns are increased by two further points. First, the FCA, like the FSA, will be able to set its own budget and to raise its own funds from the regulated community. That is a form of taxation and the FCA should be accountable for the way in which it raises and spends money.

Second, it is intended to give the FCA greater powers to deal with misselling and other breaches of its rules. In a society such as ours where all power is ultimately derived from Parliament, any increase in power should be accompanied by greater accountability to Parliament.

When Lord Turner gave evidence to the committee, he suggested drawing an analogy with the independence of the Bank of England and its Monetary Policy Committee when setting interest rates. Its minutes are published, including the arguments on both sides of any question. It deliberately makes the issues and decisions transparent.

Turner said: “We could extend that to the FCA. You could require that the FCA board minutes, where they deal with a direct public policy issue, are published and set out clearly the arguments for and against. You could ask along non-executive members of the board for you to say, ’Well, tell me what the debate was about the RDR. Did you receive good enough papers from the executive to drive that decision?’ and so on.

“I think there are particular ideas that could create a better sense of visibility of the nature of those decisions and of a clear sense of accountability.”
The Treasury committee concluded that the current bill did not provide for adequate accountability and scrutiny of, and explanation by, the regulator. It therefore recommended a number of measures to enhance the accountability of the FCA.

Its recommendations are that:

  • the board of the FCA publishes full minutes of each meeting;
  • the legislation provides that the chief executive of the FCA be subject to pre-appointment scrutiny by the Treasury committee;
  • the legislation provides that the FCA board be responsible for responding to requests for factual information and papers from Parliament; and
  • the legislation provides that Parliament, through the Treasury committee, may request retrospective reviews of the FCA’s work.

The response from the Government was published on February 20. In essence, the Government said it does not intend to adopt any of these proposals. Its reasons for taking that stand have not impressed the Treasury committee, which said: “It is widely accepted that accountability mechanisms for the FSA have been deficient and are in need of considerable strengthening. They require statutory definition.”

The refusal of the Government to accept the cogent reasons for the Treasury committee’s recommendations has ominous echoes of the position of the Government in respect of the reforms of the NHS – a refusal to accept advice.

In the interests of a positive reform of the regulatory system that will affect not only the whole regulated community but also the public at large, all MPs must be pressed to accept the Treasury committee’s views on accountability and so ensure the FCA is made properly accountable in law and to the people.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of


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There are 10 comments at the moment, we would love to hear your opinion too.

  1. What a fantastic and balanced article.

    Mr Hamilton, if we could elect our regulators you would have my vote.

    Lee Birkett

  2. Not for the first time, Peter has hit at the heart of the regulatory illness which causes all of us to cough and splutter on a continual basis.

    By devolving regulatory powers to the FSA successive governments have been able to point to the FSA’s independence as the basis for sound practice whilst enjoying the kudos that emanates from oft repeated phrases such as “world class regulator”.

    The iniquities inflicted on consumers and the regulated, supposedly in the names of ‘fairness’ and ‘enfranchisement’, are proven to be counter-productive with repeated instances of that now cliched phrase ‘unintended consequences’.

    This is what happens when the unholy marriage of theorists and consumers advocates is allowed to bear fruit.

    The government sees this as a local problem not realising the extent to which consumer detriment via ever rising compliance costs and reduced mortgage choice diminishes the interaction between consumers and the industry.

  3. A very good and accurate analysis.

    Its funny really the only people who think they are doing a good job are the FSA (soon to be FCA) themselves.

    It may be taking some time but are the waters beginning to clear ?

  4. Every paragraph in Peter Hamilton’s article was filled with sensibility.
    What a terrible shame the FSA has nobody of his intellectual capacity and balance.
    The next big drive from the FSA is to ram ‘business risk’ down our throats, just like TCF. One of the key pillars in reducing business risk is apparently the ‘culture’ of fair dealing, cascaded down from directors to the workforce. What a sick joke, coming from the policymakers at canary towers, who sneeringly disregard all opinions from Parliament’s TSC. It turns my stomach.

  5. Excellent article Peter, about time someone with a legal background stood up for fairness and equality for the IFA community and brought accountability to those who are unacountable.
    Now lets get down to who and what is behind these unacountable people, the none political charity COMMON PURPOSE! It is everywhere in public life leading beyond authority. At last A4E are being found out for (alledgerdly fraud) as well whilst the FSA/ MAS have been running pilots with them, useing none qualified advisors (not giving advise) whilst face to face with members of the public, funded by us. The truth will be out soon if anyone with half a brain bothers to to look.

  6. Julian Stevens 9th March 2012 at 3:39 pm

    Although Adair Turner has expressed cautious endorsement of the idea of accountability, Caveat No. 1 is that accountability by hindsight is not to be countenanced (despite that being the very basis on which the FSA regulates).

    Now we read Caveat No. 2, namely that the FCA might be persuaded to publish its board minutes, but only those concerning matters that “deal with a direct public policy issue”. As opposed to what? Is Adair Turner proposing that everything and anything else, at the sole discretion of the FCA, shall remain firmly off limits to outside prying eyes?

    Why shouldn’t the minutes of ALL the FCA’s board meeting be published? Why should the FCA be allowed to grant itself the luxury of selectivity? How is that supposed to amount to accountability?

    And who, if anybody, will have the power to challenge any refusals to publish?

    In the absence of an Independent Regulatory Oversight Committee to force the FCA’s hand, any refusals to publish will, as Mark Hoban likes to say: End of (so bugger off and stop trying to stick your nose in where it isn’t wanted).

    Were the.FSA remotely accountable in any meaningful sense, Adair Turner would be able to cite a whole list of examples instead of making mealy-mouthed token gestures of accord with the idea, whilst all the time having not the slightest intention of going along with any of it.

  7. @Julian
    Julian, the FSA will probably burn all the old minutes before the FCA take over.

  8. Alistair E Niven 10th March 2012 at 12:03 am

    Peter, Very glad to see that you are still watching over this stuff like a hawk. It is amazing to me that you have not been approached to take part as a non exec member, rather than the nonentities that are in place. Maybe you have and declined. Do keep at it though — you must be getting on a bit now !!

  9. Held to account for what?

    Not regulating?

  10. That would be a good day for democracy

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