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Peter Hamilton: Time has come for FCA to be part of Govt

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The summary dismissal of FCA chief exeutive Martin Wheatley has raised many questions about the role and responsibilities of the FCA, and there has been much comment. The consensus seems to be that at least one reason for the Government’s decision not to renew Wheatley’s contract was the fact he appeared to be advocating a hard line against the behaviour and actions of banks and bankers.

But most members of the public applauded the FCA’s hard line over matters such as absurdly high bonuses, market abuse, money laundering, rigging of Libor and forex rates, and the misselling of interest rate swaps. The list of what some banks were up to is long, and most people would say those banks, their managers and staff needed to be brought under control.

So the question arises of should the regulator be there to oversee the conduct of those firms and individuals in the financial services industries? And if so, how should it do its job?

Looking back over the last 40 to 50 years and thinking about the financial scandals that have occurred, there is little doubt that both conduct in financial services and the prudential aspects of running a sound firm require regulation. The first two duties of any regulator are, first, to vet all those applying to join the industry overseen by that regulator; and secondly, to enforce the rules of good conduct against those firms and individuals who are not up to standard.

The next question is, who should be the regulator of the financial services industries? Maintaining law and order within the UK is one of the most important roles of the government. Regulation is part of the role of maintaining law and order, and so it follows that it is really the job of government. It also follows that financial regulation should be carried out by a department with a minister in charge, and who in turn reports directly to Parliament.

In that way the lines of responsibility would be clear. The minister would have to explain to Parliament why some banks were so out of control. He or she would personally feel the pressure of having to stand up in Parliament to set out the unpalatable facts of the latest scandal, whether it be money laundering in Mexico or rigging the forex rates in London.

On balance, a minister responsive to Parliamentary pressure would be better than a chief executive of the so-called independent FCA, who is much more isolated. Under public and Parliamentary pressure, such a department would have dealt with the banks’ excesses at least as well as the FCA has done.

The fact is if financial regulation were the job of a government department, it would have the capacity to cause huge embarrassment to the minister in particular, and to the government in general. That is probably why the regulator has been established as a body ostensibly independent of Parliament and of the government. In that way the government can express its disquiet over the latest wrongdoings, and leave the so-called independent regulator to investigate, enforce and punish the wrongdoers.

But the FCA’s independence is only ostensible because its chairman and chief executive are both appointed by the Treasury, and two of its board are appointed by the government. It must make an annual report to the Treasury on “the discharge of its functions” and other matters. The Treasury can call for other reports and information. All that material must be laid before Parliament.

Would it not be better to face the reality of the situation and to make the FCA a government department, presumably as a part of the Treasury, with one of the Treasury ministers responsible for financial regulation? The Prudential Regulation Authority could become part of the same department.

The benefit for financial services would be at least two-fold.

First, the evolution of the rules of regulation would be subject to better scrutiny than at present. The process would be led by the minister with the political responsibility for the consequences. Thus, for example, the RDR would probably have been carried out in a much more sensitive way than it was by the FSA.

Secondly, the government would be likely to take a greater interest in important aspects of regulation such as compensation for the wrongdoings of firms (currently dealt with by the Financial Ombudsman Service) and the failure of firms (currently dealt with by the Financial Services Compensation Scheme). At the moment, there is no appetite to tackle the long overdue reform of the FOS and the FSCS.

The question of funding the regulator is a difficult one to answer satisfactorily. But at least if it were a government department, the starting position is it would be funded by taxation, its budget would be closely scrutinised by the Treasury, and supplemented by fees in much the same way as at present.

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

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. Yes Peter we cannot continue unless the accountability Issue is sorted now but both regulators and civil servants love it the way it is.

  2. Nice thinking Peter, but IMHO I don’t think government, really and truly know who or what the regulator is, any one who has written (and got a response) or talked to their MP will no doubt testify; where the Treasury, know exactly who the regulator is, now there is the problem.

  3. Couldn’t agree more with Peter’s sentiments; many of us have made this point consistently for literally years. The solution articulated in this article looks to me to be perfectly feasible and a very considerable improvement on the existing basis, especially as the leadership of this organisation is beginning to look like a game of musical chairs.

  4. I’d support anything that would bring accountability to financial services regulation. It is quickly killing the industry with its frivolous spending, silly unworkable rules and illegal ‘protection racket’ style levies.

  5. Part of the Government? Since Crash Gordon started the FSA that’s what in effect it has been. The crafty bit was that as it was labelled independent the Government could always say “It wasn’t us Guv” when things went wrong. When they went right (was there such an occasion?) then the Government was quick to take the credit. Thus the Regulator was the whipping boy of both sides of the equation. But it is/was the Treasury that held the reins or at the very least were the ‘Éminence grise’.

  6. Sorry Pete, old mate, your law may be good but your economics and economic history are woeful. The last thing you need is a strong regulator. That’s one of the prime reasons the banks are bad and bust – mis-regulation on an epic scale.
    It is an anathema to any bureaucrat to be accountable, so breaking up the FCA and returning the bits of it that make any sense – and that’s not many – to the Treasury, the Bank of England, The police etc.
    To sort the banks you need to go back to reform all sorts of Acts starting from about 1833. You also need to sort out the current (corrupt) fractional reserve model. This makes the banks a state sanctioned specially privileged cartelised suppliers of a monopoly product engaged in counterfeiting. The government loves this (as do its bureaucrats) as it allows them to destroy their debts to us whilst enjoying fat index linked entitlements funded by us.
    Look, this post has gone on long enough, but I can send you a reading list if you like? Start with Henry Hazlitt Economics in One Lesson and then read as much of Murray Rothbard as you can. It’s also worth reading Teasley Laws of Bureaucracy here – https://mises.org/library/seven-rules-bureaucracy. Enjoy.

  7. Pete, just to clarify, my previous post was referring to this bit “Looking back over the last 40 to 50 years and thinking about the financial scandals that have occurred, there is little doubt that both conduct in financial services and the prudential aspects of running a sound firm require regulation.”
    The rest of your analysis is pretty good, although bit muddled as to things like the responsibilities of the state for law and order – there are already more private courts and private policemen than official ones.

  8. Would Peter’s great idea also extend to the FOS and the FSCS?

  9. From the first drafting of the Financial Services Act 1986 and the creation of the SIB it was clear that the Government of the day was not, and would not be, willing to take any ‘direct’ responsibility for the policing and operation of Financial regulation. Despite fiddling around with the system, that remained the case under Labour, then under the Coalition, and now under a new Tory Government. This despite the blindingly obvious point that Financial Regulation is a responsibility of Government and as has been said, part of the ‘Law and Order’ remit that only Government can fulfill.

    Is a change desirable? Yes, I believe so. Can it happen? Not a cat in hell’s chance!

  10. Government being responsible – yes. Government as regulator? Equitable Life makes me doubtful.

  11. The FSA/FCA have never been independent of government. The point is that the government until recently never bothered to step in and exercise any sort of control over its regulatory subsidiary. That, as we’re now seeing, is finally changing, belatedly but hopefully with some meaningful benefits.

    I still maintain that the FCA should be subject to ongoing and effective control on the part of the government by way of a Parliamentary Regulatory Oversight Committee, with real powers to force the FCA to comply with the requirements of the Statutory Code of Practice for Regulators. For far too long, the FCA has been allowed simply to ignore the Code.

    Now, increasing numbers of people are complaining about the difficulties they’re experiencing in exercising (wisely or unwisely ~ it’s supposed to be their choice after all) their rights under the new (supposed) free access to their pension fund provisions. This because most intermediaries are rightly fearful of the regulatory repercussions from facilitating a course of action that goes against their advice. Unless and until the FCA issues an unequivocal statement (and doesn’t the regulator forever like to equivocate?) that a signed disclaimer will constitute an adequate defence against complaints, nothing will change. It looks like it simply won’t do this unless the Treasury tells it to.

  12. Harriett Baldwin MP replied to my complaint about the FSCS levy stating that the FCA was independent of Government. Which begs the question how in a democratic society you put right the abuse of a minority by a body that is not accountable – human rights legislation for IFAs I guess. Unfortunately MPs are driven (and time devoted accordingly) by the ballot box rather than what is fair for a minority. Treat others as you would have them treat you.
    But I digress. In her awful letter, Ms Baldwin added a hand written note stating that I may be aware that Wheatley was going. Why add that unless it was a sop to make me feel happy? Or was it to prove that we, the Government, have done something? In which case the FCA is not independent!
    The Government want the FCA to be independent so that hard regulatory decisions can be made without there being too much come back at the next election. It is why more powers are being devolved locally especially in terms of contentious issues – blame your council not us. It will not happen Peter.

  13. @Sam. You have nailed the accountability issue. The FCA is, de facto, a ‘government department’. If it isn’t, what is it? It has extensive powers which make it law maker, police, judge, jury, executioner and tax gatherer. In a free society it is utterly unacceptable that such rage of powers are handed over without proper democratic, legal and financial accountability. And when such powers are handed over, it always leads to cronyism and self interest.

  14. Peter. First an apology. My posts of yesterday were…shall we say ill considered. Not wrong, but out of place.
    Your piece is a very welcome shift in the debate around what I call ‘regulationism’. What you have set out is what I and many other have been saying since 2001 – the FSA/FCA is utterly unaccountable and that that is entirely unacceptable in free society. The debate is therefore now about the fundamental structure of regulation, not the minutiae of its actions. This is exactly correct. We are therefore now debating it on the grounds of our choosing, not the FCA’s.
    However, this does mean that we will now need to really sharpen up our arguments. The commentary in your article around what the regulator does and your comments about various issues are incorrect as they are starting half way up the argument. If you go back to first principles and build forward it can be clearly argued that the various banking crises (for example) are because of regulationism, not despite it.
    Furthermore if you study the FSMA2000 you will understand that it is a naked attempt to nationalise banking (and financial services generally) by regulation.
    It is important to note that the FCA rule book has over one million paragraphs – no-one knows what is actually in it. It’s just a malleable series of constantly moving traps. The Lord only had ten rules and only half of those applied directly to the affairs of men. Why do we need over one million?

  15. Most MPs believe the lie that the FCA is a separate and autonomous organisation.

    Of course, Wheatley’s sacking has disabused them of this notion, those that can be bothered to give consideration to the matter.

    Those at the top of the pole delight in saying the FCA is independent as it distances them from the repeated errors and allows them to also claim credit, as Gordon Brown did when he proclaimed the FSA as a world-class regulator.

    Until MPs understand the reality and are themselves disgusted by it then nothing will happen.

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