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