The objectives of the Financial Conduct Authority need to be overhauled to avoid unnecessary complexity and perverse consequences, according to the Treasury select committee.
Draft legislation proposes giving the regulator the strategic objective of “protecting and enhancing confidence in the UK financial system”. It also proposes three operational objectives of securing an appropriate degree of protection for consumers, protecting and enhancing the integrity of the financial system and promoting efficiency and choice in the market.
In its report into the accountability of the FCA, published today, the TSC says the Government should scrap the strategic objective or, at the very least, amend it. It says the current wording could lead the regulator to act in way that maintains a “misplaced” confidence. Consumer groups warned the committee it could make the regulator downplay consumer detriment to maintain confidence.
The committee says if the Government will not scrap it revising it to “ensuring fair, efficient and transparent markets” and adding a second strategic objective of promoting effective competition for the benefit of consumers would be an improvement.
However, it adds: “There is a risk of confusion created by multiple tiers of objectives and duties.
“The revised strategic objective of ensuring fair efficient and transparent markets already largely embodied in the current operational objectives. With the addition of a competition objective they would cover all that is required.”
The draft financial services bill committee, the FSA, the Independent Commission on Banking, and consumer groups have all criticised the wording. In November, Treasury financial secretary Mark Hoban defended the current proposals. He told the TSC: “You cannot prise apart the strategic and operational objectives. The strategic objective is the umbrella statement about the role of the FCA. It is the operational objectives which give the meat to the bones and set out what the FCA will be doing.”
Under the draft bill, the FCA will have the power to ban products for up to a year if it considers there is potential for substantial consumer detriment. The committee’s report says that it supports the need for a judgement based product intervention policy, but says it is concerned the regulator may not understand new products as well as firms and that the power could undermine competition and innovation.
It says: “We recommend that clear guidance be issued to firms when such powers are used. Their use should be sparing and the merits of each case carefully considered before intervention.”
The draft also gives the FCA power to issue early warning notices when it starts an investigation into a firm. However, the committee says the Government should continue to consult on the move because investigations could turn up nothing and damage the reputation of firms.
The report will inform changes made to the draft legislation with a bill expected in the coming weeks.