Some of the big questions about the FSA are how it does what it does and whether it is properly accountable for its actions.
Those questions are particularly pressing because of the reform of the regulation of financial services currently being undertaken by the Government. If the FSA’s accountability is inadequate, what changes should be made so that the Financial Conduct Authority is properly accountable when it takes over from the FSA?
As is well known, the regulator is independent of the Government and Parliament but there are mechanisms for ensuring some elements of accountability.
The FSA’s board is appointed by, and can be dismissed by, the Treasury. At least once a year the FSA must report to the Treasury on the discharge of its functions, the extent to which it has met its statutory regulatory objectives and certain other matters. The Treasury must lay that report before Parliament.
The FSA must also hold an annual public meeting within three months of reporting to the Treasury. That meeting must be organised so as to allow a general discussion of the report and to provide a reasonable opportunity for those attending to question the way in which the FSA has discharged, or failed to discharge, its functions during the year covered by the report.
The Treasury also has statutory power “to appoint an independent person to conduct a review of the economy, efficiency and effectiveness with which the FSA has used its resources in discharging its functions”.
However, looking back on some of the events of the past 10 years, there is room for doubt about the adequacy of those mechanisms.
By the FSA’s own admission, there have been times when its supervision has been inadequate. Its handling of Equitable Life and Northern Rock are examples. There are unanswered questions about its role in the failures of HBOS and RBS. Would the retail distribution review have taken the course it did on issues such as grandfathering if there had been adequate accountability?
‘The FSA is a very powerful body. The FCA will be at least as powerful. It is not appropriate for such a body not to be subject to proper scrutiny and oversight by someone else’
The Treasury select committee recently reported on its inquiry into the RDR. It noted there were concerns about the accountability of the FSA. When it raised those concerns with FSA CEO Hector Sants, he said when giving evidence: “I do not think we are immune from public accountability. I am an extremely strong supporter of accountability. We are accountable to Parliament through a number of mechanisms, including this committee, which I take extremely seriously.”
Sants went on to refer to the extensive consultation process the FSA undertook in relation to RDR.
In its recent paper on how the FCA will approach its job when it takes over, the FSA said the FCA will be accountable to Government and Parliament. In addition to the current mechanisms described above, it said there would be a new requirement to make a report to the Treasury in the event of regulatory failure. This will “address the FCA’s actions and decision-making and consider what lessons can be learned by firms and regulators.”
But there is a fundamental difference between making reports and conducting consultations – even extensive consultations – on the one hand and being held to account by proper oversight and required to take remedial action on the other.
Proper accountability is exemplified by the way in which Parliament holds the Government to account. Ministers are called upon to answer for their departments in Parliament.
In the debate in the House of Commons on the RDR, Harriet Baldwin MP, commenting on the likelihood that as many as 20 to 30 per cent of IFAs will leave the industry as a result of the RDR, said: “Imagine the outrage there would be in the Chamber if a minister said from the dispatch box, ’I am going to put between 20 and 30 per cent of an industry out of business at the stroke of my pen on January 1, 2013’. It is unbelievable we have allowed an organisation to grow and, unscrutinised by this legislative body, have such a power over our constituents.”
The best way of achieving full accountability for the FCA would be for it to lose its independence and to become a Government department, perhaps as a division of the Treasury but with its own minister for financial regulation. Parliament, both through questions and debates in the House of Commons and the activity of the TSC, would exercise appropriate oversight.
If things went wrong and an individual was the victim of maladministration by that department, the matter could be referred by an MP to the parliamentary ombudsman, who would be able to carry out a proper and searching inquiry and report back to Parliament.
Even if the FCA were to retain the independence currently enjoyed by the FSA, a proper system of accountability could be introduced.
The FSA is a very powerful body. The FCA will be at least as powerful. Everyone knows of the dangers of unbridled power. It is not appropriate for such a body not to be subject to proper scrutiny and oversight by someone else.
Another unsatisfactory aspect of the current position is that the FSA investigates its own failings. It appears to try to do this as objectively and thoroughly as it can but one has only to look at the example of the police investigating their own failings to understand why it was necessary to hand that task to the Independent Police Complaints Commission.
An independent supervisory commission could be established, with power to investigate complaints not only from the public but also from regulated firms and further, on its own initiative, any matters about which there were concerns. It should be properly and adequately funded and staffed and have full powers to take evidence and to require the production of documents.
This commission should have power to require the FCA to take remedial action both in relation to the way it carries out its duties but also in relation to awarding compensation for the FCA’s failings. The FCA therefore should not have immunity from being sued for its acts or omissions in the course of discharging its functions.
Since the FCA will be funded by the regulated community, it would not be fair for any payments for compensation it might be required to make to come ultimately from that community.
Therefore, there ought to be a system by which the Treasury would be required to pay the amount of the compensation. If that were to happen, the Treasury would immediately take a close interest in what the FCA was doing or not doing.
Reassuringly, the TSC has decided that “the creation of the FCA provides an opportunity to examine the accountability mechanisms that will apply under the new system of financial regulation. We will therefore instigate an inquiry into this, including the mechanisms proposed by the Government, as well as the concerns raised within the evidence attached to this report, to decide whether they are adequate.”
It is very important that the committee does this and that Parliament introduces a proper and effective system to oversee the FCA and hold it to account.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court