View more on these topics

Why the FCA must be called to account

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

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Until the regulators get a grip of their own ‘systems and controls’ I will remain a sceptic, or is it septic?

    Come on Hector, the regulator needs people who can sort things out in days rather than months. You need people who have inquisitive minds and can use them. Is the FCA going to be an IMRO/LAUTRO/PIA MkIII?

    I sincerely hope not, the damage being done to society by the collective intellectual failures is too much for it to bear right now. Consumers need protection, they don’t get it do they?

  2. Stephen Hepburn 26th August 2011 at 3:27 pm

    The site of an experienced Advisor sat upon someones settee friendly delivering advice and nurturing trust and friendship will be a thing of the past.A younger breed will sit at a table with laptop on, scared to say anything.All advice will be delivered with reems of paper absolving the advisor from responsibility and inevitably things will migrate on line.Amounts invested will diminish and people will be poorer……er except for “The final salary remunerated FCA Heirarchy!”

  3. The question of the accountability of the FSA/FCA is one that has surely at some time or other concerned most of us. It is all very well granting independence to this organisation for reasons which no doubt seemed strong at the time but which have turned out to be completely misguided, but there has to be some form of sanction applicable to the FSA by our elected representatives. As Peter Hamilton mentions above, the only one I can perceive is for the Treasury to sack the entire board and replace them with people who more readily accept parliamentary sovereignty.

    I have to say that the quote by Hector Sants, again as reproduced by Peter Hamilton above, that he “takes seriously” the mechanisms by which he is responsible to Parliament, especially the TSC, does not stand up to close scrutiny (as the euphemism goes).

    The suggestion that the FCA should become virtually a government department with a minister answerable to Parliament is very interesting and one that I think many of us would support. It would at a stroke remove a number of issues that are vexatious between IFAs and the FSA, and indeed its chief.

  4. With all due respect to the restraint employed here by Peter, I disagree with a number of the points he makes. Firstly, the FSA enjoys a most peculiar position of immunity from accountability, in that it IS a government department (fsa.gov.uk) but funded by the private sector without accountability to anyone for anything it does, least of all the ever-increasing sums of money it decides to extort from those it regulates. Every revelation of regulatory failure results in the same announcement from the FSA ~ more power, more staff, more resources, more aggressive and intrusive regulation and, above all else, more money and next time we’ll make a better fist of things. It’s always jam tomorrow but never jam today. And there appears to be nobody able or willing to call a halt to this endless escalation in financial and bureaucratic demands on the industry, much of it misdirected. Hector Sants claims to be a strong supporter of accountability, yet the facts just don’t bear this out. In fact, at his appearance before the TSC back in March, he all but said to Andrew Tyrie that if he (Tyrie) isn’t happy with the FSA’s lack of accountability, then the Committee will have to get the Law changed ~ if it thinks it can. Very evidently, the Committee isn’t happy with the FSA’s lack of accountability, yet Hector Sants made it quite clear that he has no intention of taking any steps to address those concerns and intends to carry on just the same unless the Law is changed to force a change of approach on his part.

    When did the Treasury ever dismiss anyone at the FSA? The last high profile dismissal was Clive Briault and look what he got ~ a pay-off reportedly totalling £612,000, once again paid for using Other Peoples’ Money, as is the case with everything the FSA does. If Hector Sants’ assorted expenses are added to his salary, bonus and pension contributions package, he’s costing the industry nearly a million pounds each year. In light of the FSA’s long list of assorted failures to date, has anyone at the Treasury sought to question whether or not such a figure represents anything remotely approaching value for money? To the best of my knowledge, the answer is a simple NO.

    As for the “extensive consultation process the FSA undertook in relation to the RDR”, many consider this to be nothing but a hollow token sham, not least because none of the feedback submitted was published for anyone to see and to debate. With each successive “consultation”, the FSA merely claims to have “taken on board” the submissions it has received and ploughs ahead anyway according to its own predetermined agenda. What submissions? Which ones has it taken on board and in what ways have those submissions shaped or altered its strategy from that point on? We simply don’t know and the FSA remains utterly determined to ensure that we never do. How does such a stance chime with the FSA’s claim on its website to being “an open and transparent regulator?

    Why is it necessary for the FSA’s entire workforce to be based in some of the most expensive offices in the country? How can the FSA be allowed to deny IFA’s the protection of English Law in the form of the 15 year longstop against stale complaints? How can it be legal for the FSA to cover up its own failings and oversights by imposing new rules and regulations by hindsight? How can it possibly be justifiable for FSA people to jet off in first class airline seats to far flung countries such as Korea and China at the expense of UK levy payers? If those countries want to find out how FS regulation in the West works (if they really knew, they might not want to copy much of it) and want someone from the FSA to go over to explain it to them, then they should be required to pay for it. Why should we be forced to? Is the FSA’s annual operating budget of more than £½Bn a year excessive? You’re darned right it is. But nobody’s even attempting to do anything about it. A good place to start would be to impose a mandatory cut of 50%.

    Whether or not the will of the TSC will be sufficient to bring about the creation of an Independent Parliamentary Regulatory Oversight Committee with the power to say to the FCA: This is wrong and you aren’t going to do it remains to be seen. We live in hope, if not expectation.

  5. Excellent comment Julian – sums up the situation in a nutshell. Will anything be done to change this disgraceful position we are in? We live in (false) hope

  6. An interesting article. Good to see you are still capable of stimulating an interesting debate Peter. I believe there are some good points raised in the comments too, with Mr Stevens highlighting a number of thoughtful concerns. My belief is that the separation of powers and a lack of a proper constitution in the UK has prevented us from remaining with the pack as a grown-up country with a clear understanding of how the government, (and by implication business) the law, and the state operate. The many chunks that have been taken out of the Magna Carta in the last 700 years have resulted in a mish-mash of confused powers, which even those on the inside seem incapable of grasping. Witness how previous governments have ignored Parliamentary sovereignty with respect to the Parliamentary process. Its time to grow up, and re-write the constitution, and clarity of law and accountability in matters such as this will surely follow.

Leave a comment