Select Committee on Constitution Minutes of Evidence


Memorandum by the Financial Services Authority

A.  INTRODUCTION

  1.  The FSA submits this memorandum in response to the Committee's call for evidence on its inquiry into the accountability of regulators to citizens and Parliament. The memorandum sets out:

    —  the legal basis and statutory objectives of the FSA; and

    —  the ways in which it is held accountable.

  2.  The FSA attaches great importance to being an open, transparent and accountable regulator. We issued a policy statement entitled "The open approach to regulation" in 1998 before the current legislation was enacted. Our policy proposals are reflected in the statutory framework for ensuring that the FSA is properly accountable to Ministers, Parliament and the wider public and that it takes into account the interests of all its stakeholders.

B.  BACKGROUND

  3.  The FSA is the single, statutory regulator for the great majority of financial services in the UK, and is the competent authority under the European single market directives for banking, insurance, investments, listing and other financial services matters. Its powers are conferred primarily by the Financial Services and Markets Act 2000 (FSMA), which unified the previous sectoral arrangements and regulators. The FSA also has registration functions under the various legislation applicable to mutual societies, and related functions under other legislation applicable to financial services and listing.

  4.  FSMA requires the FSA to pursue four objectives:

    —  maintaining market confidence in the financial system;

    —  promoting public understanding of the financial system, including awareness of the benefits and risks of different kinds of investment or other financial dealing;

    —  securing the appropriate degree of protection for consumers, while having regard to the general principle that consumers should take responsibility for their decisions; and

    —  reducing the extent to which it is possible for a regulated business to be used for a purpose connected with financial crime, such as money laundering, fraud and insider dealing.

  5.  FSMA applies these objectives directly to the FSA's general rule-making and policy-making functions. In carrying out these functions FSMA requires the FSA to take into account a number of matters, which we refer to as "the principles of good regulation". These are:

    —  the need to use its resources in the most economic and efficient way;

    —  recognising the responsibilities of regulated firms' own management;

    —  the principle that the burdens and restrictions imposed by regulation should be proportionate to the benefits;

    —  the international character of financial services and the desirability of maintaining the UK's competitive position;

    —  the desirability of facilitating innovation;

    —  the desirability of facilitating competition; and

    —  the need to minimise the adverse effects of regulation on competition.

  6.  The FSA is a company limited by guarantee and is financed wholly by levies on the regulated industry; it receives no Government funds. Its Plan and Budget are published each January for the financial year beginning 1 April, at the same time as it consults on its fees (which is a statutory requirement). There are corresponding arrangements for the Financial Ombudsman Service and the Financial Services Compensation Scheme, which are established and overseen by the FSA but are required to be operationally independent from it.

  7.  The FSA's governing body is the Board, currently consisting of a Chairman, three executive directors, a further ten non-executives, and the Deputy Governor (Financial Stability) of the Bank of England. The FSA directors are appointed by the Treasury following the principles for public appointments issued by the Commissioner for Public Appointments ("Nolan Principles"). The Treasury recently announced that in future the Chairman will be supported by a separate Chief Executive. The non-executive members serve in a personal capacity, not as representatives of particular interests or associations. They bring expertise in both the financial and non-financial sectors as well as from the consumer perspective. The Board sets overall FSA policy. Day-to-day operational decisions and management of staff are the responsibility of the Executive.

C.  THE ACCOUNTABILITY OF THE FSA

  8.  The basis on which the FSA's independence and accountability are secured in practice is set out in an exchange of letters between the Chancellor of the Exchequer and the Chairman of the FSA. These were published in December 2001 and are attached in Appendix 1[1]. The letters set out what the Government is responsible for under FSMA, namely:

    —  the legal and institutional framework within which regulation is carried out, including the core corporate governance structure of the FSA;

    —  appointing the executive and non-executive members of the FSA Board, and judging their overall performance in relation to the FSA's statutory responsibilities;

    —  ensuring the boundaries of FSA regulation are correct—the Government and Parliament therefore decide the FSA's scope;

    —  directing the FSA on additional matters to be included in its public Annual Report;

    —  mounting investigations in cases of possible major regulatory failure, and also to assess value for money; and

    —  directing implementation of international obligations.

  9.  The FSA's accountability to the Treasury is balanced by a legislative framework which ensures that it is open and responsive in its policies and reporting to other stakeholders, and that its procedures are seen to be fair and independent. Specifically, the FSA is accountable in the following ways.

  10.  Statutory objectives. The statutory objectives provide the FSA with a clear goal and describe the overall purpose of the regulatory system and the way in which Parliament expects it to operate in practice. The FSA has set out in "A new regulator for the new millennium" (January 2000) how it intends to meet these objectives in its work. This can be found on our website at www.fsa.gov.uk/pubs/policy/index-2000.html.

  11.  Clear governance structures. FSMA requires the FSA to have regard to applicable principles of good corporate governance, and a statement on these is included in the FSA's annual report under the Companies Acts. FSMA gives specific responsibilities to the FSA's non-executive directors—such as reviewing the economic and efficient use of the FSA's resources and setting the pay of executive Board members. The non-executive committee reports annually to the Treasury on the discharge of its functions. This is included in the FSA's published Annual Report.

  12.  Public reporting mechanisms. The FSA reports annually to the Treasury on the discharge of its functions and the extent to which it has met the statutory objectives and taken into account the principles of good regulation. The report is laid before Parliament. The FSA holds an annual open public meeting for its stakeholders to discuss the report and the FSA's performance. This is advertised in the national press and a wide range of stakeholders—firms, trade associations, consumers—attend.

  13.  Service Standards. FSMA sets out a number of explicit standards that the FSA must meet in carrying out its duties—for example, time periods within which it must take certain decisions. Now that FSMA has been in force for just over a year, the FSA has gained some experience of how the legislation works in practice. So it has published a framework of service standards in its recent Plan and Budget. In developing the framework the FSA has set itself a number of targets and will begin publishing performance against these at the time of its Annual Report later this year. The FSA will also develop other standards to cover further aspects of its work. These will be published at the same time as our Annual Report.

  14.  Direct input by the industry and consumers. The FSA is required to consult publicly on proposed rules and regulatory guidance before issuing them. The consultation must explain how the proposed rules and guidance will meet the statutory objectives and will be consistent with the principles of good regulation and must include a cost benefit analysis. The FSA publishes feedback statements following consultation. FSMA requires the FSA to establish mechanisms for consulting practitioners and consumers directly on whether the FSA is meeting its objectives—including statutory Practitioner and Consumer Panels. We have also established, voluntarily, a Small Business Practitioner Panel. The statutory Panels make annual reports (to which we respond publicly in our Annual Report) and appear before the Treasury Select Committee of the House of Commons. The Panels also have the right to require us to respond in public to their views or requests.

  15.  Public access to the FSA. Members of the public have access to the FSA through its Consumer Helpline and Consumer Help website. The Helpline handles around 205,000 calls a year and the Consumer Help website attracts up to 8,000 users a week. In addition, consumers have access to the FSA through their MPs. The FSA receives on average 60 letters a month from MPs on behalf of their constituents.

  16.  Independent review of the FSA's rules and decisions. As well as the normal safeguard of judicial review, the FSA's rules and practices are subject to independent competition scrutiny by the OFT and the Competition Commission.

  As required by FSMA, the FSA's internal procedures also ensure that a decision on a case is not taken by the FSA staff who conduct the investigation. The Regulatory Decisions Committee, which is made up of recently retired practitioners and individuals representing the public interest, is responsible for the FSA's more fundamental enforcement decisions (eg disciplinary cases and cancellation of a firm's authorisation).

  Individual decisions on enforcement and authorisation cases can be considered afresh by the Financial Services and Markets Tribunal if the firm or individual involved chooses to refer the case to it. The Tribunal is set up under FSMA and run by the Lord Chancellor's Department.

  17.  Independent investigation of complaints. The FSA has made arrangements, as required by FSMA, for investigating complaints against it. Complaints may be made by anyone directly affected by the FSA's actions or inactions—that is, regulated firms, individual employees of firms, listed companies, consumers etc. As part of these arrangements, the FSA has appointed an independent Complaints Commissioner. The Commissioner's role is to investigate complaints and report to the complainant and the FSA. She can publish this and require the FSA to publish the whole or part of its response. She can also recommend that the FSA make a compensatory payment to a complainant. Our Board will decide whether to make any such payments. If the FSA disagrees with a recommendation it must publish its reasons for doing so. A report from the Commissioner is included in the FSA's Annual Report.

  18.  Accountability to Parliament, including through the Treasury—the Treasury Select Committee holds formal hearings with the FSA on the Report. The Committee will typically hold several sessions with FSA during the year across a range of issues. During last year, for example, the FSA appeared in front of the Committee or the sub-Committee on five occasions. We welcome these opportunities to explain our work and policies.

  19.  In order to explain our actions to Parliament more widely, we also hold regular meetings and briefings with:

    —  All Party Parliamentary Groups—in particular, the Insurance and Financial Services Group and the Building Societies and Mutuals Group;

    —  Backbench groups from the three main parties; and

    —  Opposition Spokesmen.

17 March 2003


1   Appendix not printed as these letters are appended to be Written Evidence by HM Treasury. Back


 
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