Memorandum by Rt Hon David Davis, MP,
Chairman, Committee of Public Accounts
I am writing to you about the audit and accountability
arrangements for the new Financial Services Authority in connection
with your inquiry into the Government's proposals for the regulation
of financial services.
I understand that, under the terms of the draft
Financial Services and Markets Bill, the Financial Services Authority
would be responsible for regulating practically the whole financial
services industry in the United Kingdom. It would also take over
the functions of some public sector bodies, such as the Building
and Friendly Societies Commissions, the Friendly Societies Registry
and the Treasury's Insurance Directorate, which the Comptroller
and Auditor General currently audits. I also understand that the
Authority would be given the statutory objectives of maintaining
market confidence, promoting public understanding, protecting
consumers, and reducing financial crime. It would be required
to report annually to the Treasury on the achievement of these
objectives, which would provide a benchmark against which the
performance of the Authority could be measured.
The Authority would be accountable to Treasury
Ministers and through them to Parliament. The Authority would
also be establishing two statutory bodies: a Consumer Panel and
a Practitioner Forum, the latter to represent regulated firms
and individuals. Both bodies would monitor the work of the Authority
and be free to publish their views on the Authority's performance
against its statutory objectives. The Consumer Panel would also
be able to commission consumer surveys.
Clearly these measures have much to commend
them. I note, however, that the draft Bill does not provide for
independent validation of the Authority's performance and I am
not convinced that the proposals will go far enough towards providing
a satisfactory assurance to Parliament, to regulated businesses
and to consumers that the Authority is operating efficiently and
effectively and with full regard to value for money. Such assurance
is necessary because the Authority will have a significant impact
on a major area of the economy, on the businesses it regulates
and on the consumers who use financial services. Although constituted
as a private company, the Authority would have statutory objectives
and would exist to carry out public policy. In my view these arrangements
call strongly for independent validation of the Authority's performance.
I understand that the Treasury now propose to
include a power in the Bill for the Treasury to commission and
publish independent value for money audits of the Financial Services
Authority. The Treasury's intention is that these audits would
be carried out by private sector firms.
The Treasury's new proposals, although an improvement
on what was previously proposed, do not go far enough. The Treasury
would, in effect, be able to decide if and when to appoint consultants
to review the performance of the Financial Services Authority
and would be able to lay down the consultants' terms of reference.
The proposed arrangement does not provide the independent validation
which full accountability to Parliament requires.
The Comptroller and Auditor General already
has audit access to a number of bodies which share some of the
characteristics of the new regulator, including the regulators
of the privatised utilities who are, like the Financial Services
Authority, funded from levies on regulated firms. The National
Audit Office has built up considerable expertise in the regulatory
field, has published a series of reports which have added greatly
to consumer confidence, and could provide valuable assistance
to the Authority and the Treasury in this area. If the Authority
is to get off to a good start, it needs to secure the confidence
of the financial services industry, a number of whose representative
bodies have suggested a role for the National Audit Office. A
clear line of accountability to Parliament and the industry, accompanied
by independent validation of performance by the Comptroller and
Auditor General, would go a long way to achieving this.
In short, I believe that the Comptroller and
Auditor General would be well placed to provide fully independent
assessments of the performance of the Financial Services Authority
and to report to Parliament. This would enhance accountability
to Parliament and other stakeholders.
8 April 1999