Written evidence submitted by the Futures
and Options Association
1.1 The Futures and Options Association
("the FOA") is the principal European industry association
for over 170 firms and organisations engaged in the carrying on
of business in futures, options and other derivatives. Its international
membership includes banks, financial institutions, brokers, commodity
trade houses, energy and power market participants, exchanges,
clearing houses, IT providers, lawyers, accountants and consultants
(see Appendix 1).
1.2 The FOA supports the overarching objectives,
including the establishment of a Financial Policy Committee (FPC),
a Prudential Regulation Authority (PRA) and a Consumer Protection
and Markets Authority (CPMA), set out in the Government paper
A new approach to financial regulation: judgement, focus and
stability (CM7874), but does have a number of observations
and concerns, namely:
(a) The scope provisions of the PRA are unclear
and described in different terms in various sections of CM7874.
(b) It is not clear how, in the proposed structure
of the CPMA, wholesale and specialist broker-dealers, which are
not systemically important or "retail" or "market
infrastructure providers", will be accommodated and the FOA
would suggest therefore that there should be three separate divisions
within the CPMA, namely "retail", "wholesale"
(c) The FOA supports the broad-based industry
view that the UK Listing Authority should remain within the Markets
division of the CPMA rather than be transferred to the FRC.
(d) The FPC, the PRA and the CPMA should be required
to take into "full account" the secondary factors referred
to in CM7874 as largely reflected in the Financial Services and
Markets Act 2000 (described by the FSA as "Principles of
Good Regulation"), including the need for regulated institutions
to be competitive and innovative. Where possible and appropriate,
the factors should be the same for each authority because, as
factors, they will be subordinated to each of their primary objectives.
(e) Retail investor protection and fair dealings
should be at the heart of the CPMA, but its description as a "strong
consumer champion" seriously undermines its independence
as a statutory-based authority, particularly in the area of handling
customer complaints and consumer-related disciplinary proceedings,
and it suggests that other CPMA divisions will be subordinated
to its consumerist responsibilities.
(f) The proposed restructuring of financial services
regulation into separate bodies carries the risk of inter-institutional
rivalries and tensions as well as rules and supervisory duplication.
It is important therefore that there are "bright lines"
in terms of scope, responsibilities and decision-making and in
the areas of information-sharing and cooperation.
(g) The rule-making functions of the PRA and
the CPMA should be subject to scrutiny and oversight by the competition
authorities and to duties to consult publicly, issue feedback
statements and carry out market impact analysis.
(h) The PRA and the CPMA should each have a high-level,
statutory-based practitioner panel of sufficient seniority and
expertise to perform the role currently provided by the FSA's
existing high level Practitioner Panel.
(i) The right of the FPC, the CPMA and the PRA
to set their own fees should be overseen by the National Audit
Office or HM Treasury to ensure that that process is subject to
effective cost-benefit analysis, does not involve fees based on
unnecessary duplication and does not result in a severe and disproportionate
impact on the economics of financial services business.
(j) The Preliminary Impact Assessment in CM7874
appears flawed because, firstly, it covered only the options of
"do nothing" (which is not really an option) or "proceed"
and did not analyse such other options as "do less"
or even "do differently"; secondly, it did not assess
the core elements of the proposed changes; and, thirdly, it assumed
no substantive rules change as a result of structural changean
assumption the assessment conceded specifically as "unrealistic".
2. RESPONSE TO
Q1. Will the Government's financial regulation
proposals improve the framework of for financial stability in
the UK? Will they work in a crisis?
2.1 The FOA supports the establishment of
a new FPC and the need for a close interface with the PRA and
believes that these proposals will improve the framework of financial
stability within the UK, providing responsibilities and decision-making
processes are clearly defined and the traditional weaknesses of
multipartite arrangements are addressed.
Q2. Do the Government's proposals get the
balance right between tackling the problems of the last crisis
and preparing the UK financial system for the next one?
2.2 Since it is difficult to predict the
cause of the next crisis, it is not possible to determine whether
the current proposals do, in fact, "get the balance right"
but, subject to the observations in para 2.1 above, the FOA believes
that they should have a better chance of catching a growing crisis
on the "orange light" rather than the "red light".
Q3. How do the Government's proposals dovetail
with initiatives currently being undertaken at European and the
2.3 Matched responsibilities between the
new European Supervisory Authorities and the CPMA and PRA are
unlikely, so the PRA and the CPMA will, in certain respects, probably
have to represent each other's interests in their relations with
the new European Supervisory Authorities.
2.4 CM7874 does not address how the UK,
where it has the competence, will be represented on the international
Q4. What costs will the regulatory structure
place on consumers?
2.5 The CPMA, insofar as it replicates existing
parts of the FSA, should not have any significant cost implication
for consumers, although that is unlikely to be the case for the
customers of PRA regulated firms, where there will be dual regulation.
Such additional costs are likely to be passed on to customers
in commissions and charges.
Q5. Do the Government's proposals appropriately
assign roles and responsibilities between the different regulatory
2.6 In general terms, the FOA thinks the
proposed split between prudential regulation of systemically-important
institutions and business conduct regulation is appropriate, but
the scope of the firms to be regulated by the PRA (assessed to
be in the order of 1500-2000 firms) is unclear (eg broker-dealers
are equated with investment banks, which is manifestly incorrect)
and the supervisory responsibilities of the PRA are described
differently in various sections of CM7874.
2.7 It is not clear how, within the proposed
CPMA structure, the regulation of wholesale firms and the more
specialist broker-dealers, which are not systemically important
or "retail" or "market infrastructure providers",
will be accommodated. It would seem appropriate to establish within
the CPMA three separate "retail", "wholesale"
and "market" divisions, each of which should have its
Q6. Will there be unintended consequences
of the Government's proposals for regulation on the prospects
for non-bank financial institutions?
2.8 Further to para 2.7 above, the FOA believes
that there is a real risk that the CPMA will not be able to differentiate
proportionately between wholesale and retail business (which is
not an argument for "light touch" regulation), because
of the intense consumerist overlay imported into the CPMA by its
role being described in CM7874 as a "strong consumer champion"
(see also para 2.19 below).
2.9 The FOA, for all the reasons given by
the London Stock Exchange, believes that the UK Listing Authority
should remain within the markets division of the CPMA.
2.10 While the FOA does not seek to speak
for insurance and asset managers, the "on the ground"
supervisory consequences for non-bank financial institutions which
fall within the remit of the FOA are, subject to paras 2.7and
2.8 above, unlikely to generate any significant changes.
Q7. Should the FPC have a statutory remit?
If so, what should that remit be?
2.11 The FOA is content with the broad remit
(which should be statutory) assigned to it in CM7874, but believes
the FPC (like the CPMA and the PRA) should
be subject to those Principles of Good Regulation that are relevant
to its work (including taking into full account not just the monetary
and economic consequences of its actions, but also the social
the authority of the FPA to set its fees
should (as is the case with the PRA and the CPMA) be the subject
of independent oversight (see further para 2.22).
Q8. How should the success of the FPC, both
in and out of crisis, be measured?
2.12 The FOA supports the external (as opposed
to just internal) accountability of the FPC, but believes:
there should be more external members
on its Board if they are to effectively, as it is put in CM7874
"challenge" its deliberations; and
the degree of independence of the FPC,
its operational processes and its responsibilities and duties
as regards co-operation and information-sharing should all be
set out in a separate code of governance.
Q9. Given the international regulatory framework,
what macro-prudential tools should be granted to the FPC?
2.13 Other respondents will be more focussed
on replying to this question, but in general terms, the powers
and capabilities set out in CM7874 appear adequate,
2.14 The powers of the FPC are not entirely
clear. For example, it can give directions to the PRA on the regulatory
tools that should be deployed in pursuit of macro-prudential policy
and to make recommendations where specific regulatory actions
are required in order to protect financial stability (para 2.32),
but it may not exercise "any formal power of direction in
relation to firm-specific decisions or other operational matters"
(para 3.29). The FOA would note, firstly, that the former could
require the latter and that, secondly, that this undermines the
objective of integrating macro-oversight with micro-prudential
Q10. Has enough been done to mitigate the
risk of conflict between the FPC and the Monetary Policy Committee
(MPC)? Is the FPC appropriately structured in terms of:
the balance between internal and external
the size of the Committee?
2.15 It is outside the remit of the FOA
to comment on the functioning of the MPC.
Q11. What characteristics, experience and
qualities should the Government look for when appointing external
members of the FPC?
2.16 The FOA believes that the role and
responsibilities of external members are comparable to those of
a non-executive director, ie they should be sufficiently informed
and expert to ensure that the Committee lives up to its responsibilities,
including in terms of decision-making and accountability, and
to "challenge" the assumptions and decisions of the
Committee members could include, for example, a chief economist
of one of the major banks, a senior prudential regulation expert
from one of the major accountancy firms and a senior, well-respected
Q12. Should the PRA be the lead authority
over the Consumer Protection and Markets Authority (CPMA)?
2.17 Outside the area of prudential regulation,
it is difficult to see why the PRA should be the "lead authority"
over the CPMA because the CPMA will be responsible for the prudential
and business conduct regulation of the vast majority of financial
services firms in the UK, ranging from asset managers to specialist
broker-dealers, exchanges and international oil and energy corporates,
which are far removed from the competence and experience of the
PRA. Further, it is difficult to see how the CPMA could play an
authoritative role representing the UK on ESMA if it is seen to
be sub-ordinated to the PRA.
Q13. Is it appropriate for the PRA (and CPMA)
to adopt a judgements-based approach to financial regulation and
2.18 Yes, providing their staff:
have the training and competence to do
exercise their judgements in accordance
with pre-set transparent criteria and they are "cleared"
internally to ensure consistency;
subject to the principal objective of
the PRA/CPMA, take into full account the secondary factors; and
exercise any discretions in the area
of investigation fairly, consistently and in line with accepted
notions of natural justice.
Q14. Do the reforms provide adequate protection
for the consumer?
2.19 The FOA believes strongly that retail
investor protection and fair and honest dealings with all consumers
should be at the heart of the CPMA, but the description of the
CPMA as a "strong consumer champion" is deeply misconceived
and materially undermines the CPMA as a detached and balanced
regulatory authority, particularly with regard to the handling
of customer complaints and consumer-related disciplinary proceedings,
free of bias. Further, this poses the question, in respect of
what and against whom is it supposed to act as a "champion"?
2.20 Government policy is clearly confused
in this area, insofar as, by way of direct contrast, CM7874 states
that the Financial Ombudsman Service should remain independent
of the CPMA to avoid impugning "its claim to impartiality,
and hence its legitimacy on making rulings which are binding on
firms" and that it can only retain credibility "if it
does not favour, or appear to favour, consumers". Surely,
this is equally true of an independent statutory-based regulatory
authority such as the proposed CPMA!
Q15. To what extent will the regulatory and
administrative burden increase for those firms who now have to
deal with two regulators?
2.21 CPMA-regulated firms are unlikely to
face any significant increase in the regulatory and administrative
burden and the style and nature of CPMA supervision is likely
to be similar to that of the FSA in its current revised form.
However, dual-regulated PRA firms face potential duplication in
reporting obligations and supervisory visits and overlap in areas
where business conduct and prudential regulation are closely interwoven.
This could be exacerbated if cooperation and consensus-building
processes became overly bureaucratic or time-consuming. It was
concerns of this nature that led to the abandonment of the SRO
system and the establishment of the FSA in the first place.
For this reason, the FOA believes there is real
merit in one authority undertaking the provision of common services,
including authorisation, the removal of permissions, organising
supervisory visits and collecting data, albeit working in cooperation
with any other relevant authorities.
2.22 Regulatory cost could be exacerbated
significantly if the FPC, the PRA and the CPMA are able to set
their own fees without any independent oversight to ensure that
they are the subject of effective cost-benefit analysis; do not
involve duplicative functions; and do not result in a severe and
disproportionate cumulative impact on the economics of financial
services business. This role could be undertaken by, for example,
the National Audit Office or HM Treasury.
Q16. Should any of the proposed bodies be
given responsibility for promoting competition in the banking
and financial services sector?
2.23 No. This is an inappropriate role for
a regulatory authority and is already being addressed by a number
of organisations, such as TheCityUK, LondonFirst and UK Trade
On the other hand, the FOA is strongly supportive
of maintaining competitiveness as a factor that should be taken
into account by the PRA and the CPMA when carrying out their regulatory
responsibilities. It is impossible to see how they can perform
a more judgemental and interventionist rolewhich will involve
taking decisions on commercial matters, reviewing business models
and judging growth strategieswithout being required to
take into full account the need for institutions to sustain not
just their international, but also their domestic, competitiveness.
2.24 If, as stated in para 3.9 of CM7874,
one of the reasons for regulatory failure was "excessive
concern for competitiveness", that level of attention was
not, and never has been, a requirement of the existing legislation,
ie facilitating competitiveness was a factor and not an objective;
and "promotion" of competitiveness was specifically
rejected by the Joint Committee at the time of the passage of
the Financial Services and Market Act (see further Appendix 2).
2.25 Government policy towards competitiveness
was clearly expressed in the opening lines to the Executive Summary
of the HM Treasury paper "Risk, Reward and Responsibility:
The Financial Sector and Society" (December 2009), which
"a strong and competitive financial sector
is essential to a productive modern economy, and financial
services make a significant contribution to the UK economy in
It seems to the FOA that it is entirely right
that the PRA and the CPMA should be required to take into full
account this expression of Government policy, albeit as a factor
sub-ordinated to the principal objectives of each authority.
2.26 With regard to innovation, Sir David
Walker in the Preface to his Report "A review of corporate
governance in UK banks and other financial industry entities"
(July 2009) noted that
"...any undue hampering of the ability of
bank boards to be innovative and to take risks would itself bring
material costs. It would check the contribution of the banks to
wider economic recovery and delay restoration of investor confidence
in banking as a sector capable of generating reasonable returns
2.27 The FOA agrees with the Government
view that financial innovation should not be facilitated "at
all costs", but, once again, that level of priority was never
required under the existing legislation. The need to facilitate
innovation should therefore continue to be a factor to be taken
into account by the PRA and the CPMA.
2.28 Since all the "factors" will
be sub-ordinated to the delivery of the primary objective, the
FOA believes that the obligation should not just be "having
regard to" or "being mindful of" but "taking
into full account". This will ensure that meaningful and
not just superficial consideration is given to them.
Q17. Should any of the proposed bodies have
a role in promoting the City of London?
2.29 See the response to Q16 above (and Appendix
3.1 The FOA recognises that the core proposals
in CM7874 reflect government policy and the primary purpose of
this submission has been directed towards making observations
that go with the grain of that political reality.
3.2 However, the intention of the Government
to establish a "shadow" construct of the proposals for
a new CMPA and PRA within the FSA, while necessary as a first
step in implementation, will constrain the scope of the comprehensive
consultation promised by the Government "early in 2011".
3.3 More positively, this internal restructuring
within the FSA will have the advantage of "test driving"
the proposed construct and would provide an ideal opportunity
for making a preliminary assessment in terms of lessons learned
and "fitness for purpose". It would also enable the
Government to assess whether or not the objectives and mechanisms
for cooperation and coordination, particularly as between the
PRA and the FPC, could be achieved without necessarily taking
the next step of "externalising" those divisions. Such
an interim review would seem pragmatic and sensible and could
be incorporated within the proposed 2011 consultation exercise
(see Appendix 3).
LIST OF FOA MEMBERS
ADM Investor Services International Ltd
AMT Futures Limited
Bache Commodities Limited
Bank of America Merrill Lynch
Banca IMI SpA
Berkeley Futures Ltd
BNP Paribas Commodity Futures Limited
Citadel Derivatives Group (Europe) Limited
City Index Limited
CMC Group Plc
Crédit Agricole CIB
Credit Suisse Securities (Europe) Limited
Deutsche Bank AG
GDI Markets Limited
GFI Securities Limited
GFT Global Markets UK Ltd
Goldman Sachs International
HSBC Bank Plc
ICAP Securities Limited
IG Group Holdings Plc
Investec Bank (UK) Limited
JB Drax Honore«
JP Morgan Securities Ltd
Liquid Capital Securities Ltd
Louis Capital Markets UK, LLP
M & G Investment Management Ltd
Macquarie Bank Limited
Mako Global Derivatives Limited
Marex Financial Limited
Mitsubishi UFJ Securities International Plc
Mizuho Securities USA, Inc London
Monecor (London) Ltd
Monument Securities Limited
Morgan Stanley & Co International Limited
Newedge Group (UK Branch)
Nomura International Plc
ODL Securities Limited
RBS Greenwich Futures
Royal Bank of Canada
S E B Futures
Schneider Trading Associates Limited
S G London
Standard Bank Plc
Standard Chartered Bank (SCB)
Starmark Trading Limited
The Bank of Nova Scotia
The Kyte Group Limited
Tullett Prebon (Securities) Ltd
Wells Fargo Securities International Limited
Bahrain Financial Exchange
CME Group, Inc.
Dalian Commodity Exchange
Dubai Mercantile Exchange
European Energy Exchange AG
Global Board of Trade Ltd
ICE Futures Europe
RTS Stock Exchange
Shanghai Futures Exchange
Singapore Exchange Limited
Singapore Mercantile Exchange
The London Metal Exchange
The South African Futures Exchange
The Tokyo Grain Exchange
HOUSESAmalgamated Metal Trading
ED & F Man Commodity Advisers Limited
Engelhard International Limited
Glencore Commodities Ltd
Koch Metals Trading Ltd
Metdist Trading Limited
Mitsui Bussan Commodities Limited
Natixis Commodity Markets Limited
Noble Clean Fuels Limited
RBS Sempra Metals
Sucden Financial Limited
Toyota Tsusho Metals Ltd
Trafigura Derivatives Ltd
Triland Metals Ltd
TRX Futures Ltd
Atel Trading AG
BP Oil International Limited
E.ON EnergyTrading SE
EDF Energy Merchants Ltd
International Power plc
National Grid Electricity Transmission Plc
RWE Trading GMBH
Scottish Power Energy Trading Ltd
Scottish & Southern Energy Plc
Shell International Trading & Shipping Co Ltd
Baker & McKenzie
Barlow Lyde & Gilbert
Berwin Leighton Paisner LLP
BDO Stoy Hayward
Clyde & Co
CMS Cameron McKenna
Denton Wilde Sapte
Eukleia Training Limited
Exchange Consulting Group Ltd
Financial Technologies India
Freshfields Bruckhaus Deringer
Herbert Smith LLP
Hunton & Williams LLP
International Capital Market Association
ION Trading Group
JLT Risk Solutions Ltd
Katten Muchin Rosenman Cornish LLP
Mpac Consultancy LLP
Norton Rose LLP
Options Industry Council
PA Consulting Group
Patsystems (UK) Ltd
Pekin & Pekin
R3D Systems Ltd
Rostron Parry Ltd
RTS Realtime Systems Ltd
THE "COMPETITIVENESS" PRINCIPLE
OF GOOD REGULATION
1. Section s2(3) of the Financial and Services
Markets Act (2000) ("FSMA") sets out a number of factors
(otherwise known as Principles of Good Regulation) to which the
FSA must have regard in making its rules and guidance and determining
the policy and principles by which it exercises its other functions.
These include a factor described as "the international character
of financial services and markets and the desirability of maintaining
the competitive position of the United Kingdom". In commenting
on this criterion to the Future of Banking Commission, the Chairman
of the FSA described this factor as imposing a "secondary
objective" on the FSA, challenging the FSA's target of "good
regulation" by infecting it with "industry promotion"
and risking a "sort of race to the bottom".
2. With regard to imposing a "secondary
objective" on the FSA, the legal position is that, while
the FSA must, so far as is reasonably possible, act in a
way "which is compatible with the regulatory objectives",
ie, maintaining market confidence, promoting public awareness,
protecting consumers and reducing financial crime, it is required
only to "have regard" to the factors set out in s2(3)
of FSMA. In the circumstances, and bearing in mind also that competitiveness
was specifically rejected as a statutory objective by the Joint
Committee of the House of Commons and House of Lords on the Financial
Services and Markets Bill and subsequently by the then Government,
it is difficult to see how this factor can operate as an "objective",
either primary or secondary, of the FSA.
3. With regard to the observation over "industry
promotion", the fact is that no such duty is imposed on the
FSA under s2(3) of FSMA and, while some argued strongly at the
time that the competitiveness criterion should use the word "promote",
this was, once again, specifically rejected by the then Government.
In the circumstances, it is difficult to see how the Principles
of Good Regulation in s2(3) of FSMA can be construed as imposing
any sort of obligation of "industry promotion" on the
4. Clearly, neither the PRA nor the CPMA
should be inhibited from maximising regulatory effectiveness within
the boundaries of proportionality, deliverability and affordability.
This means, however, marrying up good and effective regulation
with, in the case of London, good international business, which
in turn would involve taking into account not just the need to
sustain diversity, entrepreneurialism and (another s2(3) factor
to consider) innovation, but also the international character
and competitiveness of that business. It is particularly difficult
to see how the PRA or the CPMA can fulfill a more business-intrusive
approach to supervision (described by Hector Sants as "judging
the future decisions of firms based on business models and other
analyses..." and "taking a view on management action")
without being required to take into full account the international
character and competitiveness of firms regulated by them.
THE CASE FOR A MID-TERM ASSESSMENT OF THE
PROGRAMME FOR RESTRUCTURING FINANCIAL SERVICES REGULATION
1. The proposal in CM7874 to establish a
"shadow" internal structure within the FSA which replicates
and anticipates the creation of the CPMA and the PRA will provide
a very real opportunity to "test drive" the proposals
and for a mid-term "fitness for purpose" assessment
before proceeding to the next substantive step of "externalising"
the PRA and the CPMA as separate bodies.
2. The FOA recognises that the Government
is committed to a restructuring of financial services regulation
along the lines set out in CM7874, but believes such a mid-term
assessment (which could also be the subject of the proposed early
2011 consultation) would also provide the Government with an opportunity
to assess whether or not its objectives as set out in CM7874 can
be achieved to full effect without losing the advantages and strengths
of having a unified regulatory authority. Possible advantages
solving the problems of a potential mismatch
between the scope and responsibility of the European Supervisory
Authorities and those of CPMA and the PRA;
avoiding the major costs and upheaval
involved in creating a bi-partite arrangement;
sustaining the significant changes introduced
by the FSA to correct shortcomings, many of which have relevance
to both business conduct and prudential regulation; and
reducing substantially the risk of duplication,
conflict, complexity and dual regulation of PRA/regulated firms
and the risk of inter-institutional rivalries.
3. Clearly, the underlying question is whether
an independent PRA division operating within the FSA could be
sufficiently detached to enable it to deliver on the Government's
proposals for improving the framework for managing financial stability
in the UK, particularly in the context of providing the FPC with
sufficient convergence with and "reach" into the micro-supervisory
responsibilities of an internalised PRA. The FOA recognises that
any such mid-term review may determine that evolution to an external
"twin peaks" approach as envisaged within CM7874 is
necessary, but at least such a review will help to determine how
best that next step can be achieved to the benefit of all the
"stakeholders" in financial services regulation.