Written evidence submitted by the City
of London Corporation |
1. The City Corporation welcomes the opportunity
to contribute to the Committee's scrutiny of the role of the Financial
Conduct Authority as a key component of the proposed regulatory
2. The City is a strong advocate of a regulatory
structure for UK-based financial services that will enhance the
stability of the financial system, restore public confidence and
safeguard the competitiveness of the sector. A healthy and thriving
financial services sector provides funding and other support for
business growth (including smaller businesses), creates employment,
generates export earnings and produces tax revenue in order both
to address the deficit and to finance public service provision.
This UK-based activity therefore needs to remain competitive if
Britain is to continue both to attract international business
and to prosper in global markets.
3. The Corporation's work on financial regulation
matters is informed by the International Regulatory Strategy Group
(comprising senior representatives from a variety of industry
sectors including investment banking, asset management, insurance,
legal and accountancy services, exchanges and market infrastructure).
Its role includes identifying strategic level issues where a cross-sectoral
position can add value to the expression of views from particular
4. In the current economic climate it is clear
that constructive collaboration is required between authorities
and industry. Confidence in the financial services sector's ability
to generate growth has been dented and maintaining the status
quo in terms of financial supervision is not a realistic option.
The need for adjustment to the regulatory framework is widely
acknowledged as being necessary.
5. This memorandum addresses general issues to
which the City is in a position to respond. It acknowledges that
there are widely differing views across business sectors and between
companies and trade bodies. It does not seek to offer a consensus.
6. A particular concern in the new regulatory
structure is that firms may be faced with being supervised by
two separate regulators, since it appears that the authorisation
of firms and individuals will be an overlapping responsibility
between the Prudential Regulation Authority (PRA) and the Financial
Conduct Authority (FCA). It is essential therefore that time-consuming
duplication of work between these regulatory authorities is avoided,
with an integrated model used as far as possible. There is also
a risk in the new structure of separate and distinct rulebooks
being produced by both the PRA and the FCA, particularly in the
area of prudential regulation, where the two regulators share
responsibilities. A single and consistent rulebook is essential
for all regulated entities.
7. Authorisation should be dealt with by one
authority, in order to ensure the efficient and consistent delivery
of regulatory decisions. Giving the FCA responsibility for collecting
fees from regulated firms reinforces the argument in favour of
giving it also sole responsibility for the authorisation of individuals
and organisations, in order to avoid duplication and to create
a direct link between the handling of applications and the granting
8. The move towards a judgement-based approach,
away from consultation and analysis, is likely to be detrimental
to UK-based firms. Indeed, the PRA/FCA judgement-based approach
may conflict with the move to a single rule book and supervisory
convergence at the level of the European Supervisory Authorities,
which the industry broadly supports. With the transfer of power
to the ESAs there is a concern that national authorities might
be tempted to use Pillar 2 powers to apply higher standards in
an opaque fashion. There might therefore be a need to define more
tightly the scope within which judgements may be made.
9. In addition, the new structure does create
the possibility of duplication. This includes the proposals to
separate out the FSA's existing authorisation, enforcement, and
rule-making functions between both the FCA and the PRA. There
is a clear need to examine more closely the level of benefit gained
against costs incurred. If the supervisory duplication within
the new structures materialises, there is a risk that the costs
of these proposals may exceed those set out in the assessment.
The estimate in the original impact assessment of transitional
costs of £50 million spread over three years seems low in
view of the scale of the reorganisation required.
10. The Government consultation implied that
the main dangers that the changes in regulatory structure were
designed to address were bank or building society failures on
the pattern of the events of 2007-08. There can, however, be occasional
failures in the non-banking area of the financial services sector.
Effective powers of intervention should be in place to resolve
such crises, although in the event of the failure of a non-banking
institution, the appropriate point of intervention will need to
be identified at the time, rather than setting a mandatory defined
11. While it is acknowledged that the approach
of the FCA to regulated firms must on occasions be robust and
adversarial, for instance when taking action before issues of
consumer detriment become too entrenched, or in the treatment
of clear failings in public policy areas such as the prevention
and detection of money-laundering, it is also desirable that creating
an atmosphere of mutual respect between the Agency and those it
regulates should be an aim.
Financial Policy Committee
12. Both the FCA and the PRA should have regard
to the primary objectives of the Financial Policy Committee, since
it is the body charged with setting the parameters to achieve
financial stability across the system.
13. The emphasis of all three new bodies should
be on the quality and relevance of the information and intelligence
they require and gather from regulated firms and markets, rather
than its volume. The accumulation of reports and returns when
there are neither the will nor the resources to process such information
properly is of no benefit to good regulation and supervision and
can contribute to an atmosphere of hostility between regulators
and those they regulate.
14. The proposed changes in the UK's regulatory
structure will of course take place as rule-making powers move
from domestic authorities to the new system of EU-wide supervisory
institutions. The banking supervisor is based in London and it
is essential that the new UK bodies, from the start, seek to influence
the development of the EU-wide regulatory and supervisory structure,
encourage secondments and develop a dialogue with equivalent bodies
including those in the United States and the emerging financial
centres of the Middle East and Asia. However, the UK authorities
appear to be playing down the role of the ESAs, which could undermine
the development of sound and effective regulation at the EU level
if this results in the UK being less engaged.
15. The requirement for the FCA (and other regulatory
bodies) to have regard to the competitiveness of the UK financial
service sector is very strongly endorsed. Proper and effective
regulation is essential for financial stability and both domestic
and international trust and confidence and is the main mandate
for the new authorities. It is however important that they should
share the responsibility of HM Treasury to promote the competitive
position of the sector, as a major contributor to employment,
export earnings and tax revenue. It is essential that this position
is not undermined by regulatory requirements and approaches which
exceed in their prescriptive nature those of partners and competitors.