Financial Conduct Authority - Treasury Contents

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 structure.

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 sectors.

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 of authorisation.

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 threshold.

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.

November 2011

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Prepared 13 January 2012