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Financial Services and Markets Appendices to the Minutes of Evidence


Note by the Comptroller and Auditor General, National Audit Office


  1. This Note has been prepared as a contribution to the inquiry by the Joint Committee on Financial Services and Markets into the Government's proposals for the regulation of financial services.

  2. Over the next couple of years, the Financial Services Authority will assume responsibility for regulating many thousands of businesses, including banks, building societies, friendly societies, insurance companies, providers of retail financial services, fund managers, and securities and derivatives firms. It will also regulate the Lloyd's insurance market, which has not before been subject to external regulation.


  3. Under the terms of the Bill, the Authority will be required to report annually to the Treasury on the achievement of its statutory objectives, which are to maintain market confidence, promote public understanding, protect consumers, and reduce financial crime. The Government intend these objectives to provide benchmarks against which the performance of the Authority can be measured. The Authority will be accountable to Treasury Ministers and through them to Parliament.

  4. The Authority will also be establishing two statutory bodies: a Consumer Panel and a Practitioner Forum, the latter to represent regulated firms and individuals. Both bodies will 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 will also be able to commission consumer surveys.

  5. As a Companies Act company the Authority will, in the normal way, appoint its own external auditors. But the Bill does not make provision for the independent examination and evaluation of the Authority's performance.

  6. We understand however that the Treasury intend to strengthen the provision for the independent scrutiny of the Authority by including in the Bill a power for the Treasury to commission and publish independent value for money audits of the Financial Services Authority. As we understand it, these audits would be carried out on each occasion by a private sector firm with relevant expertise selected through a competitive process. The aim would be to provide Parliament and other interested bodies with additional assurance that the FSA is operating efficiently and effectively and with full regard to value for money. Such provisions would clearly be a significant response to the concerns that have been expressed about the need for independent scrutiny of the FSA. But the question is whether they go far enough, in that the timing of such examinations and their terms of reference would not be fixed independently of the executive. There is therefore a risk that the examinations would not be seen to be fully independent. This would put a question mark over the extent of the accountability of the Authority to Parliament.

  7. There is a good case for the Comptroller and Auditor General having rights of access to the Financial Services Authority to undertake value for money scrutinies:

    —  Although constituted as a private sector company, the Authority exists to carry out public policy.

    —  The Comptroller and Auditor General would bring the necessary authority and independence to the role of independent assessor and would be well placed to report on the Authority's performance against its statutory objectives.

    —  The Comptroller and Auditor General is the external auditor of a number of regulatory bodies—such as the economic regulators—which share some of the characteristics of the new regulator, and he also has rights of access to a wide range of other bodies exercising regulatory functions whose performance he examines, reporting the results to Parliament. Working with a wide range of external specialists and well respected organisations the National Audit Office have built up considerable expertise in the regulatory field and would be well placed to carry out authoritative studies of the way the FSA is addressing its objectives, through providing reassurance to Parliament and assisting in the accountability of the Authority.

    —  A number of representative bodies

[5]have suggested such a role for the National Audit Office, arguing that, because of the range of responsibilities of the new regulator, and notwithstanding their representation on the Practitioner Forum, regulated firms would not be in a good position to assess the Authority's performance against the statutory objectives or provide pressure for value for money.


  8. There are various ways in which the arrangements for independent scrutiny of the Authority could be strengthened. For example the legislation could provide the Comptroller and Auditor General with full access rights to the Financial Services Authority on the basis of which he could periodically report to Parliament on the Authority's performance. Alternatively the Comptroller and Auditor General could be given the same powers as the Treasury to carry out or otherwise commission and publish periodic performance audits of the Financial Services Authority. Under that scenario it would be important, of course, for the Comptroller and Auditor General and the Treasury to consult on a case by case basis to avoid any duplication of effort. And this would certainly be possible from the Comptroller and Auditor General's point of view.

7 April 1999

5   The Association of Private Client Investment Managers and Stockbrokers: Association of Unit Trusts and Investment Funds: the Securities Institute. Back

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Prepared 14 May 1999