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
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
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 bodiessuch
as the economic regulatorswhich 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
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
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
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