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Financial Services and Markets Appendices to the Minutes of Evidence


Memorandum by Rt Hon David Davis, MP, Chairman, Committee of Public Accounts

  I am writing to you about the audit and accountability arrangements for the new Financial Services Authority in connection with your inquiry into the Government's proposals for the regulation of financial services.

  I understand that, under the terms of the draft Financial Services and Markets Bill, the Financial Services Authority would be responsible for regulating practically the whole financial services industry in the United Kingdom. It would also take over the functions of some public sector bodies, such as the Building and Friendly Societies Commissions, the Friendly Societies Registry and the Treasury's Insurance Directorate, which the Comptroller and Auditor General currently audits. I also understand that the Authority would be given the statutory objectives of maintaining market confidence, promoting public understanding, protecting consumers, and reducing financial crime. It would be required to report annually to the Treasury on the achievement of these objectives, which would provide a benchmark against which the performance of the Authority could be measured.

  The Authority would be accountable to Treasury Ministers and through them to Parliament. The Authority would also be establishing two statutory bodies: a Consumer Panel and a Practitioner Forum, the latter to represent regulated firms and individuals. Both bodies would 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 would also be able to commission consumer surveys.

  Clearly these measures have much to commend them. I note, however, that the draft Bill does not provide for independent validation of the Authority's performance and I am not convinced that the proposals will go far enough towards providing a satisfactory assurance to Parliament, to regulated businesses and to consumers that the Authority is operating efficiently and effectively and with full regard to value for money. Such assurance is necessary because the Authority will have a significant impact on a major area of the economy, on the businesses it regulates and on the consumers who use financial services. Although constituted as a private company, the Authority would have statutory objectives and would exist to carry out public policy. In my view these arrangements call strongly for independent validation of the Authority's performance.

  I understand that the Treasury now propose to include a power in the Bill for the Treasury to commission and publish independent value for money audits of the Financial Services Authority. The Treasury's intention is that these audits would be carried out by private sector firms.

  The Treasury's new proposals, although an improvement on what was previously proposed, do not go far enough. The Treasury would, in effect, be able to decide if and when to appoint consultants to review the performance of the Financial Services Authority and would be able to lay down the consultants' terms of reference. The proposed arrangement does not provide the independent validation which full accountability to Parliament requires.

  The Comptroller and Auditor General already has audit access to a number of bodies which share some of the characteristics of the new regulator, including the regulators of the privatised utilities who are, like the Financial Services Authority, funded from levies on regulated firms. The National Audit Office has built up considerable expertise in the regulatory field, has published a series of reports which have added greatly to consumer confidence, and could provide valuable assistance to the Authority and the Treasury in this area. If the Authority is to get off to a good start, it needs to secure the confidence of the financial services industry, a number of whose representative bodies have suggested a role for the National Audit Office. A clear line of accountability to Parliament and the industry, accompanied by independent validation of performance by the Comptroller and Auditor General, would go a long way to achieving this.

  In short, I believe that the Comptroller and Auditor General would be well placed to provide fully independent assessments of the performance of the Financial Services Authority and to report to Parliament. This would enhance accountability to Parliament and other stakeholders.

8 April 1999

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Prepared 14 May 1999