Banking StandardsLetter from Martin Wheatley, Managing Director, Financial Services Authority
During my oral evidence on 27 February, you expressed some concern over the FCA’s strategic objective and whether it could act to the detriment of its operational objectives. You asked if a redrafting of the FCA’s objectives is required. In response, I said that I would be happy to provide you with my further thoughts once I had a chance to examine the issue in its legal context and consider all the necessary details.
It may be helpful if I start by setting out some background as to the genesis of the FCA’s strategic objective. Given the breadth of the FCA’s regulatory responsibilities, the FCA’s three operational objectives have to cover a wide range of activity in the financial services industry. As a result, in drafting the legislation, we understand the Government believed it was necessary to bring the operational objectives together under one umbrella to give the FCA a clear steer as to what society expects of it.
However, the Government recognised that while the strategic objective should steer the FCA as to the overall aim it is trying to achieve, the operational objectives should be the means by which the FCA discharged its responsibilities. The 2012 Act therefore provides that the FCA should, so far as possible, advance its operational objectives, and act compatibly with the strategic objective. As a result, there are no powers in the 2012 Act which are triggered off the strategic objective—instead those powers can be deployed where the FCA considers it necessary or desirable to do so for the purposes of advancing any of its operational objectives.
At the time the Government was considering the content of the strategic objective the FSA made clear that it would be concerned were the FCA to end up with an objective it could never fulfil. However, we are satisfied that the strategic objective as it currently appears does not leave the FCA exposed in that way.
We also think that, as a statement of the overall outcome society expects of the FCA, the strategic objective is a reasonably good fit to the operational objectives.
Competition Objective
I understand that you are also concerned about the scope of the FCA’s competition objective. As you know, the FSA has never had a specific objective in relation to competition. The 2012 Act, as it currently stands, simply requires the FSA to have regard to the need to avoid any adverse impact on competition arising out the exercise of its functions. This in effect amounts to a duty to pay competition the appropriate level of attention.
As I understand your concern, it is that there may be circumstances, even with the benefit of the new competition objective, where the FCA may take action that could have an adverse impact on competition.
Again, it may be helpful if I set out some background to the FCA’s competition remit. In addition to the competition objective, which the FCA may advance through the use of its powers, the FCA is also under a duty—when operating under the consumer protection and integrity objectives—to act in way which promotes effective competition for the benefit of consumers. This means that it must always consider how it might promote competition, even when it is not acting under the competition objective. However, the Government (rightly, in our view) recognised that there may be circumstances in which we need to hold our objectives in balance, particularly the need to protect consumers.
An example of a potential situation in which this might occur can be found in the product intervention power, which as you may recall gives the FCA the power to ban products, or ban particular product features. The power can be deployed to advance either the consumer protection objective or the competition objective. However, when the FCA uses the power for consumer protection purposes, it is taking action which some would argue is inherently anti-competitive: requiring a product to be taken off the market entirely, or removing certain product features from circulation. We were concerned that a blanket duty to promote competition in all circumstances would be argued to act as a brake on the FCA’s ability to achieve the consumer protection outcomes which society rightly expects it to deliver.
As a result, we think that the legislation has struck the right balance by giving the FCA a clear mandate to intervene to promote effective competition for the benefit of consumers, while recognising that there are some limited circumstances in which it will need to act to protect consumers in ways that could be argued by some as not promoting competition outcomes.
In this respect we do not believe we are that different from many other sectoral regulators, such as Ofcom, who have to strike a balance between the promotion of competition and the achievement of other public policy objectives set by Parliament.
We would be happy to discuss these issues further if it would assist.
15 March 2013