Memorandum by the Financial Services Authority |
1. The FSA submits this memorandum in response
to the Committee's call for evidence on its inquiry into the accountability
of regulators to citizens and Parliament. The memorandum sets
the legal basis and statutory objectives
of the FSA; and
the ways in which it is held accountable.
2. The FSA attaches great importance to
being an open, transparent and accountable regulator. We issued
a policy statement entitled "The open approach to regulation"
in 1998 before the current legislation was enacted. Our policy
proposals are reflected in the statutory framework for ensuring
that the FSA is properly accountable to Ministers, Parliament
and the wider public and that it takes into account the interests
of all its stakeholders.
3. The FSA is the single, statutory regulator
for the great majority of financial services in the UK, and is
the competent authority under the European single market directives
for banking, insurance, investments, listing and other financial
services matters. Its powers are conferred primarily by the Financial
Services and Markets Act 2000 (FSMA), which unified the previous
sectoral arrangements and regulators. The FSA also has registration
functions under the various legislation applicable to mutual societies,
and related functions under other legislation applicable to financial
services and listing.
4. FSMA requires the FSA to pursue four
maintaining market confidence in
the financial system;
promoting public understanding of
the financial system, including awareness of the benefits and
risks of different kinds of investment or other financial dealing;
securing the appropriate degree of
protection for consumers, while having regard to the general principle
that consumers should take responsibility for their decisions;
reducing the extent to which it is
possible for a regulated business to be used for a purpose connected
with financial crime, such as money laundering, fraud and insider
5. FSMA applies these objectives directly
to the FSA's general rule-making and policy-making functions.
In carrying out these functions FSMA requires the FSA to take
into account a number of matters, which we refer to as "the
principles of good regulation". These are:
the need to use its resources in
the most economic and efficient way;
recognising the responsibilities
of regulated firms' own management;
the principle that the burdens and
restrictions imposed by regulation should be proportionate to
the international character of financial
services and the desirability of maintaining the UK's competitive
the desirability of facilitating
the desirability of facilitating
the need to minimise the adverse
effects of regulation on competition.
6. The FSA is a company limited by guarantee
and is financed wholly by levies on the regulated industry; it
receives no Government funds. Its Plan and Budget are published
each January for the financial year beginning 1 April, at the
same time as it consults on its fees (which is a statutory requirement).
There are corresponding arrangements for the Financial Ombudsman
Service and the Financial Services Compensation Scheme, which
are established and overseen by the FSA but are required to be
operationally independent from it.
7. The FSA's governing body is the Board,
currently consisting of a Chairman, three executive directors,
a further ten non-executives, and the Deputy Governor (Financial
Stability) of the Bank of England. The FSA directors are appointed
by the Treasury following the principles for public appointments
issued by the Commissioner for Public Appointments ("Nolan
Principles"). The Treasury recently announced that in future
the Chairman will be supported by a separate Chief Executive.
The non-executive members serve in a personal capacity, not as
representatives of particular interests or associations. They
bring expertise in both the financial and non-financial sectors
as well as from the consumer perspective. The Board sets overall
FSA policy. Day-to-day operational decisions and management of
staff are the responsibility of the Executive.
C. THE ACCOUNTABILITY
8. The basis on which the FSA's independence
and accountability are secured in practice is set out in an exchange
of letters between the Chancellor of the Exchequer and the Chairman
of the FSA. These were published in December 2001 and are attached
in Appendix 1.
The letters set out what the Government is responsible for under
the legal and institutional framework
within which regulation is carried out, including the core corporate
governance structure of the FSA;
appointing the executive and non-executive
members of the FSA Board, and judging their overall performance
in relation to the FSA's statutory responsibilities;
ensuring the boundaries of FSA regulation
are correctthe Government and Parliament therefore decide
the FSA's scope;
directing the FSA on additional matters
to be included in its public Annual Report;
mounting investigations in cases
of possible major regulatory failure, and also to assess value
for money; and
directing implementation of international
9. The FSA's accountability to the Treasury
is balanced by a legislative framework which ensures that it is
open and responsive in its policies and reporting to other stakeholders,
and that its procedures are seen to be fair and independent. Specifically,
the FSA is accountable in the following ways.
10. Statutory objectives. The statutory
objectives provide the FSA with a clear goal and describe the
overall purpose of the regulatory system and the way in which
Parliament expects it to operate in practice. The FSA has set
out in "A new regulator for the new millennium" (January
2000) how it intends to meet these objectives in its work. This
can be found on our website at www.fsa.gov.uk/pubs/policy/index-2000.html.
11. Clear governance structures. FSMA requires
the FSA to have regard to applicable principles of good corporate
governance, and a statement on these is included in the FSA's
annual report under the Companies Acts. FSMA gives specific responsibilities
to the FSA's non-executive directorssuch as reviewing the
economic and efficient use of the FSA's resources and setting
the pay of executive Board members. The non-executive committee
reports annually to the Treasury on the discharge of its functions.
This is included in the FSA's published Annual Report.
12. Public reporting mechanisms. The FSA
reports annually to the Treasury on the discharge of its functions
and the extent to which it has met the statutory objectives and
taken into account the principles of good regulation. The report
is laid before Parliament. The FSA holds an annual open public
meeting for its stakeholders to discuss the report and the FSA's
performance. This is advertised in the national press and a wide
range of stakeholdersfirms, trade associations, consumersattend.
13. Service Standards. FSMA sets out a number
of explicit standards that the FSA must meet in carrying out its
dutiesfor example, time periods within which it must take
certain decisions. Now that FSMA has been in force for just over
a year, the FSA has gained some experience of how the legislation
works in practice. So it has published a framework of service
standards in its recent Plan and Budget. In developing the framework
the FSA has set itself a number of targets and will begin publishing
performance against these at the time of its Annual Report later
this year. The FSA will also develop other standards to cover
further aspects of its work. These will be published at the same
time as our Annual Report.
14. Direct input by the industry and consumers.
The FSA is required to consult publicly on proposed rules and
regulatory guidance before issuing them. The consultation must
explain how the proposed rules and guidance will meet the statutory
objectives and will be consistent with the principles of good
regulation and must include a cost benefit analysis. The FSA publishes
feedback statements following consultation. FSMA requires the
FSA to establish mechanisms for consulting practitioners and consumers
directly on whether the FSA is meeting its objectivesincluding
statutory Practitioner and Consumer Panels. We have also established,
voluntarily, a Small Business Practitioner Panel. The statutory
Panels make annual reports (to which we respond publicly in our
Annual Report) and appear before the Treasury Select Committee
of the House of Commons. The Panels also have the right to require
us to respond in public to their views or requests.
15. Public access to the FSA. Members of
the public have access to the FSA through its Consumer Helpline
and Consumer Help website. The Helpline handles around 205,000
calls a year and the Consumer Help website attracts up to 8,000
users a week. In addition, consumers have access to the FSA through
their MPs. The FSA receives on average 60 letters a month from
MPs on behalf of their constituents.
16. Independent review of the FSA's rules
and decisions. As well as the normal safeguard of judicial review,
the FSA's rules and practices are subject to independent competition
scrutiny by the OFT and the Competition Commission.
As required by FSMA, the FSA's internal procedures
also ensure that a decision on a case is not taken by the FSA
staff who conduct the investigation. The Regulatory Decisions
Committee, which is made up of recently retired practitioners
and individuals representing the public interest, is responsible
for the FSA's more fundamental enforcement decisions (eg disciplinary
cases and cancellation of a firm's authorisation).
Individual decisions on enforcement and authorisation
cases can be considered afresh by the Financial Services and Markets
Tribunal if the firm or individual involved chooses to refer the
case to it. The Tribunal is set up under FSMA and run by the Lord
17. Independent investigation of complaints.
The FSA has made arrangements, as required by FSMA, for investigating
complaints against it. Complaints may be made by anyone directly
affected by the FSA's actions or inactionsthat is, regulated
firms, individual employees of firms, listed companies, consumers
etc. As part of these arrangements, the FSA has appointed an independent
Complaints Commissioner. The Commissioner's role is to investigate
complaints and report to the complainant and the FSA. She can
publish this and require the FSA to publish the whole or part
of its response. She can also recommend that the FSA make a compensatory
payment to a complainant. Our Board will decide whether to make
any such payments. If the FSA disagrees with a recommendation
it must publish its reasons for doing so. A report from the Commissioner
is included in the FSA's Annual Report.
18. Accountability to Parliament, including
through the Treasurythe Treasury Select Committee holds
formal hearings with the FSA on the Report. The Committee will
typically hold several sessions with FSA during the year across
a range of issues. During last year, for example, the FSA appeared
in front of the Committee or the sub-Committee on five occasions.
We welcome these opportunities to explain our work and policies.
19. In order to explain our actions to Parliament
more widely, we also hold regular meetings and briefings with:
All Party Parliamentary Groupsin
particular, the Insurance and Financial Services Group and the
Building Societies and Mutuals Group;
Backbench groups from the three main
17 March 2003
1 Appendix not printed as these letters are appended
to be Written Evidence by HM Treasury. Back