Memorandum by HM Treasury on the Financial
Services Authority
INTRODUCTION
1. HM Treasury submits this memorandum in
response to the Committee's call for evidence on the accountability
of regulators to citizens and to Parliament, as the government
department primarily responsible for the legal and institutional
framework within which the regulation of financial services is
carried out in the UK. This memorandum sets out the legal framework
under which the Financial Services Authority (FSA) operates and
describes the various mechanisms by which it is held accountable
to Ministers, Parliament, stakeholders and the wider public.
BACKGROUND
2. The main responsibility for regulatory
supervision of the UK financial services sector falls to a single,
unified regulator, the FSA. The FSA is a private company that
carries out public functions and which has regulatory powers conferred
upon it by the Financial Services and Markets Act 2000 (FSMA).
3. The Financial Services and Markets Act
(FSMA) came in to force at midnight on 30 November 2001, providing
the legal underpinning for the FSA to act as the UK's sole financial
regulator and supervisor. The FSA is independent of Government
and separate from the conduct of monetary policy by the Bank of
England. FSMA gives the FSA four statutory objectives, which are
intended to clearly define the role and functions of the FSA and
make it accountable for the way its functions are exercised:
(i) Maintaining confidence in the financial
system;
(ii) Promoting public understanding of the
financial system;
(iii) Securing the appropriate degree of
protection for consumers; and
(iv) Reducing financial crime.
4. In the course of discharging all its
general functions, the FSA must have regard to the seven principles
of good regulation that are enshrined in FSMA and which form an
important complement to the statutory objectives:
the need to use its resources in
the most efficient and economic way;
recognition of the responsibilities
of regulated firms' own management;
proportionality between the burden,
or restrictions imposed on a regulated body in relation to the
benefits;
the desirability of facilitating
innovation in connection with regulated activities;
the international character of financial
services and markets and the desirability of maintaining the competitive
position of the United Kingdom;
the need to minimise the adverse
effects on competition that may arise from anything done in the
discharge of its functions; and
the desirability of facilitating
competition between those who are subject to any form of regulation
by the Authority.
5. Under the regulatory framework created
by FSMA, the Government remains responsible for the following:
the legal institutional framework
within which regulation is carried out, including the core corporate
governance structure of the FSA;
the appointment of Board members
and assessment of their overall performance in relation to the
statutory objectives;
ensuring that the boundaries of FSA
regulation are correct;
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
obligations.
These responsibilities were clearly set out
by the Chancellor in his letter to Sir Howard Davies of 13 December
2001 (see Appendix).
6. The governing body of the FSA is the
Board, which is currently made up of a Chairman, three executive
directors and 11 non-executive directors. The non-executive directors
are required to report on the economy and efficiency of the use
of FSA resources, to review the FSA's internal financial controls
and to determine the remuneration of the executive members of
the Board. The Board is appointed by the Treasury and maybe dismissed
by the same. Although the FSA falls outside of OCPA, Ministers
have agreed that Board appointments should follow the Nolan Principles.
Though the Board is currently led by a Chairman alone, the Chancellor
announced on 10 February 2003, in a written statement to Parliament,
that the successor to Sir Howard Davies as Chairman will also
be supported by a Chief Executive.
7. Though creating a single regulator in
the place of the nine that had existed prior to the commencement
of FSMA, FSMA did not widen the scope of the FSA, in any significant
way, beyond those activities and products already regulated by
the organisations that the FSA was absorbing. These broadly encompassed
activities and products related to savings and investments as
well as deposit-taking, insurance and the listing of shares. This
remit is set to be extended with the addition of regulation of
mortgages and long term care insurance in October 2004 and of
general insurance mediation in January 2005.
8. The FSA is not reliant upon central government
for its funding, but has the power to levy fees on all the firms
which it regulates to cover the costs of its functions as defined
within FSMA. The FSA reports annually on its planned expenditure
(as published in the FSA Plan and Budget) and is statutorily required
to consult on its proposed fee structure.
LEGISLATIVE POWERS
OF FSA
9. The FSMA regulatory regime is made up
of a number of legislative instruments ranging from primary legislation
and statutory instruments to FSA legislation (rules, guidance,
codes, statements and directions). The Act itself determines the
institutional structure, responsibilities, powers and accountabilities
of the regulatory regime. The boundaries of FSA regulation are
determined by statutory instruments which are made by the Treasury
and subject to Parliamentary scrutiny. The detailed content of
regulation is set out in FSA rules and so on, which are not subject
to direct Parliamentary control. The relationship between the
Treasury's legislation and FSA legislation is conceived as one
of difference rather than subordination.
10. As noted above, the Treasury determines
the scope of the regulatory regime by way of statutory instrument.
Such statutory instruments are subject to public consultation
and accompanied by a regulatory impact assessment where required.
In addition, FSMA provides (in broad terms) that statutory instruments
which increase the scope of regulation must be approved by both
Houses of Parliament. So for example, any statutory instrument
that subjected a particular activity to FSA regulation for the
first time would be subject to debate in both Houses. The Treasury
keep the scope of regulation under review. A large proportion
of the activities that are currently subject to regulation, are
activities which the UK is obliged to regulate by virtue of community
law.
11. The FSA has rule-making powers, power
over the preparation and issuing of codes and is able to give
general guidance and determine general policies. The FSA's rules
impose binding requirements on authorised (and in some cases unauthorised)
persons, which have the force of law. There are important checks
and balances of these powers contained within FSMA, which sets
out clear procedures that the FSA must follow in the exercise
of its rule-making powers.
12. The FSA may only make rules if they
appear to be necessary or expedient for the purpose of protecting
the interests of consumers. If the FSA proposes to make any rules,
it must publicly consult on the proposed rules and the consultation
must be accompanied by, amongst other things, a cost benefit analysis
and an explanation of the FSA's reasons for believing that making
the proposed rules is compatible with its statutory objectives
and principles of good regulation (see above).
13. There are also two statutory panels
under the terms of FSMA. The Financial Services Practitioner Panel
and the Consumer Panel are bodies independent of the FSA, who
may make representations direct to the FSA Board regarding the
concerns of their constituent members. The FSA is obliged by FSMA
to have regard to the recommendations of the panels. Where the
FSA disagrees with Panel representations which relate to the extent
to which the FSA's policies and practices are consistent with
the FSA's statutory objectives and principles of good regulation,
the FSA must give its reasons for such disagreement. A report
of FSA responses to Panel recommendations is made in the FSA's
Annual Report.
ACCOUNTABILITY OF
THE FSA
14. As a private company, the FSA is independent
of the government, but there are a number of mechanisms by which
the FSA is held accountable, to Treasury Ministers, Parliament,
those it regulates and to consumers.
OPERATIONAL ACCOUNTABILITY
15. In addition to the two statutory panels,
and the ex ante requirements to consult before the exercise of
its rule making power, described above, a party aggrieved by certain
FSA decisions, including the determination of an application they
have made to the FSA, or if an authorised person is aggrieved
by the exercise of the FSA's disciplinary power, may refer the
matter to the Financial Services and Markets Tribunal. The Financial
Service and Markets Tribunal is an independent statutory body.
Each case is considered by a panel consisting of laymen and at
least one person with legal experience. Tribunal members are appointed
by the Lord Chancellor.
16. FSMA also imposes procedural requirements
on the FSA, which ensure that its decision making is fair and
transparent. Where the FSA is considering taking major, adverse
decisions in relation to any person (eg the refusal of an application
for authorisation or the imposition of disciplinary penalties),
it must give the person concerned a warning notice indicating
what the proposed action is and why the FSA proposes to take it.
The FSA must also give the person concerned the opportunity to
make representations to it before it takes the decision.
17. Furthermore, under the terms of FSMA,
there is an independent Complaints Commissioner, who will undertake
to investigate complaints raised with regards to the FSA's exercise
of, or failure to exercise any of its functions apart from the
legislative functions, for which the consultation mechanism exists.
These include complaints about maladministration, negligence,
unreasonable delay, unprofessional behaviour, bias and lack of
integrity. No charge is made by the FSA or the Commissioner to
those who use the scheme. However complaints cannot be made about
the FSA's rule making, the issuing of statements or principle
and codes of practice, or the issuing of general guidance, as
such complaints are excluded from the scheme. As discussed above,
FSMA prescribes alternative mechanisms for public scrutiny of
such functions.
18. There are also a number of independent
bodies that may hold the FSA to account. The Director of the Office
of Fair Trading (responsible for enforcement of competition legislation)
is obliged to keep under review the FSA's rules, codes and general
guidance. If the Director considers that any such measure has
a significantly adverse effect on competition, he must make a
report to the Treasury and to the Competition Commission. If the
Competition Commission agrees with that conclusion, the Treasury
are obliged (in most cases) to direct the Authority to remedy
the position. The FSA is also subject to administrative law and
judicial review as it is a statutory regulator and performs public
functions.
19. The Treasury also has the power to launch
enquiries into matters of grave regulatory concern. The Chancellor
elaborated on this power in his letter to Howard Davies of 13
December 2001 and this remains an important part of the accountability
structure for the FSA (see Appendix).
PERFORMANCE ACCOUNTABILITY
20. The most important mechanism by which
the FSA is held accountable for its performance is through the
publication of an Annual Report, which must be laid before Parliament.
(Copies of the most recent report may be found in the Libraries
of both Houses.) In this report, the FSA must detail its performance
against its statutory objectives and illustrate how it has addressed
the principles of good regulation. The Treasury has the power
to direct that particular matters be included in the Annual Report.
In the wake of the report's publication, the Treasury Select Committee
may hold a formal hearing with the FSA. The Annual Report must
also be presented at an Annual Open Public Meeting, which is open
to members of the public to attend.
21. As well as having the power to direct
that particular elements be included in the FSA's Annual Report,
the Treasury may commission an independent value for money review
of the FSA's operations, under Section 12 of FSMA. The Treasury
may determine the timing and the frequency of such a review and
the person(s) who will conduct it (see Appendix).
HM Treasury
25 March 2003
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