| Financial Services Authority | |
|---|---|
| Agency overview | |
| Formed | December 2001 |
| Jurisdiction | United Kingdom |
| Headquarters | London, United Kingdom |
| Employees | 3,800 |
| Agency executive | Adair Turner, Chairman |
| Website | |
| http://www.fsa.gov.uk | |
The Financial Services Authority (FSA) is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government.[1] Its main office is based in Canary Wharf, London, with another office in Edinburgh. When acting as the competent authority for listing of shares on a stock exchange, it is referred to as the UK Listing Authority (UKLA),[2] and maintains the Official list.
The FSA's Chairman and CEO are Lord Turner of Ecchinswell[3] and Hector Sants.
On 16 June 2010, the Chancellor of the Exchequer, George Osborne, announced plans to abolish the FSA and separate its responsibilities between a number of new agencies and the Bank of England.[4]
Contents |
The FSA has the legal form of a company limited by guarantee (number 01920623). It was incorporated on 7 June 1985 under the name of The Securities and Investments Board Ltd ("SIB") at the instigation of the UK Chancellor of the Exchequer, who is the sole member of the company and who delegated certain statutory regulatory powers to it under the then Financial Services Act 1986. After a series of scandals in the 1990s culminating in the collapse of Barings Bank, there was a desire to bring to an end the self-regulation of the financial services industry and to consolidate regulation responsibilities which had been split amongst multiple regulators. The SIB revoked the recognition of The Financial Intermediaries, Managers and Brokers Regulatory Association (FIMBRA) as a Self-Regulatory Organisation (SRO) in June 1994 subject to a transitional wind-down period to provide for continuity of regulation whilst members moved to the Personal Investment Authority (PIA), which in turn was subsumed.
The Securities and Investments Board changed its name to the Financial Services Authority on 28 October 1997 and it now exercises statutory powers given to it by the Financial Services and Markets Act 2000, that replaced the earlier legislation and came into force on 1 December 2001. In addition to regulating banks, insurance companies and financial advisers, the FSA has regulated mortgage business from 31 October 2004 and general insurance (excluding travel insurance) intermediaries from 14 January 2005.
On 16 June 2010, the Chancellor of the Exchequer, George Osborne, announced plans to abolish the FSA and separate its responsibilities between a number of new agencies and the Bank of England. The Financial Conduct Authority will be responsible for policing the City and the banking system.[4] A new Prudential Regulatory Authority will carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies.[4] All other responsibilities will be assumed by the Bank of England which will establish a Financial Policy Committee. The transition is expected to be completed by 2012 and existing FSA chief executive Hector Sants will continue in this role and will oversee the process.[5]
The Financial Capability division of the FSA broke away from the organisation in 2010, and is now known as The Money Advice Service.
Companies involved in any of the following activities must be regulated by the FSA.
Since 14 January 2005 The FSA ( Financial Services Authority) have also been regulating the Motor Industry, applicable when insurance products have been sold in conjunction with the vehicle purchase. This regulation now covering some 5,000 Motor Dealers has focused heavily on the FSA's "Treating Customers Fairly"[8] principles that should be representative of the Motor Dealers trading style.
The Financial Services and Markets Act 2000 imposed four statutory objectives upon the FSA:
The Financial Services Act 2010, which was passed by Parliament on 8 April 2010, gave the FSA the additional statutory objective of "Contributing to the protection and enhancement of the stability of the UK financial system" and removed the public awareness objective.[9]
The statutory objectives are supported by a set of principles of good regulation which the FSA must have regard to when discharging its functions. These are:
The FSA has a priority of making retail markets for financial products and services work more effectively, and so help retail consumers to get a fair deal. Over several years, the FSA has developed work to raise levels of confidence and capability among consumers. Since 2004, this work is described as a national strategy[10] on building financial capability in the UK. This programme is comparable to financial education and literacy strategies in other OECD countries, including the United States.
In June 2006, the FSA created its Retail Distribution Review (RDR) programme which they maintain will enhance consumer confidence in the retail investment market. Many industry pundits and independent commentators share the view that the proposals will cause more problems than they seek to resolve. This includes the loss of 30% of independent financial advisers, the wholesale removal of consumers ability to choose the commission route when purchasing investment products and the removal of the clear distinction between independent and 'tied' advisers. The RDR has a target for full-implementation of 31 December 2012.[11]
The RDR is expected to have a significant impact on the way in which financial services are delivered to retail investors in the UK.[12] The primary delivery mechanism of financial services to retail customers is via apprioximately 30,000 Independent Financial Advisers (IFAs) who are authorised and regulated by the FSA. They are expected to bear the brunt of the force of the RDR. The key elements of RDR are:
The combination of these factors is expected to significantly reduce the profitability of many IFA practices.[14] In anticipation of the new regulatory environment being enforced the industry landscape is undergoing significant change. Despite the fact that many in the industry are considered to be poorly prepared for the changes coming into effect,[15] The most significant identifiable trends are:
The Payment Services Regulations 2009 came into force on 1 November 2009[25] and shifted the onus onto the banks to prove negligence by the holder of debit and credit cards in cases of disputed payments.[26] The FSA said "It is for the bank, building society or credit card company to show that the transaction was made by you, and there was no breakdown in procedures or technical difficulty" before refusing liability.
On the same date the Banking Conduct Regime commenced.[27] It applies to the regulated activity of accepting deposits, and replaces the non-lending aspects of the Banking Code and Business Banking Code (industry-owned codes that were monitored by the Banking Code Standards Board).
The FSA is not accountable to Treasury Ministers or to Parliament, as confirmed by Hector Sants at a Treasury Select Committee meeting on 9 March 2011. Sants told TSC Chair, Andrew Tyrie, that Parliament needed to legislate to remove the FSA's non-accountable status. This was further confirmed by Mark Garnier MP who, when commenting on the FSA's negative reaction to a Treasury Select Committee (TSC) report on the RDR, stated that if the FSA chose to ignore the TSC there was nothing they could do about it.
It is operationally independent of Government and is funded entirely by the firms it regulates through fines, fees and compulsory levies. Its Board consists of a Chairman, a Chief Executive Officer, a Chief Operating Officer, two Managing Directors, and 9 non-executive directors (including a lead non-executive member, the Deputy Chairman) selected by, and subject to removal by, HM Treasury. Among these, the Deputy Governor for Financial Stability of the Bank of England is an 'ex officio' Board member. This Board decides on overall policy with day-to-day decisions and management of the staff being the responsibility of the Executive. This is divided into three sections each headed by a Managing director and having responsibility for one of the following sectors: retail markets, wholesale and institutional markets, and regulatory services.
Its regulatory decisions can be appealed to the Financial Services and Markets Tribunal.
HM Treasury decides upon the scope of activities that should be regulated, but it is for the FSA to decide what shape the regulatory regime should take in relation to any particular activities.
The FSA is also provided with advice on the interests and concerns of consumers by the Financial Services Consumer Panel.[28] This panel describes itself as "An Independent Voice for Consumers of Financial Services". Members of the panel are appointed and can be dismissed by the FSA and emails to them are directed to FSA staff. The Financial Services Consumer Panel will not address individual consumer complaints.
The FSA is governed by a Board appointed by HM Treasury. The current members of the Board are:
The FSA rarely takes on wider implication cases. For example, thousands of consumers have complained to the Financial Ombudsman Service about payment protection insurance (PPI) and bank charges. However, despite determining that there was a problem in the selling of PPI,[29][30][31] the FSA has taken effective action against very few firms in the case of PPI and it was the Office of Fair Trading (OFT) that finally took on the wider implications role in the case of bank charges. The FSA and the FOS have staff placed within their co-organisation in order to advise on wider implication issues. It is surprising, therefore, that so little action has taken place.
The FSA in an internal report into the handling of the collapse in confidence of customers of the Northern Rock Plc describe themselves as inadequate.[32] It is reported that in order to prevent such a situation occurring again, the FSA is considering allowing a bank to delay revealing to the public when it gets into financial difficulties.[33]
The FSA was criticised in the final report of the European Parliament's inquiry into the crisis of the Equitable Life Assurance Society.[34] It is widely reported that the long awaited Parliamentary Ombudsman's investigation into the government's handling of Equitable Life is equally scathing of the FSA's handling of this case[35]
The FSA ignored warning signals from Northern Rock building society and continued to allow the bank to operate without a risk mitigation programme for months before the bank's collapse.[36]
The FSA has been criticised by some within the IFA community for increasing fees charged to firms and for the perceived retroactive application of current standards to historic business practices.
The perceived lack of action by the FSA in many cases, and allegations of regulatory capture has led to it being nicknamed the Fundamentally Supine Authority by Private Eye magazine.
The FSA is not legally able to circumvent statute yet hides behind secret legal opinion regarding its summary removal of practitioners legal rights in respect of their ability to use a longstop defence against stale claims.
FSA regulation is also often regarded as reactive rather than proactive. In 2004-05 the FSA was actively involved in crackdowns against financial advice firms who were involved in the selling of split-cap investment trusts and precipice bonds, with some success in restoring public confidence.. However, despite heavily criticising split-cap investment trusts, in 2007 it suddenly abandoned its investigation.[37] Where it has been rather poorer in its remit is in actively identifying and investigating possible future issues of concern, and addressing them accordingly.
There have also been some questions raised about the competence of FSA staff.[38]
The composition of the FSA board appears to consist mainly of representatives of the financial services industry and career civil servants. There are no representatives of consumer groups. As the FSA was created as a result of criticism of the self-regulating nature of the financial services industry, having an independent authority staffed mainly by members of the same industry could be perceived as not providing any further advantage to consumers.
Although one of the prime responsibilities of the FSA is to protect consumers, The FSA has been active in trying to ensure companies' anonymity when they have been involved in misselling activity, preferring to side with the companies that have been found guilty rather than consumers.[39][40]
This is most obviously seen in the case known as the LAUTRO 19, where the FSA identified 19 insurers which had breached their contractual warranties by using incorrect charges to calculate the premiums for mortgage endowment policies. This miscalculation led to massive consumer detriment as well as vast and unquantifiable costs for the advisers who unwittingly sold these products. The FSA has steadfastly refused to publicly name the miscreant companies and has spent £100,000s on legal fees to baulk the efforts of the Information Commissioner who had concluded that naming the companies would be in the public interest.
It was announced in November 2008, that despite self-acknowledged failures by the FSA in effectively regulating the financial services industry, FSA staff would receive bonuses.[41] On 31 May 2008, The Times confirmed that FSA staff had received £20m in bonuses for 2008/09, a 40% increase on the previous year.[42]
On 11 February 2009, FSA deputy chairman, Sir James Crosby resigned after it was revealed that he had fired a whistleblower, Paul Moore, who had warned of dangerous lending practices at HBOS when he had been in charge of risk regulation.[43]
Lord Adair Turner, current FSA chairman defended the actions of the regulator on the BBC's Andrew Marr show on 13 February 2009. His comments were that other regulatory bodies throughout the world, which had a variety of different structures and which are perceived either as heavy touch or light touch also failed to predict the economic collapse. In line with the other regulators, the FSA had failed intellectually by focusing too much on processes and procedures rather than looking at the bigger economic picture. In response as to why Sir James Crosby had been appointed deputy chairman when his bank HBOS had been highlighted by the FSA as using risky lending practises, Lord Turner said that they had files on almost every financial institution indicating a degree of risk.[44]
Turner faced further criticism from the Treasury Select Committee on 25 February 2009, especially over failures to spot or act on reckless lending by banks before the crisis of 2008 occurred. He attributed much of the blame on the politicians at the time for pressuring the FSA into "light touch" regulation.[45]
On 17 April 2009, a whistleblower (former FSA employee) alleged that the FSA had turned a blind eye to the explosion in purchases of whole sale loans taken on by various UK building societies from 2005 onwards. The FSA has denied the claims - "This is not whistleblowing, it is green ink" a spokesman said. "The allegations are a farrago of lies, distortions and half truths made by an obviously disgruntled former employee who clearly has an axe to grind. It does not paint a realistic picture of our supervision of building societies."[46]
There were suggestions that the FSA stifles the UK financial services industry through over-regulation, following a leaked letter from Prime Minister Tony Blair during 2005. This incident led Callum McCarthy, then Chief Executive of the FSA, to formally write to the Prime Minister asking him to either explain his opinions or retract them.[47]
The Prime Minister's criticisms were viewed as particularly surprising since the FSA's brand of light-touch financial regulation has typically been popular with banks and financial institutions in comparison with the more prescriptive rules-based regulation employed by the US Securities and Exchange Commission and by other European regulators;[48] by contrast, most critiques of the FSA accuse it of instigating a regulatory "race to the bottom" aimed at attracting foreign companies at the expense of consumer protection.[49]
The FSA counters that its move away from rules-based regulation towards more principles-based regulation, far from weakening its consumer protection goals, can in fact strengthen them: "Our Principles are rules. We can take enforcement action on the basis of them; we have already done so; and we intend increasingly to do so where it is appropriate to do so."[50] As an example, the enforcement action taken in late 2006 against firms mis-selling payment protection insurance was based on their violation of principle six of the FSA's Principles for Business, rather than requiring the use of the sort of complex technical regulations that many in financial services find burdensome.[51]
The FSA has been criticised for its supposedly weak enforcement program.[52][53][54] For example, while FSMA prohibits insider trading, the FSA has only successfully prosecuted two insider dealing cases, both involving defendants who did not contest the charges.[55] Likewise, since 2001, the FSA has only sought insider trading fines eight times against individuals and companies it regulates,[56] despite the FSA's own studies indicating that unexplained price movements occurs prior to around 25 percent of all UK corporate merger announcements.[57] After the HBOS insider trading scandal, the FSA informed MPs on 6 May 2008 that they planned to crack down on inside trading more effectively and that the results of their efforts would be seen in 2008/09[58] On 22 June, the Daily Telegraph reported that the FSA had wrapped up their case into HBOS insider trading and no action would be taken.[59] On 26 June, the HBOS Chairman said that "There is a strong case for believing that the UK is exceptionally bad at dealing with white-collar crime".[60]
On 29 July 2008, however, it was announced that the Police, acting on information supplied by the FSA, had arrested workers at UBS and JP Morgan Cazenove for alleged insider dealing and that this was the third case within a week.[61] A year after the subprime mortgage crisis had made global headlines, the FSA levied a record £900,000 on an IFA for selling subprime mortgages.[62]
The FSA has been held by some observers to be weak and inactive in allowing irresponsible banking to precipitate the credit crunch which commenced in 2007, and which has involved the shrinking of the UK housing market, increasing unemployment (especially in the financial and building sectors), the public acquisition of Northern Rock in mid-February 2008, and the takeover of HBOS by Lloyds TSB. On 18 September 2008, the FSA announced a ban on short selling to reduce volatility in difficult markets lasting until 16 January 2009.[63][64]
Certainly, the FSA's implementation of capital requirements for banks has been lax relative to some other countries. For example, it has been reported[65] that Australia's Commonwealth Bank is measured as having 7.6% Tier 1 capital under the rules of the Australian Prudential Regulation Authority, but this would be measured as 10.1% if the bank was under the jurisdiction of the FSA.
In March 2009, Lord Turner published a regulatory review of the global financial crisis.[66] The review broadly acknowledges that 'light touch' regulation has failed and that the FSA should concentrate on macroeconomic regulation as well as scrutinising individual companies. The review also proposes cross-border regulation of banks. There are no further promises to improve consumer protection or to directly intervene against financial institutions who treat their customers badly. The review was reportedly met with widespread relief in the city of london where firms had feared a 'revolution' in the way that they would be regulated.[67]