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Financial Services Authority
Financial Services Authority.png
Agency overview
Formed December 2001
Jurisdiction United Kingdom
Headquarters London, United Kingdom
Employees 2,800
Agency executive Adair Turner, Chairman
Website
http://www.fsa.gov.uk

The Financial Services Authority ("FSA") is an independent non-governmental body, quasi-judicial body and a company limited by guarantee that regulates the financial services industry in the United Kingdom. Its board is appointed by the Treasury.[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.

Contents

History

Main entrance - 25 North Colonnade (Canary Wharf, London) - FSA building

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.

25 The North Colonnade

Statutory objectives

The Financial Services and Markets Act imposed four statutory objectives upon the FSA:

  • market confidence: maintaining confidence in the financial system
  • public awareness: promoting public understanding of the financial system;
  • consumer protection: securing the appropriate degree of protection for consumers; and
  • reduction of financial crime: reducing the extent to which it is possible for a business carried on by a regulated person to be used for a purpose connected with financial crime

Regulatory principles

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:

  • efficiency and economy: the need to use its resources in the most efficient and economic way.
  • role of management: a firm’s senior management is responsible for its activities and for ensuring that its business complies with regulatory requirements. This principle is designed to guard against unnecessary intrusion by the FSA into firms’ business and requires it to hold senior management responsible for risk management and controls within firms. Accordingly, firms must take reasonable care to make it clear who has what responsibility and to ensure that the affairs of the firm can be adequately monitored and controlled.
  • proportionality: The restrictions the FSA imposes on the industry must be proportionate to the benefits that are expected to result from those restrictions. In making judgements in this area, the FSA takes into account the costs to firms and consumers. One of the main techniques they use is cost benefit analysis of proposed regulatory requirements. This approach is shown, in particular, in the different regulatory requirements applied to wholesale and retail markets.
  • innovation: The desirability of facilitating innovation in connection with regulated activities. For example, allowing scope for different means of compliance so as not to unduly restrict market participants from launching new financial products and services.
  • international character: Including the desirability of maintaining the competitive position of the UK. The FSA takes into account the international aspects of much financial business and the competitive position of the UK. This involves co-operating with overseas regulators, both to agree international standards and to monitor global firms and markets effectively.
  • competition: The need to minimise the adverse effects on competition that may arise from the FSA's activities and the desirability of facilitating competition between the firms it regulates. This covers avoiding unnecessary regulatory barriers to entry or business expansion. Competition and innovation considerations play a key role in the FSA's cost-benefit analysis work. Under the Financial Services and Markets Act, the Treasury, the Office of Fair Trading and the Competition Commission all have a role to play in reviewing the impact of the FSA's rules and practices on competition.

Accountability and management

The FSA is accountable to Treasury Ministers, and through them to Parliament. 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 [4]. 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.

Retail consumers

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[5] 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) program to help enhance consumer confidence in the retail investment market. To this end, RDR supports clear education of consumers about different types of services available, improved professional standards in the industry, and clear, fair practices in remuneration for financial advice. The RDR has a target for full-implementation of 31 December 2012.[6]

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2009 regulations

Major regulations were introduced in 2009.

The Payment Services Regulations 2009 came into force on 1 November 2009[7] and shifted the onus onto the banks to prove negligence by the holder of debit and [credit card]]s in cases of disputed payments.[8]. 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[9]. 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).

Board

Lord Turner, Chairman of the Financial Services Authority.

The FSA is governed by a Board appointed by HM Treasury.

  • Adair Turner - Chairman
  • Deputy Chairman - vacant, following resignation of Sir James Crosby
  • Hector Sants - Chief Executive, formerly CEO EMEA Credit Suisse First Boston
  • Jon Pain - Managing Director of the Supervision Business Unit, the FSA
  • Sally Dewar - Managing Director of the Risk Business Unit, the FSA
  • David Kenmir - Chief Operating Officer, the FSA
  • Carolyn Fairbairn - Non-executive FSA Board member, Director of Strategy and Development at ITV plc
  • Peter Fisher - Non-executive FSA Board member, Managing Director of BlackRock
  • Brian Flanagan - Non-executive FSA Board member, formerly a Vice President of Mars Inc
  • Karin Forseke - Non-executive FSA Board, formerly CEO of Carnegie Investment Bank AB
  • Sir John Gieve - Non-executive FSA Board member, Deputy Governor, Financial Stability of the Bank of England
  • Professor David Miles - Non-executive FSA Board member, Managing Director and Chief UK Economist at Morgan Stanley
  • Michael Slack - Non-executive FSA Board, Director of the British Insurance Brokers' Association
  • Hugh Stevenson - Non-executive FSA Board member, Chairman of the FSA Pension Plan Trustee Ltd

Activities regulated

Companies involved in any of the following activities must be regulated by the FSA.

  • Accepting deposits
  • Issuing e-money
  • Effecting or carrying out contracts of insurance as principal
  • Dealing in investments (as principal or agent)
  • Arranging deals in investments
  • Arranging regulated mortgage contracts [10]
  • Arranging regulated home reversion plans
  • Arranging regulated home purchase plans
  • Managing investments
  • Assisting in the administration and performance of a contract of insurance[11]
  • Safeguarding and administering investments
  • Sending dematerialised instructions
  • Establishing etc collective investment schemes
  • Establishing etc personal pension schemes
  • Establishing etc stakeholder pension schemes
  • Advising on investments
  • Advising on regulated mortgage contracts
  • Advising on regulated home reversion plans
  • Advising on regulated home purchase plans
  • Lloyd's market activities
  • Entering into and administering a funeral plan
  • Entering into and administering a regulated mortgage contract
  • Entering into and administering a home reversion plan
  • Entering into and administering a home purchase plan
  • Agreeing to do most of the above activities

Since January 14, 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"[12] principles that should be representative of the Motor Dealers trading style.

Actions relating to the 2007—2009 credit crisis

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 the 18th of September 2008, the FSA announced a ban on short selling to reduce volatility in difficult markets lasting until January 16, 2009.[13][14]

Certainly, the FSA's implementation of capital requirements for banks has been lax relative to some other countries. For example, it has been reported[15] 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.[16] 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.[17]

Criticism

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[18][19][20], 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 [21]. 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.[22]

The FSA was criticised in the final report of the European Parliament's inquiry into the crisis of the Equitable Life Assurance Society.[23] 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[24]

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.[25]

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.[citation needed]

FSA regulation is also often regarded as reactive rather than proactive.[citation needed] 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.[citation needed]. However, despite heavily criticising split-cap investment trusts, in 2007 it suddenly abandoned its investigation.[26] Where it has been rather poorer in its remit is in actively identifying and investigating possible future issues of concern, and addressing them accordingly.[citation needed]

There have also been some questions raised about the competence of FSA staff.[27]

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.[28][29]

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.[30] On May 31, 2008, The Times confirmed that FSA staff had received £20m in bonuses for 2008/09, a 40% increase on the previous year.[31]

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.[32]

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.[33]

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.[34]

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. 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," a spokesman said. "It does not paint a realistic picture of our supervision of building societies."[35]

More principles-based regulation

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.[36]

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;[37] 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.[38]

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."[39] 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.[40]

Enforcement cases

The FSA has been attacked for its supposedly weak enforcement program.[41][42][43] 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.[44] Likewise, since 2001, the FSA has only sought insider trading fines eight times against individuals and companies it regulates,[45] despite the FSA's own studies indicating that unexplained price movements occurs prior to around 25 percent of all UK corporate merger announcements.[46] 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[47] 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[48]. 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".[49]

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 3rd case within a week.[50] 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 [51]

See also

Notes

  1. ^ http://nds.coi.gov.uk/Content/Detail.asp?ReleaseID=394966&NewsAreaID=2
  2. ^ http://www.fsa.gov.uk/Pages/Doing/UKLA/index.shtml
  3. ^ Lord Turner confirmed chairman of FSA in its hour of need
  4. ^ Financial Services Consumer Panel - Our work
  5. ^ “Financial capability in the UK", Financial Services Authority, 2004, ISBN 1-84518-176-X
  6. ^ Retail Distribution Review, Financial Services Authority, 17/02/09. Accessed 13/07/09
  7. ^ FSA: Payment Services Regulations 2009, in force from 1 November 2009
  8. ^ Telegraph - Card fraud: banks now have to prove your guilt, 12 February 2010
  9. ^ FSA: The Banking Conduct Regime and the Banking Conduct of Business sourcebook (BCOBS), in force from 1 November 2009
  10. ^ Mortgage Conduct of Business rules
  11. ^ Insurance Conduct of Business Sourcebook
  12. ^ FSA: Treating Customers Fairly web page
  13. ^ "FSA statement on short positions in financial stocks". http://www.fsa.gov.uk/pages/Library/Communication/PR/2008/102.shtml. 
  14. ^ http://news.bbc.co.uk/1/hi/business/7624012.stm
  15. ^ Boyd, Tony, "A Capital Idea", 21 October 2008
  16. ^ Regulatory review of the global financial crisis
  17. ^ City relief as Turner shuns revolution
  18. ^ FSA update on payment protection insurance (PPI)
  19. ^ Case for OFT investigation into payment protection insurance now overwhelming, says Citizens Advice
  20. ^ Citizens Advice urges swifter action on PPI
  21. ^ The FSA Northern Rock report: condemned in its own words, the regulator that missed the collapse The Times, 27 March 2008
  22. ^ FSA unveils plans for banks to seek secret emergency funding
  23. ^ Final report of the European Parliament's inquiry into the crisis of the Equitable Life Assurance Society European Parliament, 25 May 2007
  24. ^ Government disputes order to pay billions to Equitable policyholders
  25. ^ FSA allowed Northern Rock to keep breaking rules
  26. ^ FSA ends split-cap scandal investigation with no scalps, The Times, 22 May 2007
  27. ^ Regulator, heal thyself, The Economist, 20 January 2005
  28. ^ Freedom of Information Act 2000 Decision Notice FS50075781
  29. ^ Freedom of Information Act 2000 Decision Notice FS50094595
  30. ^ FSA staff will get bonuses despite overseeing financial crisis
  31. ^ Bank watchdog ‘failures’ pocket £20m in bonuses
  32. ^ Sir James Crosby resigns from FSA
  33. ^ FSA chairman Lord Turner: we got it wrong but we'll keep our bonuses
  34. ^ http://www.guardian.co.uk/business/2009/feb/26/regulators
  35. ^ Building societies face awful truth about boom-time spending spree
  36. ^ Freedom of Information request for disclosure of the letter from Sir Callum McCarthy to the Prime MinisterFSA, 29 May 2007
  37. ^ FTSE firms will 'keep UK rules' BBC, 12 June 2006
  38. ^ Speech by SEC Chairman: 'The Hunters and the Stag': Why National Securities Regulators Must Collaborate In the Era of Global Investing 16 November 2006
  39. ^ Treating Customers Fairly and more principles based regulation Clive Briault, Managing Director for Retail Markets, FSA, 24 July 2006
  40. ^ FSA fines home shopping company £270,000 for PPI selling failures FSA, 20 December 2006
  41. ^ 'London loophole' leaves US at odds with FSA
  42. ^ How can this still happen?, The Guardian, 18 January 2003
  43. ^ FSA chiefs hit back at criticism, The Scotsman, 12 March 2003
  44. ^ Law and the Market: the Impact of Enforcement, John C. Coffee Jnr
  45. ^ FSA Struggles With Insider Trading That Doesn't Happen in U.K., Bloomberg, 11 June 2007
  46. ^ Measuring Market Cleanliness, FSA, March 2006
  47. ^ We'll crack down on insider dealing, FSA tells MPs
  48. ^ FSA admits defeat after HBOS probe
  49. ^ UK is weak on tackling white collar crime and short sellers, says HBOS chairman
  50. ^ Eight arrested in FSA insider dealing inquiry
  51. ^ FSA levies record sub-prime fine on Thinc

External links


Financial Services Authority
File:Financial Services
Agency overview
Formed December 2001
Jurisdiction United Kingdom
Headquarters London, United Kingdom
Employees 2,800
Agency executive Adair Turner, Chairman
Website
http://www.fsa.gov.uk

The Financial Services Authority (FSA) is an independent non-governmental body, quasi-judicial body and a company limited by guarantee responsible for the financial regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury.[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 June 16, 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

History

(Canary Wharf, London) - FSA building]]

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.

Statutory objectives

The Financial Services and Markets Act imposed five statutory objectives upon the FSA:

  • market confidence: maintaining confidence in the financial system;
  • public awareness: promoting public understanding of the financial system;
  • financial stability: contributing to the UK's financial stability;
  • consumer protection: securing the appropriate degree of protection for consumers; and
  • reduction of financial crime: reducing the extent to which it is possible for a business carried on by a regulated person to be used for a purpose connected with financial crime

Regulatory principles

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:

  • efficiency and economy: the need to use its resources in the most efficient and economic way.
  • role of management: a firm’s senior management is responsible for its activities and for ensuring that its business complies with regulatory requirements. This principle is designed to guard against unnecessary intrusion by the FSA into firms’ business and requires it to hold senior management responsible for risk management and controls within firms. Accordingly, firms must take reasonable care to make it clear who has what responsibility and to ensure that the affairs of the firm can be adequately monitored and controlled.
  • proportionality: The restrictions the FSA imposes on the industry must be proportionate to the benefits that are expected to result from those restrictions. In making judgements in this area, the FSA takes into account the costs to firms and consumers. One of the main techniques they use is cost benefit analysis of proposed regulatory requirements. This approach is shown, in particular, in the different regulatory requirements applied to wholesale and retail markets.
  • innovation: The desirability of facilitating innovation in connection with regulated activities. For example, allowing scope for different means of compliance so as not to unduly restrict market participants from launching new financial products and services.
  • international character: Including the desirability of maintaining the competitive position of the UK. The FSA takes into account the international aspects of much financial business and the competitive position of the UK. This involves co-operating with overseas regulators, both to agree international standards and to monitor global firms and markets effectively.
  • competition: The need to minimise the adverse effects on competition that may arise from the FSA's activities and the desirability of facilitating competition between the firms it regulates. This covers avoiding unnecessary regulatory barriers to entry or business expansion. Competition and innovation considerations play a key role in the FSA's cost-benefit analysis work. Under the Financial Services and Markets Act, the Treasury, the Office of Fair Trading and the Competition Commission all have a role to play in reviewing the impact of the FSA's rules and practices on competition.

Accountability and management

The FSA is accountable to Treasury Ministers, and through them to Parliament. 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 [5]. 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.

Retail consumers

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[6] 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 to help enhance consumer confidence in the retail investment market. To this end, RDR supports clear education of consumers about different types of services available, improved professional standards in the industry, and clear, fair practices in remuneration for financial advice. The RDR has a target for full-implementation of 31 December 2012.[7]

2009 regulations

Major regulations were introduced in 2009.

The Payment Services Regulations 2009 came into force on 1 November 2009[8] and shifted the onus onto the banks to prove negligence by the holder of debit and credit cards in cases of disputed payments.[9]. 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[10]. 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).

Board

The FSA is governed by a Board appointed by HM Treasury.

  • Adair Turner - Chairman
  • Deputy Chairman - vacant, following resignation of Sir James Crosby
  • Hector Sants - Chief Executive, formerly CEO EMEA Credit Suisse First Boston
  • Jon Pain - Managing Director of the Supervision Business Unit, the FSA
  • Sally Dewar - Managing Director of the Risk Business Unit, the FSA
  • Lesley Titcomb - Acting Chief Operating Officer, the FSA
  • Carolyn Fairbairn - Non-executive FSA Board member, Director of Strategy and Development at ITV plc
  • Peter Fisher - Non-executive FSA Board member, Managing Director of BlackRock
  • Brian Flanagan - Non-executive FSA Board member, formerly a Vice President of Mars Inc
  • Karin Forseke - Non-executive FSA Board, formerly CEO of Carnegie Investment Bank AB
  • Sir John Gieve - Non-executive FSA Board member, Deputy Governor, Financial Stability of the Bank of England
  • Professor David Miles - Non-executive FSA Board member, Managing Director and Chief UK Economist at Morgan Stanley
  • Michael Slack - Non-executive FSA Board, Director of the British Insurance Brokers' Association
  • Hugh Stevenson - Non-executive FSA Board member, Chairman of the FSA Pension Plan Trustee Ltd

Activities regulated

Companies involved in any of the following activities must be regulated by the FSA.

  • Accepting deposits
  • Issuing e-money
  • Effecting or carrying out contracts of insurance as principal
  • Dealing in investments (as principal or agent)
  • Arranging deals in investments
  • Arranging regulated mortgage contracts [11]
  • Arranging regulated home reversion plans
  • Arranging regulated home purchase plans
  • Managing investments
  • Assisting in the administration and performance of a contract of insurance[12]
  • Safeguarding and administering investments
  • Sending dematerialised instructions
  • Establishing etc collective investment schemes
  • Establishing etc personal pension schemes
  • Establishing etc stakeholder pension schemes
  • Advising on investments
  • Advising on regulated mortgage contracts
  • Advising on regulated home reversion plans
  • Advising on regulated home purchase plans
  • Lloyd's market activities
  • Entering into and administering a funeral plan
  • Entering into and administering a regulated mortgage contract
  • Entering into and administering a home reversion plan
  • Entering into and administering a home purchase plan
  • Agreeing to do most of the above activities

Since January 14, 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"[13] principles that should be representative of the Motor Dealers trading style.

Actions relating to the 2007—2009 credit crisis

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 the 18th of September 2008, the FSA announced a ban on short selling to reduce volatility in difficult markets lasting until January 16, 2009.[14][15]

Certainly, the FSA's implementation of capital requirements for banks has been lax relative to some other countries. For example, it has been reported[16] 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.[17] 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.[18]

Criticism

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[19][20][21], 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 [22]. 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.[23]

The FSA was criticised in the final report of the European Parliament's inquiry into the crisis of the Equitable Life Assurance Society.[24] 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[25]

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.[26]

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.[citation needed]

FSA regulation is also often regarded as reactive rather than proactive.[citation needed] 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.[citation needed]. However, despite heavily criticising split-cap investment trusts, in 2007 it suddenly abandoned its investigation.[27] Where it has been rather poorer in its remit is in actively identifying and investigating possible future issues of concern, and addressing them accordingly.[citation needed]

There have also been some questions raised about the competence of FSA staff.[28]

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.[29][30]

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.[31] On May 31, 2008, The Times confirmed that FSA staff had received £20m in bonuses for 2008/09, a 40% increase on the previous year.[32]

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.[33]

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.[34]

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.[35]

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. 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," a spokesman said. "It does not paint a realistic picture of our supervision of building societies."[36]

More principles-based regulation

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.[37]

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;[38] 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.[39]

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."[40] 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.[41]

Enforcement cases

The FSA has been attacked for its supposedly weak enforcement program.[42][43][44] 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.[45] Likewise, since 2001, the FSA has only sought insider trading fines eight times against individuals and companies it regulates,[46] despite the FSA's own studies indicating that unexplained price movements occurs prior to around 25 percent of all UK corporate merger announcements.[47] 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[48] 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[49]. 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".[50]

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 3rd case within a week.[51] 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 [52]

Planned abolition of the Financial Services Authority

On June 16, 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 Consumer Protection and Markets 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. [53]

See also

Notes

  1. ^ http://nds.coi.gov.uk/Content/Detail.asp?ReleaseID=394966&NewsAreaID=2
  2. ^ http://www.fsa.gov.uk/Pages/Doing/UKLA/index.shtml
  3. ^ Lord Turner confirmed chairman of FSA in its hour of need
  4. ^ a b c Vina, Gonzalo. "U.K. Scraps FSA in Biggest Bank Regulation Overhaul Since! 1997". Businessweek (Bloomberg). http://www.businessweek.com/news/2010-06-16/u-k-scraps-fsa-in-biggest-bank-regulation-overhaul-since-1997.html. Retrieved 16 June 2010. 
  5. ^ Financial Services Consumer Panel - Our work
  6. ^ “Financial capability in the UK", Financial Services Authority, 2004, ISBN 1-84518-176-X
  7. ^ Retail Distribution Review, Financial Services Authority, 17/02/09. Accessed 13/07/09
  8. ^ FSA: Payment Services Regulations 2009, in force from 1 November 2009
  9. ^ Telegraph - Card fraud: banks now have to prove your guilt, 12 February 2010
  10. ^ FSA: The Banking Conduct Regime and the Banking Conduct of Business sourcebook (BCOBS), in force from 1 November 2009
  11. ^ Mortgage Conduct of Business rules
  12. ^ Insurance Conduct of Business Sourcebook
  13. ^ FSA: Treating Customers Fairly web page
  14. ^ "FSA statement on short positions in financial stocks". http://www.fsa.gov.uk/pages/Library/Communication/PR/2008/102.shtml. 
  15. ^ "FSA introduces short-selling ban". BBC News. 19 September 2008. http://news.bbc.co.uk/1/hi/business/7624012.stm. Retrieved 2 April 2010. 
  16. ^ Boyd, Tony, "A Capital Idea", 21 October 2008
  17. ^ Regulatory review of the global financial crisis
  18. ^ City relief as Turner shuns revolution
  19. ^ FSA update on payment protection insurance (PPI)
  20. ^ Case for OFT investigation into payment protection insurance now overwhelming, says Citizens Advice
  21. ^ Citizens Advice urges swifter action on PPI
  22. ^ The FSA Northern Rock report: condemned in its own words, the regulator that missed the collapse The Times, 27 March 2008
  23. ^ FSA unveils plans for banks to seek secret emergency funding
  24. ^ Final report of the European Parliament's inquiry into the crisis of the Equitable Life Assurance Society European Parliament, 25 May 2007
  25. ^ Government disputes order to pay billions to Equitable policyholders
  26. ^ FSA allowed Northern Rock to keep breaking rules
  27. ^ FSA ends split-cap scandal investigation with no scalps, The Times, 22 May 2007
  28. ^ Regulator, heal thyself, The Economist, 20 January 2005
  29. ^ Freedom of Information Act 2000 Decision Notice FS50075781
  30. ^ Freedom of Information Act 2000 Decision Notice FS50094595
  31. ^ FSA staff will get bonuses despite overseeing financial crisis
  32. ^ Bank watchdog ‘failures’ pocket £20m in bonuses
  33. ^ Sir James Crosby resigns from FSA
  34. ^ FSA chairman Lord Turner: we got it wrong but we'll keep our bonuses
  35. ^ Pratley, Nils (26 February 2009). "Past failings catch up with FSA". The Guardian (London). http://www.guardian.co.uk/business/2009/feb/26/regulators. Retrieved 2 April 2010. 
  36. ^ Building societies face awful truth about boom-time spending spree
  37. ^ Freedom of Information request for disclosure of the letter from Sir Callum McCarthy to the Prime Minister FSA, 29 May 2007
  38. ^ FTSE firms will 'keep UK rules' BBC, 12 June 2006
  39. ^ Speech by SEC Chairman: 'The Hunters and the Stag': Why National Securities Regulators Must Collaborate In the Era of Global Investing 16 November 2006
  40. ^ Treating Customers Fairly and more principles based regulation Clive Briault, Managing Director for Retail Markets, FSA, 24 July 2006
  41. ^ FSA fines home shopping company £270,000 for PPI selling failures FSA, 20 December 2006
  42. ^ 'London loophole' leaves US at odds with FSA
  43. ^ How can this still happen?, The Guardian, 18 January 2003
  44. ^ FSA chiefs hit back at criticism, The Scotsman, 12 March 2003
  45. ^ Law and the Market: the Impact of Enforcement, John C. Coffee Jnr
  46. ^ FSA Struggles With Insider Trading That Doesn't Happen in U.K., Bloomberg, 11 June 2007
  47. ^ Measuring Market Cleanliness, FSA, March 2006
  48. ^ We'll crack down on insider dealing, FSA tells MPs
  49. ^ FSA admits defeat after HBOS probe
  50. ^ UK is weak on tackling white collar crime and short sellers, says HBOS chairman
  51. ^ Eight arrested in FSA insider dealing inquiry
  52. ^ FSA levies record sub-prime fine on Thinc
  53. ^ "Reforms 'would have eased crisis'". BBC News. 17 June 2010. http://news.bbc.co.uk/1/hi/business/10338178.stm. 

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