Financial Services Authority

2008/9 Schools Wikipedia Selection. Related subjects: Business

The Financial Services Authority ("FSA") is an independent non-departmental public body and quasi-judicial body that regulates the financial services industry in the United Kingdom. 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), and maintains the Official list.

The FSA's Chairman and CEO are Callum McCarthy and Hector Sants.

History

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. It changed its name to the FSA on 28 October 1997 and now exercises statutory powers given to it by the Financial Services and Markets Act 2000, which 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 intermediaries from 14 January 2005.

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, three Managing Directors, and 11 non-executive directors (including a lead non-executive member, the Deputy Chairman) selected by, and subject to removal by, HM Treasury. 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.

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 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.

The FSA board

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

  • Callum McCarthy - Chairman
  • Deirdre Hutton - Deputy Chairman
  • Hector Sants - Chief Executive
  • Clive Briault - Managing Director of Retail Markets
  • James Crosby - Non-executive FSA Board member
  • Peter Fisher - Non-executive FSA Board member
  • Brian Flanagan - Non-executive FSA Board member
  • Karin Forseke - Non-executive FSA Board
  • John Gieve - Non-executive FSA Board member
  • David Kenmir - Managing Director, Regulatory Services, the FSA
  • David Miles - Non-executive FSA Board member
  • Michael Slack - Non-executive FSA Board
  • Hugh Stevenson - Non-executive FSA Board member

Activities that must be regulated by the FSA

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
• Arranging regulated home reversion plans
• Arranging regulated home purchase plans
• Managing investments
• Assisting in the administration and performance of a contract of insurance
• 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

Criticism of the FSA

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.

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. 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.

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 John Tiner, then Chief Executive of the FSA, to formally write to the Prime Minister asking him to either explain his opinions or retract them.

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; 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.

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." 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 ("a firm must pay due regard to the interests of its customers and treat them fairly"), rather than requiring the use of the sort of complex technical regulations that many in financial services find burdensome.

Enforcement cases

The FSA has been attacked for its supposedly weak enforcement program. 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. Likewise, since 2001, the FSA has only sought insider trading fines eight times against individuals and companies it regulates, despite the FSA's own studies indicating that unexplained price movements occurs prior to around 25 percent of all UK corporate merger announcements. It should be noted, however, that although aggregate evidence of potential insider dealing exists across global financial markets, cases are notoriously difficult to prove in court.

The FSA would contend that any criticism of its enforcement program is moot: unlike other foreign regulators, the FSA's regulation is supervision-led, not enforcement-led; rather than punishing firms for breaching regulations, FSA supervisors work closely with their firms to prevent breaches occurring in the first place, thus reducing the need for a large enforcement program.

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