Financial Services Authority
On the basis of evidence from Government papers, academic commentary and legislative materials, is there consensus in the UK on the aims to be achieved by the regulation of providers of banking and financial services in the UK and on the balance to be struck between competing aims?
The near-collapse of some UK banks in 2007/8 highlighted the failures of the Financial Services Authority. Northern Rock’s collapse was due to ‘inadequate application of the regulatory regime.’ Subsequently, the Financial Services Act 2010 made some amendments to the Financial Services and Markets Act (FSMA) 2000 with regards to the objectives of the regulatory Financial Services Authority (the Authority) and provided for any further financial difficulties in the Banking Act 2009. The statutory aims set out in the FSMA 2000 are not exclusive: the reality contains a much broader scope. The general objectives of regulation in the UK are ensuring the banks and financial services are accountable; that costs are proportionate to the benefits; that the process is transparent and that fairness is created for all. These are largely provided for in the Authority’s ‘Principles of Good Regulation’. The Authority’s statutory objectives, as set out in the FSMA, are slightly less vague. Generally, there is agreement on the importance of each legislative and political aim and principle set out in different materials: what is contested is how competing aims are balanced against each other.
Public awareness
Public awareness is no longer one of the Authority’s statutory objectives as of 2010, yet is still an important regulatory objective nonetheless. The Authority has since been required to set up the Consumer Financial Education Body. The CFEB must create a balance between their objectives in enhancing public awareness and regarding the importance of market confidence and financial stability. Vice versa, the Authority must take into account to the importance of public awareness and the CFEB’s advice that concerns public awareness. Public awareness can in some ways contradict the market confidence objective; ‘financial panic’ brought on by experts informing the public about problems with the UK financial situation has been considered capable of knocking market confidence and causing financial crisis in the UK economy. Thus, public awareness and market confidence can be viewed as competing aims of UK regulation.
Market confidence
As aforementioned, one of the Authority’s objectives is to maintain confidence in the UK financial system. This confidence is not exclusive to the citizens of the UK, but also aims at making the ‘efficient, orderly and fair markets… internationally attractive and sustainable.’ The Authority in 2000 expressed that their market confidence objective did not imply ‘zero-failure’, as doing so would be burdensome for firms, stifling for competition and innovation, and uneconomic from a cost-benefit perspective, thus contradicting the other broader objectives of the Authority. It is likely that there was little opposition to an expression that market confidence was not a ‘zero-failure’ policy at the time when the UK seemed to be viewed internationally as financially successful, yet following the banking crisis in 2007/8, there is likely to be much more emphasis on restoring market confidence than there was on safeguarding it twelve years ago.
Consumer protection
The Authority aims to protect consumers – particularly retail consumers – by reducing risk. The Authority uses language in its January 2000 paper that implies reluctance on imposing consumer protection responsibilities on itself, stating that ‘consumers should take responsibility for their decisions’, and that the Authority aims to ‘facilitate innovation… by avoiding unreasonable… restrictions.’ Higher consumer protection could be considered unnecessary state intervention, compromising the concept of a free market. There is reluctance in imposing higher levels of regulation because of examples where moral hazard arises: where ‘too big to fail’ firms are more likely to undertake high-risk high-return operations, being aware that the Government will protect consumers/investors and bail the firms out if there were to be a negative outcome of the risk, and therefore not taking full responsibility for the actions they have taken. Thus the Authority places limits on the consumer protection objective in order to hold both businesses and individuals accountable for their own decisions.
Financial stability
Another objective, given to the Authority in the Financial Services Act 2010, is to contribute to the protection and enhancement of the stability of the UK financial system. The purpose of this was to strengthen the Authority, but the Coalition Government then established a separate regulatory agency, namely the Financial Stability Committee, within the Bank of England to ensure that the objectives are ‘not the subject of compromises within a single regulator.’ The granting of power back to the Bank of England, which will have effect upon the passing of the Financial Services Regulation Bill, takes the UK regulatory system to pre-2000: the Bank of England, which is in reality linked to the Treasury and therefore has more political influence than the Authority, which only grants the Treasury residual responsibility, would have a stronger role and regulation would once more be sectoral. The objective of this as mentioned above would be to remove ‘compromises’ within the Authority. Compromises are bound to occur in order to ensure that equally important objectives are achieved: the only instance in which compromises would not be necessary would be if one objective were substantially more important than another. One can conclude that following the banking crisis of 2007/8; the Government may identify financial stability as the most important aim of financial regulation. Indeed, the Banking Act 2009, which is the only relevant, selective and precise legislation regarding one of the issues that arose out of the financial crisis, provides the Authorities with tools to deal with banks that get into financial difficulties, implying what area of regulation ought to gain emphasis.
Reducing financial crime
Under the FSMA 2000, the Authority is also responsible for reducing financial crime. The Authority again tries to limit its responsibility for this, stating that ‘deterring money laundering should not be just a concern for the regulator… [it] should be of concern to all UK citizens and… firms.’ In delegating responsibility to consumers and companies to identify financial crime, the Authority implies that its efforts are less concerned with criminal activity and more on error and misjudgement. However, there is a lot of focus on financial crime in the high impact banks as highlighted in last month’s FSA newsletter, which stated that they would be monitoring a group of large banks. This suggests that although reducing financial crime is important, it is only truly of concern to the Authority if the crime is of large consequence: the Authority has planned methods to ‘harness market forces… to provide incentives for firms and their customers to behave in ways that will reduce the need for direct regulatory action.’ Therefore, reducing financial crime is an objective that can be outweighed by other, higher-impact aims, and is mainly emphasised as a key aim due to its impact on market confidence and consumer protection.
Regulatory principles
The regulatory principles, highlighted in the FSMA, are incorporated in the main objectives. The CFEB advises the Authority on how best to achieve regulatory transparency. The Authority is also efficient, with its ‘one-stop’ regulation and supervision. It takes a ‘cost-benefit point of view’ in determining the level of which the Authority’s regulation infringes the free market. The underlying principle of many of the regulatory aspects regards fairness: consumer protection and public awareness are prime examples of fairness being a key principle of the objectives.
Conclusion
There is consensus on the aims of regulation in the UK. The importance of public awareness, market confidence, consumer protection, financial stability and the reduction of financial crime appear undisputed, and the principles of good regulation are intertwined with each objective. What is contested is whether or not they are balanced. What one can conclude is that there does in fact seem to be an imbalance: financial stability is a crucial aim of the FSA, above consumer protection, market confidence, public awareness, and financial crime. Each below this compete: market confidence and public awareness seem to contradict each other in some aspects; whilst with regards to the prevention of financial crime and consumer protection, the regulatory authorities appear to delegate responsibility to the consumers and businesses themselves.
The near-collapse of some UK banks in 2007/8 highlighted the failures of the Financial Services Authority. Northern Rock’s collapse was due to ‘inadequate application of the regulatory regime.’ Subsequently, the Financial Services Act 2010 made some amendments to the Financial Services and Markets Act (FSMA) 2000 with regards to the objectives of the regulatory Financial Services Authority (the Authority) and provided for any further financial difficulties in the Banking Act 2009. The statutory aims set out in the FSMA 2000 are not exclusive: the reality contains a much broader scope. The general objectives of regulation in the UK are ensuring the banks and financial services are accountable; that costs are proportionate to the benefits; that the process is transparent and that fairness is created for all. These are largely provided for in the Authority’s ‘Principles of Good Regulation’. The Authority’s statutory objectives, as set out in the FSMA, are slightly less vague. Generally, there is agreement on the importance of each legislative and political aim and principle set out in different materials: what is contested is how competing aims are balanced against each other.
Public awareness
Public awareness is no longer one of the Authority’s statutory objectives as of 2010, yet is still an important regulatory objective nonetheless. The Authority has since been required to set up the Consumer Financial Education Body. The CFEB must create a balance between their objectives in enhancing public awareness and regarding the importance of market confidence and financial stability. Vice versa, the Authority must take into account to the importance of public awareness and the CFEB’s advice that concerns public awareness. Public awareness can in some ways contradict the market confidence objective; ‘financial panic’ brought on by experts informing the public about problems with the UK financial situation has been considered capable of knocking market confidence and causing financial crisis in the UK economy. Thus, public awareness and market confidence can be viewed as competing aims of UK regulation.
Market confidence
As aforementioned, one of the Authority’s objectives is to maintain confidence in the UK financial system. This confidence is not exclusive to the citizens of the UK, but also aims at making the ‘efficient, orderly and fair markets… internationally attractive and sustainable.’ The Authority in 2000 expressed that their market confidence objective did not imply ‘zero-failure’, as doing so would be burdensome for firms, stifling for competition and innovation, and uneconomic from a cost-benefit perspective, thus contradicting the other broader objectives of the Authority. It is likely that there was little opposition to an expression that market confidence was not a ‘zero-failure’ policy at the time when the UK seemed to be viewed internationally as financially successful, yet following the banking crisis in 2007/8, there is likely to be much more emphasis on restoring market confidence than there was on safeguarding it twelve years ago.
Consumer protection
The Authority aims to protect consumers – particularly retail consumers – by reducing risk. The Authority uses language in its January 2000 paper that implies reluctance on imposing consumer protection responsibilities on itself, stating that ‘consumers should take responsibility for their decisions’, and that the Authority aims to ‘facilitate innovation… by avoiding unreasonable… restrictions.’ Higher consumer protection could be considered unnecessary state intervention, compromising the concept of a free market. There is reluctance in imposing higher levels of regulation because of examples where moral hazard arises: where ‘too big to fail’ firms are more likely to undertake high-risk high-return operations, being aware that the Government will protect consumers/investors and bail the firms out if there were to be a negative outcome of the risk, and therefore not taking full responsibility for the actions they have taken. Thus the Authority places limits on the consumer protection objective in order to hold both businesses and individuals accountable for their own decisions.
Financial stability
Another objective, given to the Authority in the Financial Services Act 2010, is to contribute to the protection and enhancement of the stability of the UK financial system. The purpose of this was to strengthen the Authority, but the Coalition Government then established a separate regulatory agency, namely the Financial Stability Committee, within the Bank of England to ensure that the objectives are ‘not the subject of compromises within a single regulator.’ The granting of power back to the Bank of England, which will have effect upon the passing of the Financial Services Regulation Bill, takes the UK regulatory system to pre-2000: the Bank of England, which is in reality linked to the Treasury and therefore has more political influence than the Authority, which only grants the Treasury residual responsibility, would have a stronger role and regulation would once more be sectoral. The objective of this as mentioned above would be to remove ‘compromises’ within the Authority. Compromises are bound to occur in order to ensure that equally important objectives are achieved: the only instance in which compromises would not be necessary would be if one objective were substantially more important than another. One can conclude that following the banking crisis of 2007/8; the Government may identify financial stability as the most important aim of financial regulation. Indeed, the Banking Act 2009, which is the only relevant, selective and precise legislation regarding one of the issues that arose out of the financial crisis, provides the Authorities with tools to deal with banks that get into financial difficulties, implying what area of regulation ought to gain emphasis.
Reducing financial crime
Under the FSMA 2000, the Authority is also responsible for reducing financial crime. The Authority again tries to limit its responsibility for this, stating that ‘deterring money laundering should not be just a concern for the regulator… [it] should be of concern to all UK citizens and… firms.’ In delegating responsibility to consumers and companies to identify financial crime, the Authority implies that its efforts are less concerned with criminal activity and more on error and misjudgement. However, there is a lot of focus on financial crime in the high impact banks as highlighted in last month’s FSA newsletter, which stated that they would be monitoring a group of large banks. This suggests that although reducing financial crime is important, it is only truly of concern to the Authority if the crime is of large consequence: the Authority has planned methods to ‘harness market forces… to provide incentives for firms and their customers to behave in ways that will reduce the need for direct regulatory action.’ Therefore, reducing financial crime is an objective that can be outweighed by other, higher-impact aims, and is mainly emphasised as a key aim due to its impact on market confidence and consumer protection.
Regulatory principles
The regulatory principles, highlighted in the FSMA, are incorporated in the main objectives. The CFEB advises the Authority on how best to achieve regulatory transparency. The Authority is also efficient, with its ‘one-stop’ regulation and supervision. It takes a ‘cost-benefit point of view’ in determining the level of which the Authority’s regulation infringes the free market. The underlying principle of many of the regulatory aspects regards fairness: consumer protection and public awareness are prime examples of fairness being a key principle of the objectives.
Conclusion
There is consensus on the aims of regulation in the UK. The importance of public awareness, market confidence, consumer protection, financial stability and the reduction of financial crime appear undisputed, and the principles of good regulation are intertwined with each objective. What is contested is whether or not they are balanced. What one can conclude is that there does in fact seem to be an imbalance: financial stability is a crucial aim of the FSA, above consumer protection, market confidence, public awareness, and financial crime. Each below this compete: market confidence and public awareness seem to contradict each other in some aspects; whilst with regards to the prevention of financial crime and consumer protection, the regulatory authorities appear to delegate responsibility to the consumers and businesses themselves.