Supervision and Enforcement by the FSA
Supervision and enforcement is at the heart of what a regulator does on a daily basis. The FSA's purpose is to protect the public, by ensuring that authorised firms comply with their Part IV Permission, and the rules set out in the Handbook. FSA has powers under s 138 which are set out in the Handbook.
This is a huge task: there are around 29,000 firms to regulate, and 165,000 individuals to supervise. The annual budget is around £492 million, which is provided by the firms. There are 4,000 staff.
Any regulator can never achieve 100% perfection, unless you work in a jurisdiction where you curtail business completely. Only through applying principles, and not rules (this is a contested point), can you achieve good regulation.
'Principles-based' regulation:
E.g. SYSC 3.1.1 in the Handbook - A firm must take reasonable care to establish and maintain such systems and controls as are appropriate to its business - It is up to the directors to comply with the principles. SYSC 3.1.6... These rules are vague.
The alternative to principles-based regulation would be detailed specifications of the type of systems and controls that must be in place: e.g. what position must the person who makes certain decisions have.
Principles-based regulation creates a culture within the authorised firms and the industry as a whole so they know what principles they are meant to comply with. They run their own business to comply with the principles. It would be extremely difficult to amend the Rulebook according to the ever-changing industry. There is no evidence that highly detailed prescription works in ensuring financial stability. There is a more open relationship between the financial services and the regulator in principles-based regulation.
However, there are disadvantages of principles-based regulation. It didn't prevent the insolvency of Northern Rock PLC; or the effective insolvency of RBS PLC, which was the biggest bank in the world by assets: it had $3.5 trillion. It failed in 2008 and was bailed out by the UK Government with £45.5 billion of equity capital, and £282 billion under the asset protection scheme. Before this, the FSA was seen across the world as a huge success.
Was it the principles-based regulation that was at fault? Or what it the manner in which the FSA approached its task? It was not the case that the FSA needed more power. The FSA has a risk-based style of regulation, where they assess the risk that an authorised firm poses to the FSA's statutory objectives. They assess the impact and likelihood of the risk. Firms of low impact are not subject to an individual risk assessment. If it is not low risk, it is assessed for firm risk and environmental risk. If they had done this properly in Spring 2007, it would have noticed Northern Rock. When the FSA has found these high-risk firms, their action must be proportionate to the risk prevented. The FSA is about talking, encouraging, negotiating etc; not about criminalising. The risk mitigation programme lasts between 12 and 36 months.
Firms comply with the FSA's regulatory programmes because the FSA can take specific enforcement action and remove their Part IV Permission, and they will then be criminal and their contracts unenforceable. The FSA can put disciplinary measures on firms, e.g. fines; get injunctions against firms, e.g. preventing the sales of a product; investigatory powers; give firms informal warnings; or even ban individuals from working at a firm.
In s 56(2) of the FSMA 2000, a prohibition order can be made against an individual who is not fit and proper for the role. They can bar individuals from particular or all regulated activities. The individual can appeal to the Tribunal against the penalty because they are being prevented from employment. The FSA also has the power, under s 45, on their own initiative, can vary or cancel the authorisation of a firm. This is very serious. Other disciplinary actions the FSA can undertake are financial penalties, public censures, press releases, and private warnings.
The enforcement process can be very serious to firms. It is designed to give businesses, firms and individuals the right to contest it. The first stage is a warning notice, issued to the firm, which exchanges representations with the FSA and seeks legal advice. Then the Independent Regulatory Decisions Committee meets in private. It is independent of the FSA. The firm can appeal to the Upper Tribunal, and they have a right of access to material that the FSA relied on. This is an open and fair process.
This is a huge task: there are around 29,000 firms to regulate, and 165,000 individuals to supervise. The annual budget is around £492 million, which is provided by the firms. There are 4,000 staff.
Any regulator can never achieve 100% perfection, unless you work in a jurisdiction where you curtail business completely. Only through applying principles, and not rules (this is a contested point), can you achieve good regulation.
'Principles-based' regulation:
E.g. SYSC 3.1.1 in the Handbook - A firm must take reasonable care to establish and maintain such systems and controls as are appropriate to its business - It is up to the directors to comply with the principles. SYSC 3.1.6... These rules are vague.
The alternative to principles-based regulation would be detailed specifications of the type of systems and controls that must be in place: e.g. what position must the person who makes certain decisions have.
Principles-based regulation creates a culture within the authorised firms and the industry as a whole so they know what principles they are meant to comply with. They run their own business to comply with the principles. It would be extremely difficult to amend the Rulebook according to the ever-changing industry. There is no evidence that highly detailed prescription works in ensuring financial stability. There is a more open relationship between the financial services and the regulator in principles-based regulation.
However, there are disadvantages of principles-based regulation. It didn't prevent the insolvency of Northern Rock PLC; or the effective insolvency of RBS PLC, which was the biggest bank in the world by assets: it had $3.5 trillion. It failed in 2008 and was bailed out by the UK Government with £45.5 billion of equity capital, and £282 billion under the asset protection scheme. Before this, the FSA was seen across the world as a huge success.
Was it the principles-based regulation that was at fault? Or what it the manner in which the FSA approached its task? It was not the case that the FSA needed more power. The FSA has a risk-based style of regulation, where they assess the risk that an authorised firm poses to the FSA's statutory objectives. They assess the impact and likelihood of the risk. Firms of low impact are not subject to an individual risk assessment. If it is not low risk, it is assessed for firm risk and environmental risk. If they had done this properly in Spring 2007, it would have noticed Northern Rock. When the FSA has found these high-risk firms, their action must be proportionate to the risk prevented. The FSA is about talking, encouraging, negotiating etc; not about criminalising. The risk mitigation programme lasts between 12 and 36 months.
Firms comply with the FSA's regulatory programmes because the FSA can take specific enforcement action and remove their Part IV Permission, and they will then be criminal and their contracts unenforceable. The FSA can put disciplinary measures on firms, e.g. fines; get injunctions against firms, e.g. preventing the sales of a product; investigatory powers; give firms informal warnings; or even ban individuals from working at a firm.
In s 56(2) of the FSMA 2000, a prohibition order can be made against an individual who is not fit and proper for the role. They can bar individuals from particular or all regulated activities. The individual can appeal to the Tribunal against the penalty because they are being prevented from employment. The FSA also has the power, under s 45, on their own initiative, can vary or cancel the authorisation of a firm. This is very serious. Other disciplinary actions the FSA can undertake are financial penalties, public censures, press releases, and private warnings.
The enforcement process can be very serious to firms. It is designed to give businesses, firms and individuals the right to contest it. The first stage is a warning notice, issued to the firm, which exchanges representations with the FSA and seeks legal advice. Then the Independent Regulatory Decisions Committee meets in private. It is independent of the FSA. The firm can appeal to the Upper Tribunal, and they have a right of access to material that the FSA relied on. This is an open and fair process.