Our society today demands that every organisation, department, and person – no matter how high their position – is responsible to someone else. As individuals we are held to account by our own personal relationships and the law of this land. The police enforce the law and if we break that law we will be tried through the judicial system.
In financial services we have a similar structure whereby the government has formed the Financial Services Authority (FSA), the laws and rules have been formulated by Treasury legislation and written by the regulator. Whereby a separate body will try individual transgressions in society, it will be the FSA to whom the broker must answer if they are deemed to have broken the rules.
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To some people this makes the FSA all-powerful – judge, jury and executioner if you will. Who polices the police? By the way, the answer is not: ‘I dunno – the coastguard?’ as Homer Simpson once memorably uttered. The question is often raised regarding who the FSA is accountable to? Of course, ultimately it is the government. But, how does the government, and specifically the Treasury, gather the information to ensure the regulator is carrying out its role economically, efficiently and effectively?
Regulator efficiency
In June 2006 the Treasury asked the National Audit Office (NAO) to conduct a review of the FSA focusing on those three issues listed above – its economy, its efficiency and its effectiveness. Last month, the NAO published its findings on how the FSA had used its resources in five main areas of its operation: performance management; working with other UK regulators; international influencing and representation; financial crime; and the financial capability of consumers.
In terms of performance management, the NAO acknowledges the tools the FSA has developed to ‘manage its performance’ and meet its objectives, but says it needs to focus more on the cost of these activities. The FSA is implementing an activity based costing system and the NAO is keen to see this finalised quickly so that it can ‘record the total cost of individual projects, the cost of supervising larger firms and estimate the generic cost of supervising smaller firms’. In a year when the FSA’s budget has breached the £300 million barrier for the first time, and the burden on brokers intensifies, this seems like a reasonable request.
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The NAO says the FSA has ‘good and improving working relationships with other UK regulators’. It praises particularly the good working relationship between the FSA and the Office of Fair Trading (OFT), plus acknowledges the ongoing work with the Pensions Regulator, the Financial Reporting Council, as well as the Bank of England and the Treasury itself.
The relationship with the OFT is of most interest to brokers given the work both have carried out in the payment protection insurance (PPI) market, and the NAO stresses that both organisations should continue to avoid duplication of work in areas, such as PPI, where there may be cross-over. AMI believes it is important they continue to work together to ensure a clear message is sent to PPI firms.
The review says the FSA has committed ‘significant senior level resource’ to influencing international developments and again praised the effectiveness of the FSA’s work in this area. It does however feel that the FSA could ‘sharpen up’ its communication of this work regarding the strategy it is undertaking and the contribution it makes.
In the European arena especially the FSA is deemed to be influential although the NAO feels it should explain more clearly ‘the respective responsibilities of the FSA and Treasury’ and its own strategy ‘for influencing and representation’ in the EU. With 70 per cent of regulation coming from Europe this is a vital message for FSA to take to ensure firms are aware of what might be coming from Brussels and how the FSA is shaping the debate.
Suggestions and outcomes
The NAO review has a number of suggestions for the FSA to step up its focus on financial crime – currently it ‘devotes under 10 per cent of its resources to its financial crime objective’. The review suggests the FSA should examine its risk assessments and see if ‘greater weight should be given to smaller firms than at present’.
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Finally, in terms of financial capability the FSA is called ‘a world leader’ but the NAO stressed that this needs to be built on in terms of focusing on ‘the costs of low financial capability’ and ‘developing a medium-term strategy for its financial capability programme beyond 2011’. The FSA is planning to spend a substantial amount of money – £90 million – in this area between 2006 and 2011, and the NAO has asked the FSA to look at quantifying ‘the costs to society and the financial services market of low levels of financial capability to help determine long-term plans’. AMI also agrees that ‘measurable goals’ for improvements should be set.
The NAO report identifies that the FSA needs to increase its focus on demonstrating outcomes for consumers and markets, plus there needs to be more focus on the cost and benefits of projects. AMI feels it is important that the FSA is placed under the same degree of scrutiny that the firms it regulates are subject to, and therefore welcome such reviews. Indeed, we feel they should happen more regularly and have called for the NAO review to take place every two years. It is only through these reviews that the FSA will become fit for purpose and fit for the markets it regulates.
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