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Phoenix - Relevant Papers - Pre-legislative scrutiny



Financial Conduct Authority: Report on the Government response

On 10 January 2012, the House of Commons' Treasury Committee (the Committee) published its report on the proposed Financial Conduct Authority (FCA). On 20 February 2012, the Committee received the Government’s response to its report. The Committee has now published a report which comments on the Government’s response.

The report provides commentary on some of the more important issues and is intended to assist the House of Commons as the Financial Services Bill is considered and amended. The issues that the report provides commentary on are:

  • The FCA’s strategic and operational objectives.
  • Competition law powers.
  • Accountability.
  • PRA veto over the FCA.

In the report the Committee also reiterates an earlier concern that it believes that the Government’s proposals are being rushed.

View Financial Conduct Authority: Report on the Government response, 27 February 2012

Response from the Court of the Bank of England on accountability recommendations

On 17 January 2012, the Court of the Bank of England (the Bank) published its response to the recommendations made by the House of Commons’ Treasury Committee (the Treasury Committee) and the Joint Committee on the draft Financial Services Bill on the Bank’s accountability.

Key points in the response are:

  • The new responsibilities for the Bank in the area of financial stability will need to be accompanied by new accountability mechanisms.
  • That an oversight committee be established with direct access to the policymaking processes and papers in the Bank.
  • The role of the oversight committee should be to assess whether the processes employed in making financial stability policy decisions have considered a full range of options and have taken reasonable account of the relevant information, analysis, differing views amongst policymakers, and challenges from outside the Bank.
  • The oversight committee should commission reviews from outside experts concerning the performance of the Bank’s financial stability policymakers.
  • The forthcoming crisis management Memorandum of Understanding between the Bank and the Treasury should establish a clear framework for coordination. It should also establish a power for the Chancellor, when public funds are at risk and there is a serious threat to financial stability, to direct the use of the Bank’s tools of crisis management.
  • The Bank supports the Treasury Committee’s recommendation that future Governors of the Bank be appointed for a single eight-year term.

The Treasury Committee also issued a short press release on the Bank’s response. The Treasury Committee’s chairman, Andrew Tyrie MP‚ stated:

“The Bank of England’s response requires careful consideration. The Treasury Committee intends to produce a short report in time for consideration by the Chancellor before he publishes the Financial Services Bill at the end of the month. Whilst supporting some of the Committee’s recommendations, on several key points the Court of the Bank of England falls short of what is needed. These points will be set out in the Committee’s report.”

View Response from the Court of the Bank of England on the recommendations made by the Treasury Committee and the Joint Committee on the draft Financial Services Bill on the accountability of the Bank of England, 17 January 2012

View Bank of England’s proposals for reform fall short of what is needed, claims Treasury Committee Chairman, 17 January 2012

Treasury Select Committee Report on the Financial Conduct Authority

On 13 January 2012, the House of Commons’ Treasury Select Committee (the Committee) published a report on the proposed new Financial Conduct Authority (FCA), to advise the Government in preparation for the drafting and publication of the Financial Services Bill (the Bill) in early 2012.

The report began with an analysis of how the FCA fits into the proposed regulatory structure, followed by a consideration of its objectives. It then looks at the proposed lines of accountability for the FCA and makes suggestions for improvement. The report then outlines the FCA’s place in the wider regulatory architecture, including how the FCA should coordinate with the proposed new Prudential Regulation Authority (PRA) and the EU. Finally, the report looks at the proposed new powers of the FCA, such as early warning notices and product intervention.

Some of the key conclusions in the report are:

  • Competition should be central to the culture of the FCA.
  • The Government should re-examine the need for the FCA’s strategic objective. The report states that the strategic objective, as set out in the draft Bill, may lead the FCA to seek to enhance confidence in markets at times when that confidence may be misplaced. There is also the risk of confusion due to there being multiple tiers of objectives and duties.
  • It is not necessary to transfer the competition powers of the Office of Fair Trading (OFT) to the FCA. Instead, the Committee prefers an approach whereby the FCA can refer issues of competition law to the OFT.
  • The FCA should develop more reliable estimates of its own cost effectiveness.
  • The Government should examine the scope for differentiating between retail consumers and wholesale consumers in the draft Bill.
  • There should be improved communication between the FCA and the industry.
  • The draft Bill does not provide for adequate accountability, or a framework for sufficient scrutiny of the FCA. Therefore, the draft Bill should be revised to ensure that the FCA is properly accountable to Parliament and that the necessary tools are available.

The report is accompanied by a press release which contains a summary of the background to the report, as well as comments from the chair of the Committee, Andrew Tyrie MP.

View Treasury Select Committee Report on the Financial Conduct Authority, 13 January 2012

View Treasury Select Committee Report on the Financial Conduct Authority: Volume 2: Additional Written Evidence, 13 January 2012

View Press release: Treasury Select Committee publishes report into the Financial Conduct Authority, 13 January 2012

Report of the Financial Services Bill Joint Committee

In June 2011, the Government published a consultation document and white paper, A new approach to financial regulation: the blueprint for reform, which included a draft of the Financial Services Bill (the Bill). The Bill contained the core provisions needed to give effect to the Government's regulatory reform proposals and a joint committee of both Houses of Parliament was appointed to conduct pre-legislative scrutiny. On 19 December 2011, the the joint committee on the draft Bill published its much anticipated report which also includes comments on the recommendations proposed by the Independent Commission on Banking (ICB).

The joint committee argues that successful regulation depends more on regulatory culture, focus and philosophy than on structure. However, it states that without significant changes to clarify objectives, allocate appropriate powers and create proper accountability the Bill as currently drafted will not guarantee the changes that need to be made to regulatory culture. In light of this the report makes a number of recommendations concerning the reforms including:

  • In order to align its objectives with its own activities and with international best practice, the Bill should explicitly give the Prudential Regulation Authority (PRA) a micro-prudential objective alongside its concern with avoiding risks to the whole financial system. When supervising PRA regulated persons, the primary objective should remain to reduce risks to the stability of the UK financial system. The secondary objective should be to reduce potential costs of failure to the Financial Services Compensation Scheme (FSCS), taxpayer funds and customers. However, neither objective will require the PRA to become a zero failure regulator.
  • In relation to the PRA's insurance objective there is legal uncertainty regarding the definition of the "reasonable expectations" of policyholders. The PRA should be responsible for ensuring that with-profits consumers are treated fairly, but the Treasury must find a way to redraft the Bill to achieve this end without using this phrase.
  • That the initial designation of PRA regulated activities is a key factor in understanding the intentions and scope of the Bill and that a draft of the Order must be made available when the Bill is introduced into Parliament.
  • That the regulation of market infrastructure should sit with the PRA and, as is the case for other PRA-regulated firms, the Financial Conduct Authority (FCA) will have an important role in regulating conduct issues and it is important that the legislation makes this clear.
  • The FCA's strategic objective should be amended to focus on promoting fair, efficient and transparent financial services markets that work well for users.
  • The FCA should have a clear role in promoting competition and its operational objective of "promoting efficiency and choice" should be replaced by "promoting competition, efficiency and choice for the benefit of consumers".
  • That the requirement to consult before disclosing the fact that a warning notice has been issued should be removed from the draft Bill. However, the FCA should have a discretion to weigh relevant factors and decide which sets of interests listed in the Bill are best served by disclosing or not disclosing that a warning notice has been issued. The FCA should also publish guidance as to how it will exercise its discretion in respect of disclosing that a warning notice has been issued.
  • Both the PRA and the FCA should seek to ensure that the public understand when a banking group is not subject to UK prudential regulation. Where deposits are not covered by the FSCS the regulators should require banks to make this clear with prominent warnings in branches and on websites.
  • Whilst accepting that a joint rule book for the PRA and FCA may not be possible, a draft Memorandum of Understanding on co-ordination should be available when the Bill is introduced into Parliament.

In relation to the ICB's final recommendations the report:

  • Urges the Treasury to confirm that legislation will be subject to pre-legislative scrutiny in Parliament.
  • Argues that it should be for Parliament to define the ring-fence for retail banking and that this definition may need adjusting from time to time and therefore not be enshrined in primary legislation but in secondary legislation.
  • Calls for the legislation enacting the recommendations on ring-fencing to be introduced "speedily" and into Parliament during the 2012-13 session in order to give banks a clear framework to work to.
  • Believes that there is a good case for allowing banks to build up capital over time.
  • Calls on the Government to think carefully about imposing on banks headquartered in the UK capital requirements relating to their overseas subsidiaries over and above that agreed internationally.

View Draft Financial Services Bill - Draft Financial Services Bill Joint Committee report, 19 December 2011

Uncorrected oral evidence

The Joint Committee (the Committee) on the draft Financial Services Bill has published uncorrected transcripts of oral evidence presented to it. The transcripts state that neither the witnesses nor members of the Committee have had the opportunity to correct the record.  The transcripts are not yet an approved formal record of the proceedings.  

The Committee has published transcripts from the following sessions:

  • This transcript contains evidence given by Hector Sants (CEO, the FSA and CEO designate, the PRA) Lord Turner (Chairman, the FSA), Martin Wheatley (CEO designate, the FCA) and Margaret Cole (interim Managing Director, the FSA’s Conduct Business Unit) - 10 November 2011.
  • This transcript contains evidence given by Andrew Procter (Global Head of Government and Regulatory Affairs, Deutsche Bank), Sally Dewar (Managing Director, International Regulatory Risk, JP Morgan) and Robert Charnley (Head of Regulatory Controllers, EMEA and Asia, Goldman Sachs) - 8 November 2011.
  • This transcript contains evidence given by Sir Mervyn King (Governor, BoE), Paul Tucker (Deputy Governor for Financial Stability, BoE) and Andrew Bailey (Deputy Chief Executive designate, the PRA)- 3 November 2011.
  • This transcript contains evidence given by Stuart Gulliver (Chief Executive, HSBC), Bob Diamond (Chief Executive, Barclays) and Stephen Hester (Chief Executive, RBS) - 1 November 2011.
  • This transcript contains evidence given by Sir John Gieve (Deputy Governor, BoE, 2006-09) - 27 October 2011.
  • This transcript contains evidence given by Ms Maggie Craig (Director of Conduct Regulation, ABI) and Hugh Savill (Director of Prudential Regulation and Taxation, ABI) - 25 October 2011.
  • This transcript contains evidence given by Mr Russell Collins (Chairman, FSPP), Mr Guy Matthews (Chairman, FSA Smaller Businesses Practitioner Panel), Mr Adam Phillips (Chairman, FSCP), Sir Anthony Holland (Complaints Commissioner), Mr Mark Lyonette, (Chief Executive, ABCUL), Mr Martin Shaw (Chief Executive, Association of Financial Mutuals), Mr Jeremy Palmer (Head of Financial Policy, BSA), Mr Steve Gay (Director General, Association of Independent Financial Advisers),  Mr Nick Cann (Chief Executive, Institute of Financial Planning) and Andre Villeneuve, (Chairman, International Regulatory Strategy Group, City of London) - 20 October 2011.
  • This transcript contains evidence given by Mr Peter Beales (Managing Director, Policy Division, AFME), Mr Mark Florman (Chief Executive, BVCA), Mr Richard Saunders (Chief Executive, IMA), Mr Ian Cornwall (Chief Executive, Association of Private Client Investment Managers and Stockbrokers) and Mr David Paterson (Head of Corporate Governance, National Association of Pension Funds) - 18 October 2011.
  • This transcript contains evidence given by Sir John Vickers - 13 October 2011.
  • This transcript contains evidence given by Rt Hon Alistair Darling (MP), Professor Charles Goodhart (CBE), Professor Eilis Ferran and Professor John Kay - 11 October 2011.
  • This transcript contains evidence given by Dr Malcolm Edey (Assistant Governor, Financial System, the Reserve Bank of Australia), Christine Farnish (Chair, Consumer Focus), Peter Vicary-Smith (Chief Executive, Which?), Gillian Guy (Chief Executive, Citizens Advice), Martin Lewis (, Paul Lewis (freelance financial journalist), Mark Neale (Chief Executive, FSCS), Natalie Ceeney (Chief Executive and Chief Ombudsman, FOS) and Tony Hobman (Chief Executive, Money Advice Service) - 15 September 2011.
  • This transcript contains evidence given by Mr Andrea Enria (Chairman, EBA) - 13 September 2011.
  • This transcript contains evidence given by Mr Charles Dumas (Chairman, Lombard Street Research Ltd) and Ms Gillian Tett (US Managing Editor, Financial Times) - 8 September 2011.

Written evidence

On 15 September 2011, the Joint Committee published the written evidence received in relation to the draft Financial Services Bill. The written evidence contains 63 submissions, including evidence from:

  • Association of British Insurers.
  • Bank of England.
  • Financial Ombudsman Service.
  • Financial Services Authority.
  • Investment Management Association.

View Joint Committee - Written evidence