I ask for a second time: Who watches the watchdog?
Yesterday, in the run up to Committee stage of the Financial Services and Markets Bill this Wednesday (January 25 2023), I discussed the competitiveness objective for the FCA and PRA.
Today, I want to talk about accountability and proportionality.
There seems to be a sense at the moment that one shouldn’t question or intrude into the work and workings of our financial services regulators, lest their independence be put asunder.
Let’s be clear, their independence is critical. Cardinal I would say. The key though is not to conflate independence with accountability. We must have sufficient scrutiny.
In making this point I am not suggesting that any of this comes from our regulators or indeed that they are doing anything other than the best they can in the circumstances.
The question for Parliament, as we delve into the detail of the Financial Services Bill, is how we best equip our regulators to operate independently, doing the best for Britain, attracting positive notice internationally and being amenable to rightsized Parliamentary and other scrutiny and accountability.
The Bill intends to significantly increase the powers of our regulators. This must be matched by increased accountability, not least to Parliament. A positive move in this respect is the formation of a sub-Committee of the Treasury Select Committee to consider financial services more regularly and in greater depth.
This could be greater strengthened through such measures as:
- More regular scrutiny of senior figures within the regulators on specific policy considerations and regulatory changes as well as the more general strategic discussions that currently take place.
- Further resourcing and expert staff and advisers to assist parliamentarians with the technical input that would be needed to properly hold the regulators to account.
- Inquiries of the committee should ensure that regulatory action is consistent with their statutory duties. This would give key stakeholders a parliamentary forum in which adjustments between different duties could be considered and debated in depth.
- Pre-legislative scrutiny of certain financial services regulation, including taking evidence from industry stakeholders, could also be a valuable role to allow for proper scrutiny of any major new regulatory proposals and complement the existing processes for scrutinising and approving secondary legislation within both Houses.
The Government brought forward a helpful new clause at Common’s Report stage of the Bill. Clause 37 gives Ministers a power to require the FCA and the PRA to publish information at any time and on any requested matters, in addition to the current requirement to provide an annual report.
While this is a welcome addition to the Bill, in demonstrating the Government’s recognition that the regulators should be expected to report on key aspects of their performance, as it stands, the Clause does raise some further questions.
It is unclear how the Government will decide the criteria for requesting a report and whether it will seek input from parliament, industry, and the new bodies that the Bill creates, such as the Cost Benefit Analysis Panels, in understanding where there is a demand for information. It is also unclear whether the Government will consider measures related to international competitiveness as well as those domestically focussed where the regulators have stated they will continue with their existing reporting approach.
In addition, it would be beneficial for the regulators to undertake detailed comparator analysis of our competitor jurisdictions and how we are shaping up.
At this stage the risk is that Clause 37 never reaches its potential in gaining traction in our overall regulatory approach. The Bill offers the opportunity to focus on accountability and proportionality and the positive interplay that can be created between those principles.
A significant issue currently is that not all financial products are the same, nor are the people purchasing, trading, transacting them. And yet, largely the regulator approaches these markets, the people, and the products as if they are. Greater proportionality could certainly result in greater consumer protection, not least as precious resources are better focussed and deployed. One size never fits all. As I said at Second Reading, if you are buying a pet or a plane should the regulator treat you the same?
Our cross-party House of Lords Regulators and Industry Committee also drew this conclusion stating: “It is vital that the concerns regarding the inflexible and sometimes unnecessarily complex processes require a broader reassessment of regulatory culture. There is a need for current rules to be applied more proportionately and efficiently and objective- setting for staff at all levels to support this…reviews should focus on the scope for more efficient and proportionate as well as less cumbersome and mechanistic engagement.”
There is an opportunity for the Bill to strengthen the existing proportionality duties of the financial regulators with an enhanced proportionality principle. A new ‘Proportionality Principle’ within the Bill would require the regulators to tailor their regulation and regulatory practices. Crucially, they would also have to report back to Parliament on how they have delivered on the principle.
As I said yesterday, I’d be delighted to hear from you on any interactions you have had with our financial regulators and how their vital work may be further assisted through this Bill. I have put down several amendments to this end and we will start debating them from Wednesday. How they will be received, well, I will feedback in these pages.