Reform in haste, repent at leisure warns UK Treasury Committee

The UK government’s House of Commons Treasury Committee has responded sceptically to plans to overhaul the UK financial industry regulatory system by 2012.

The Committee notes that the proposals for the UK to move to a ‘twin-peaks’ system with two regulators, the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA), by 2012 are “ambitious” and cautions it “is concerned about the risks involved in such an ambitious timetable”.

In a statement, Andrew Tyrie, chair of the Committee, underlined the body’s support for the reform, while also cautioning: “It is vital to maintain the momentum for reform, but there is no point in flawed change.”

Tim Kirk, partner and national head of financial services at accountancy BDO, agrees it is unclear whether enough time remains for regulatory reorganisation. “It’s hard to know at this stage,” he says. “I think if we continue to see some of the levels of [staff] attrition they are having, that would raise some concerns in their ability to execute the change programme.”

The Committee also expressed concerns about the amount of power that would be concentrated within the Bank of England, specifically its ability to act independently of the UK government when the stability of the financial system is threatened. “There are sound reasons for insulating economic policy decisions from short-term political pressures,” says the Committee. “However, the report underlines the importance of democratic accountability.”

Nonetheless, it also states that the actions of the Bank of England so far in liaising with the Treasury Committee have been “exemplary” and reflect a commitment from the Bank “to achieve accountability to parliament”.

The Committee also raises questions about the policies and aims of the individual regulators. With regard to the PRA, which falls under the onus of the Bank of England, it questions the tolerance it would have for the failure of institutions. Hector Sants has said in the past that the priority must be to move towards a system in which failures can occur without demolishing the financial system as a whole. However, the Committee says: “Suggestions that the Authority would have a ‘low tolerance’ for the failure of systemically important institutions imply the opposite.”

Kirk agrees it is unclear whether failure of institutions will be accepted, particularly given the political environment. “I think there’s a challenge for politicians and society to contemplate the possibility of a large bank failing and people queuing around the corner, looking poor on the six o’clock news,” he says. “I suspect there’s a lack of real, explicit consensus on the level of failure they’re going to tolerate.”

The FCA also comes under fire from the Committee, which warns that branding the regulator as a consumer champion would be “inappropriate, confusing and potentially dangerous”. It warns that the role of the FCA “requires a balance between preventing abusive behaviour and ensuring regulation does not impose excessive costs and restrictions”.
To suggest the role of the FCA is that of a consumer champion is misleading, the Treasury Committee argues.

Kirk makes the point that the label of consumer champion is not a fair reflection of what the FCA should work on. “Consumers do require a degree of protection in the market because they need so much information and power, but I think, fundamentally, the role of the regulator should be to promote competition and to make sure customers don’t get treated unfairly because of a huge difference of power and information,” he says. “That is quite different to being an active advocate or an extension of consumer rights.”

It was in response to similar criticisms that the Treasury moved in mid-February to re-brand the FCA from its original moniker of Consumer Protection and Markets Authority in an attempt to more directly reflect the focus of the body. However, it remains unclear exactly how much the remit of the FCA has changed, with the latest papers stating it will remain a consumer champion by “putting consumer outcomes at the centre of the regulatory process”.