Financial Services Authority

Financial Services Authority

The Financial Services Authority ("FSA") is an independent non-governmental body, quasi-judicial body and a company limited by guarantee that regulates the financial services industry in the United Kingdom. Its main office is based in Canary Wharf, London, with another office in Edinburgh. When acting as the competent authority for listing of shares on a stock exchange, it is referred to as the [ UK Listing Authority] (UKLA), and maintains the Official list.

The FSA's Chairman and CEO are Callum McCarthy (to be replaced by Lord Turner of Ecchinswell from September 2008 [ [ Lord Turner confirmed chairman of FSA in its hour of need] ] ) and Hector Sants.


The FSA has the legal form of a company limited by guarantee (number 01920623). It was incorporated on 7 June 1985 under the name of The Securities and Investments Board Ltd (SIB) at the instigation of the UK Chancellor of the Exchequer, who is the sole member of the company and who delegated certain statutory regulatory powers to it under the then Financial Services Act 1986. After a series of scandals in the 1990s culminating in the collapse of Barings Bank, there was a desire to bring to an end the self-regulation of the financial services industry and to consolidate regulation responsibilities which had been split amongst multiple regulators. The SIB revoked the recognition of The Financial Intermediaries, Managers and Brokers Regulatory Association (FIMBRA) as a Self-Regulatory Organisation (SRO) in June 1994 subject to a transitional wind-down period to provide for continuity of regulation whilst members moved to the Personal Investment Authority (PIA), which in turn was subsumed.

The SIB changed its name to the FSA on 28 October 1997 and now exercises statutory powers given to it by the Financial Services and Markets Act 2000, which replaced the earlier legislation and came into force on 1 December 2001. In addition to regulating banks, insurance companies and financial advisers, the FSA has regulated mortgage business from 31 October 2004 and general insurance (excluding travel insurance) intermediaries from 14 January 2005.

Statutory objectives

The Financial Services and Markets Act imposed four statutory objectives upon the FSA:

* market confidence: maintaining confidence in the financial system
* public awareness: promoting public understanding of the financial system;
* consumer protection: securing the appropriate degree of protection for consumers; and
* reduction of financial crime: reducing the extent to which it is possible for a business carried on by a regulated person to be used for a purpose connected with financial crime

Regulatory principles

The statutory objectives are supported by a set of principles of good regulation which the FSA must have regard to when discharging its functions. These are:

* efficiency and economy: the need to use its resources in the most efficient and economic way.
* role of management: a firm’s senior management is responsible for its activities and for ensuring that its business complies with regulatory requirements. This principle is designed to guard against unnecessary intrusion by the FSA into firms’ business and requires it to hold senior management responsible for risk management and controls within firms. Accordingly, firms must take reasonable care to make it clear who has what responsibility and to ensure that the affairs of the firm can be adequately monitored and controlled.
* proportionality: The restrictions the FSA imposes on the industry must be proportionate to the benefits that are expected to result from those restrictions. In making judgements in this area, the FSA takes into account the costs to firms and consumers. One of the main techniques they use is cost benefit analysis of proposed regulatory requirements. This approach is shown, in particular, in the different regulatory requirements applied to wholesale and retail markets.
* innovation: The desirability of facilitating innovation in connection with regulated activities. For example, allowing scope for different means of compliance so as not to unduly restrict market participants from launching new financial products and services.
* international character: Including the desirability of maintaining the competitive position of the UK. The FSA takes into account the international aspects of much financial business and the competitive position of the UK. This involves co-operating with overseas regulators, both to agree international standards and to monitor global firms and markets effectively.
* competition: The need to minimise the adverse effects on competition that may arise from the FSA's activities and the desirability of facilitating competition between the firms it regulates. This covers avoiding unnecessary regulatory barriers to entry or business expansion. Competition and innovation considerations play a key role in the FSA's cost-benefit analysis work. Under the Financial Services and Markets Act, the Treasury, the Office of Fair Trading and the Competition Commission all have a role to play in reviewing the impact of the FSA's rules and practices on competition.

Accountability and management

The FSA is accountable to Treasury Ministers, and through them to Parliament. It is operationally independent of Government and is funded entirely by the firms it regulates through fines, fees and compulsory levies. Its Board consists of a Chairman, a Chief Executive Officer, a Chief Operating Officer, two Managing Directors, and 11 non-executive directors (including a lead non-executive member, the Deputy Chairman) selected by, and subject to removal by, HM Treasury. Among these, the Deputy Governor for Financial Stability of the Bank of England is an "ex officio" Board member. This Board decides on overall policy with day-to-day decisions and management of the staff being the responsibility of the Executive. This is divided into three sections each headed by a Managing director and having responsibility for one of the following sectors: retail markets, wholesale and institutional markets, and regulatory services.

Its regulatory decisions can be appealed to the Financial Services and Markets Tribunal.

HM Treasury decides upon the scope of activities that should be regulated, but it is for the FSA to decide what shape the regulatory regime should take in relation to any particular activities.

The FSA is also provided with advice on the interests and concerns of consumers by the Financial Services Consumer Panel [ [ Financial Services Consumer Panel - Our work] ] . This panel describes itself as "An Independent Voice for Consumers of Financial Services". Members of the panel are appointed and can be dismissed by the FSA and emails to them are directed to FSA staff. The Financial Services Consumer Panel will not address individual consumer complaints.

Retail consumers

The FSA has a priority of making retail markets for financial products and services work more effectively, and so help retail consumers to get a fair deal. Over several years, the FSA has developed work to raise levels of confidence and capability among consumers. Since 2004, this work is described as a national strategy [ [ “Financial capability in the UK", Financial Services Authority, 2004, ISBN 1-84518-176-X] ] on building financial capability in the UK. This programme is comparable to financial education and literacy strategies in other OECD countries, including the United States.

The FSA board

The FSA is governed by a Board appointed by HM Treasury.

* Callum McCarthy - Chairman, formerly Chief Executive of OFGEM
* Sir James Crosby - Deputy Chairman, Fellow of the Faculty of Actuaries
* Hector Sants - Chief Executive, formerly CEO EMEA Credit Suisse First Boston
* Clive Briault - Managing Director of Retail Markets, the FSA (resigned)
* David Kenmir - Managing Director, Regulatory Services, the FSA
* Carolyn Fairbairn - Non-executive FSA Board member, Director of Strategy and Development at ITV plc
* Peter Fisher - Non-executive FSA Board member, Managing Director of BlackRock
* Brian Flanagan - Non-executive FSA Board member, formerly a Vice President of Mars Inc
* Karin Forseke - Non-executive FSA Board, formerly CEO of Carnegie Investment Bank AB
* Sir John Gieve - Non-executive FSA Board member, Deputy Governor, Financial Stability of the Bank of England
* Professor David Miles - Non-executive FSA Board member, Managing Director and Chief UK Economist at Morgan Stanley
* Michael Slack - Non-executive FSA Board, Director of the British Insurance Brokers' Association
* Hugh Stevenson - Non-executive FSA Board member, Chairman of the FSA Pension Plan Trustee Ltd

Activities that must be regulated by the FSA

Companies involved in any of the following activities must be regulated by the FSA.

• Accepting deposits
• Issuing e-money
• Effecting or carrying out contracts of insurance as principal
• Dealing in investments (as principal or agent)
• Arranging deals in investments
• Arranging regulated mortgage contracts
• Arranging regulated home reversion plans
• Arranging regulated home purchase plans
• Managing investments
• Assisting in the administration and performance of a contract of insurance
• Safeguarding and administering investments
• Sending dematerialised instructions
• Establishing etc collective investment schemes
• Establishing etc personal pension schemes
• Establishing etc stakeholder pension schemes
• Advising on investments
• Advising on regulated mortgage contracts
• Advising on regulated home reversion plans
• Advising on regulated home purchase plans
Lloyd's market activities
• Entering into and administering a funeral plan
• Entering into and administering a regulated mortgage contract
• Entering into and administering a home reversion plan
• Entering into and administering a home purchase plan
• Agreeing to do most of the above activities

Actions relating to the 2007/2008 credit crunch crisis

The FSA has been held by some observers to be weak and inactive in allowing irresponsible banking to precipitate the credit crunch which commenced in 2007, and which has involved the shrinking of the UK housing market, increasing unemployment (especially in the financial and building sectors), the public acquisition of Northern Rock in mid-February 2008, and the takeover of HBOS by Lloyds TSB. On the 18th of September 2008, the FSA announced a ban on short selling to reduce volatility in difficult markets. [cite web |url= |title=FSA statement on short positions in financial stocks]

Criticism of the FSA

The FSA rarely takes on wider implication cases. For example, thousands of consumers have complained to the Financial Ombudsman Service about payment protection insurance and bank charges. However, despite determining that there was a problem in the selling of PPI [ FSA update on payment protection insurance (PPI)] [ Case for OFT investigation into payment protection insurance now overwhelming, says Citizens Advice] [ Citizens Advice urges swifter action on PPI] , the FSA has taken effective action against very few firms in the case of PPI and it was the Office of Fair Trading (OFT) that finally took on the wider implications role in the case of bank charges. The FSA and the FOS have staff placed within their co-organisation in order to advise on wider implication issues. It is surprising, therefore, that so little action has taken place.

The FSA in an internal report in to the handling of the collapse in confidence of customers of the Northern Rock Building Society describe themselves as indequate [ [ The FSA Northern Rock report: condemned in its own words, the regulator that missed the collapse] The Times, 27 March 2008] . It's reported that in order to prevent such a situation occurring again, the FSA is considering allowing banks to delay revealing to the public when it gets in to financial difficulties. [ FSA unveils plans for banks to seek secret emergency funding]

The FSA was criticised in the final report of the European Parliament's inquiry in to the crisis of the Equitable Life Assurance Society. [ [ Final report of the European Parliament's inquiry in to the crisis of the Equitable Life Assurance Society] European Parliament, 25 May 2007] . It is widely reported that the long awaited Parliamentry Ombudsman's investigation in to the government's handling of Equitable Life is equally scathing of the FSA's handling of this case [ Government disputes order to pay billions to Equitable policyholders]

The FSA ignored warning signals from Northern Rock building society and continued to allow the bank to operate without a risk mitigation programme for months before the bank's collapse. [ [ FSA allowed Northern Rock to keep breaking rules] ]

The FSA has been criticised by some within the IFA community for increasing fees charged to firms and for the perceived retroactive application of current standards to historic business practices.Fact|date=October 2007

FSA regulation is also often regarded as reactive rather than proactive.Fact|date=October 2007 In 2004-05 the FSA was actively involved in crackdowns against financial advice firms who were involved in the selling of split-cap investment trusts and precipice bonds, with some success in restoring public confidence.Fact|date=October 2007. However, despite heavily criticising split-cap investment trusts, in 2007 it suddenly abandoned it's investigation [ [ FSA ends split-cap scandal investigation with no scalps] , The Times, 22 May 2007] Where it has been rather poorer in its remit is in actively identifying and investigating possible future issues of concern, and addressing them accordingly.Fact|date=October 2007

There have also been some questions raised about the competence of FSA staff. [ [ Regulator, heal thyself] , The Economist, 20 January 2005]

The composition of the FSA board appears to consist mainly of representatives of the Financial Services industry and career civil servants. There are no representatives of consumer groups. As the FSA was created as a result of criticism of the self-regulating nature of the financial services industry, having an independent authority staffed mainly by members of the same industry could be perceived as not providing any further advantage to consumers.

Although, one of the prime responsibilities of the FSA is to protect consumers, The FSA has been active in trying to ensure company's anonymity when they have been involved in misselling activity, preferring to side with the companies that have been found guilty rather than consumers. [ Freedom of Information Act 2000 Decision Notice FS50075781] [ Freedom of Information Act 2000 Decision Notice FS50094595]

More Principles Based Regulation

There were suggestions that the FSA stifles the UK financial services industry through over-regulation, following a leaked letter from Prime Minister Tony Blair during 2005. This incident led Callum McCarthy, then Chief Executive of the FSA, to formally write to the Prime Minister asking him to either explain his opinions or retract them. [ [ Freedom of Information request for disclosure of the letter from Sir Callum McCarthy to the Prime Minister] FSA, 29 May 2007]

The Prime Minister's criticisms were viewed as particularly surprising since the FSA's brand of light-touch financial regulation has typically been popular with banks and financial institutions in comparison with the more prescriptive rules-based regulation employed by the US Securities and Exchange Commission and by other European regulators; [ [ FTSE firms will 'keep UK rules'] BBC, 12 June 2006] by contrast, most critiques of the FSA accuse it of instigating a regulatory "race to the bottom" aimed at attracting foreign companies at the expense of consumer protection. [ [ Speech by SEC Chairman:'The Hunters and the Stag': Why National Securities Regulators Must Collaborate In the Era of Global Investing] 16 November 2006]

The FSA counters that its move away from rules-based regulation towards more principles-based regulation, far from weakening its consumer protection goals, can in fact strengthen them: "Our Principles are rules. We can take enforcement action on the basis of them; we have already done so; and we intend increasingly to do so where it is appropriate to do so." [ [ Treating Customers Fairly and more principles based regulation] Clive Briault, Managing Director for Retail Markets, FSA, 24 July 2006] As an example, the enforcement action taken in late 2006 against firms mis-selling payment protection insurance was based on their violation of principle six of the FSA's Principles for Business ("a firm must pay due regard to the interests of its customers and treat them fairly"), rather than requiring the use of the sort of complex technical regulations that many in financial services find burdensome. [ [ FSA fines home shopping company £270,000 for PPI selling failures] FSA, 20 December 2006]

Enforcement cases

The FSA has been attacked for its supposedly weak enforcement program. [ [ 'London loophole' leaves US at odds with FSA] ] [ [,,876917,00.html How can this still happen?] , The Guardian, 18 January 2003] [ [ FSA chiefs hit back at criticism] , The Scotsman, 12 March 2003] For example, while FSMA prohibits insider trading, the FSA has only successfully prosecuted two insider dealing cases, both involving defendants who did not contest the charges. [ [,%20Law%20and%20the%20Market.pdf Law and the Market: the Impact of Enforcement] , John C. Coffee Jnr] Likewise, since 2001, the FSA has only sought insider trading fines eight times against individuals and companies it regulates, [ [ FSA Struggles With Insider Trading That Doesn't Happen in U.K.] , Bloomberg, 11 June 2007] despite the FSA's own studies indicating that unexplained price movements occurs prior to around 25 percent of all UK corporate merger announcements. [ [ Measuring Market Cleanliness] , FSA, March 2006] After the HBOS Insider trading scandal, The FSA informed MPs on 6 May 2008 that they planned to crack down on inside trading more effectively and that the results of their efforts would be seen in 2008/09 [ [ We'll crack down on insider dealing, FSA tells MPs] ] On 22 June, the Daily Telegraph reported that the FSA had wrapped up their case in to HBOS insider trading and no action would be taken [ [ FSA admits defeat after HBOS probe] ] . On 26 June, the HBOS Chairman said that "There is a strong case for believing that the UK is exceptionally bad at dealing with white-collar crime". [ [ UK is weak on tackling white collar crime and short sellers, says HBOS chairman] ] On 29 July 2008, however, it was announced that the Police acting on information supplied by the FSA had arrested workers at UBS and JP Morgan Cazenove for alleged insider dealing and that this was the 3rd case within a week. [ [ Eight arrested in FSA insider dealing inquiry] ] A year after the subprime mortgage crisis had made global headlines, The FSA levied a record £900,000 on an IFA for selling subprime mortgages [ [ FSA levies record sub-prime fine on Thinc] ]


For criticism of the slogan "principles-based" regulation, see [ Lawrence A. Cunningham, A Prescription to Retire the Rhetoric of 'Principles-Based Systems' in Corporate Law, Securities Regulation and Accounting (2007)] . For a comparative look at "principles-based" regulation in the United Kingdom and Canada, see [ Cristie L. Ford, New Governance, Compliance, and Principles-Based Securities Regulation (2007)] .

External links

* [ FSA website]
* [ European Parliament Temporary Committee of Inquiry into the Crisis of the Equitable Life Assurance Society]
* [ The Herald: Northern Rock to be nationalised ("18/02/2008")]
* [ Telegraph: Nationalising Northern Rock is right ("18/02/2008")]
* [ BBC News: City watchdog revises probe rules ("19/07/2005")]
* [ BBC News: FSA under fire after Blair speech ("06/06/2005")]

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