FSA replacement could be a "poor relation" without change in focus, says Treasury Committee

Outlining its recommendations for the new Financial Conduct Authority (FCA), the Treasury Committee said it could be the "poor relation" of the new financial institutions if it does not "put competition at the heart of the new regulatory framework".

"We need a fresh approach to regulation. The plain fact is that the FSA did not succeed in protecting consumers from spectacular regulatory failures," committee chair Andrew Tyrie said.

He added that the founding of the new institution was "the opportunity to create something better".

Promoting effective competition for the benefit of the consumer was, said the Committee, "closely in line" with the thinking of other bodies recently tasked with reforming the banking and financial services sector - including the Office of Fair Trading (OFT) and the Independent Commission on Banking (ICB).

The Government intends to set out its proposals to overhaul the system of financial services regulation in the UK for parliamentary debate in a draft Financial Services Bill shortly.

Chancellor of the Exchequer George Osborne first proposed setting up a new 'Consumer Protection and Markets Authority' (CPMA) as part of his substantial reform programme for the supervision of the UK's financial sector in 2010. The CPMA, now FCA, will regulate the conduct of every authorised financial firm providing services to consumers. It will also be responsible for ensuring the good conduct of retail and wholesale financial services firms.

Under the Financial Services Bill the FSA will be dismantled and most of the day-to-day regulation and supervision of banks, building societies and insurers to a new Prudential Regulation Authority (PRA) within the Bank of England. A new Financial Policy Committee (FPC), also within the Bank, will address wider 'macro-prudential' issues that may threaten economic and financial stability.

However, last month a Joint Committee of MPs and peers said that the Bank of England had to be made "suitably accountable" to Parliament and the public under the new Bill before it could be given such wide-ranging new powers.

The Treasury Committee made preliminary recommendations on the Government's proposals for the Financial Services Bill in February 2011. Its recommendations for the FCA included ensuring that its objectives and remit were clear and making competition the body's primary objective.

The FCA's objectives had already evolved considerably from the Government's original proposal of a conduct regulator with the primary objective of "ensuring confidence in financial services and markets, with particular focus on protecting consumers and ensuring market integrity", the Committee said. However its current form, consisting of "four tiers of objectives and duties" was "much more complex".

In its report, the Committee said that its view had not changed.

"Competition... will benefit consumers directly and indirectly. Not only will there be a greater choice available for consumers, but the transparency which effective competition brings should reduce the need for heavy-handed regulation. Greater competition should also help prevent firms becoming too big to fail", it said.

The FCA and financial services industry must also make better efforts to communicate with each other, in order to avoid the "shortcomings" associated with the current system of regulation.

"Too often we've heard that the FSA is aloof and unapproachable and that, in any case, firms are nervous about approaching them – we must break with that culture. Encouraging a greater level of engagement between firms and the regulator is in the consumer interest," Tyrie said.

The report also recommended different levels of protection to protect a "wide range" of consumers, from individual investors to major financial institutions.

The Treasury Committee also echoed the Joint Committee's concerns that the new regulator as proposed was not properly accountable to Parliament.

"A higher level of accountability to Parliament can help provide better quality regulation and avoid the problems that have plagued the FSA in recent times," Tyrie said.

The report recommended that the FCA's board publish full minutes of each meeting and be compelled to respond to requests for factual information and papers from Parliament.