Rushed financial service reforms will result in another defective regulatory framework, MPs warn

In a further report on the Government's plans for the Financial Conduct Authority (FCA), which is due to take over the financial conduct regulatory role of the existing Financial Services Authority (FSA) from 2013, the Treasury Committee highlighted its four remaining areas of concern about the new body. These included a lack of sufficient accountability processes, and the need for a more thorough analysis of the costs and benefits of new regulation, it said.

"The structure and objectives of the FCA will sit at the heart of this new regulatory system. Unless sufficient time is given to getting these reforms right we could end up, once again, with a defective regulatory framework," said committee chair Andrew Tyrie.

The FCA is one of the new bodies established by the draft Financial Services Bill, which will dismantle the FSA and hand most of the day-to-day regulation of 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, while the FCA will handle conduct and compliance issues. It will also take over consumer credit regulation, including the responsibility for so-called 'payday loans', from consumer protection regulator the Office of Fair Trading (OFT).

The Financial Services Bill Committee is currently accepting evidence on the bill and will report its findings on 22 March 2012. The Government has previously said that it is aiming for the proposals to become law by the end of this year, with the new system in operation from early 2013.

In its previous report on the structure of the FCA, the Committee warned that the new body ran the risk of becoming the "poor relation" of the new bodies if it did not focus on encouraging competition in financial services and a greater level of engagement with firms, consumers and stakeholders. A higher level of accountability to Parliament would also help provide a "better quality" of regulation, it said.

Accountability was the focus of its new report, as the Committee said that it was "not enough" for a body with the FCA's powers to merely match the "weak, pre-existing accountability arrangements of the FSA".

For the new body to be sufficiently accountable to Parliament and ultimately to the public, the Committee must be able to request retrospective reviews of its work, Tyrie said. Its board should also be responsible for responding to requests for factual information and papers from Parliament, and for publishing full board minutes of each meeting. In addition, the FCA's chief executive should be subject to pre-appointment scrutiny by the Committee.

"It was only as a result of intensive Treasury Committee pressure that the FSA published an account of the UK's biggest ever banking failure. Without a statutory base for Parliamentary involvement the temptation will always exist for the relevant authorities to try and brush matters under the carpet," Tyrie said.

He also called for "periodic cost-benefit reviews" of any new regulatory burdens to prevent increasing costs, which often seemed to be passed onto consumers, from "rising inexorably". "Too often the FSA has treated cost-benefit analyses on new regulations as a box-ticking exercise," he said.

The report also proposed that the FPC should be granted the power of veto over the FCA in areas relating to financial stability, rather than the PRA as suggested by the Government.

"Financial stability is the responsibility of the FPC. If anyone is to wield a veto over the FCA, it should therefore be the FPC and not the PRA," Tyrie said.

Last month the Treasury Committee reiterated its concerns about the Bank of England's accountability to Parliament when it takes on the FSA's regulatory function. The internal Oversight Committee, which the Bank has proposed setting up as a non-executive subcommittee of its current governance structure, falls "well short" of the independent Supervisory Board the Committee had proposed, it said.