The Treasury Select Committee (TSC) has called for the Financial Conduct Authority (FCA) to divest its enforcement powers to a new regulatory body, as part of its report on the HBOS scandal.
As a result of the proposed separation of powers, the FCA would be responsible for financial supervision, while a new body would take control of enforcement of financial regulations.
In its review of HBOS collapse, the TSC said the FCA’s predecessor, the FSA, had shown a number of failings in the level of dialogue and coordination between its supervision and enforcement divisions.
This, it said, raised questions about how best to manage the relationship between these two regulatory functions, and that these questions remained relevant for the FCA.
The TSC said a Parliamentary Commission on Banking Standards in 2013 (PCBS) had also identified the relationship between the supervision and enforcement functions as an area of concern, due to ‘inherent tension’ between the two.
Andrew Tyrie was chair of the PCBS at the time, and the then Chancellor, George Osbourne, chose not to act on this recommendation.
Now Osbourne has been replaced by Philip Hammond, and the TSC, which Tyrie has been head of since June 2015, has called for the government to reconsider the proposal.
Going back to the HBOS case, the TSC noted the failures during the financial crisis were largely due to prudential failings. The bulk of enforcement staff and expertise lies within the FCA, which has no role in prudential supervision of banks.
As a result the TSC recommended an independent enforcement function that could and should sit equidistant between the Prudential Regulatory Authority (PRA) and FCA.
A second reason the TSC added was: “The current system, whereby the same organisation supervises, applies and prosecutes the law is outdated and can be construed as unfair.”
A separation of the two would increase confidence in the impartiality of regulatory enforcement decisions, and facilitate objective scrutiny of supervisors’ actions by enforcement staff.
One final reason the Committee gave for a potential split is that it would allow the FCA, the PRA and the enforcement body, to enjoy much greater clarity over their objectives. “There is a danger, especially with the FCA, that its multitude of objectives and initiatives are leading to regulatory overload. An FCA with fewer objectives, and a single separate body responsible for enforcement, would probably result in better accountability and better outcomes” the TSC added.
As a result of these reasons, the Committee concluded the case for structural separation had merit, and it said it expected the Treasury to appoint an independent reviewer to re-examine the case for a separate body.