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FCA sets out steps for ‘when things go badly wrong’

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  • 18/04/2013
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FCA sets out steps for ‘when things go badly wrong’
The Financial Conduct Authority (FCA) has set out the steps it will follow in the event of a regulatory failure.

The FCA’s predecssor, the Financial Services Authority (FSA), was heavily criticised for a lack of transparency over its investigation into the regulatory failings that allowed the collapse of HBOS and RBS during the financial crisis.

In a paper out today the FCA said it has “substantially revised” the FSA’s approach to regulation and learned from failings in the past.

“We have designed a forward-looking judgement-based approach to make sure that regulatory outcomes improve.

“A judgement-based approach may mean we get some things wrong, but this does not have to mean a regulatory failure, if the proper approach was followed, and without the benefit of hindsight,” it said.

The FCA is required to carry out an investigation into regulatory faillings and produce a report in two instances.

Firstly this is when events have occurred in relation to a regulated person or others which indicated a significant failure to secure appropriate consumer protection, or had or could have had a significant adverse effect on the regulator’s integrity or competition objectives.

Secondly, it is in events which might not have occurred, or the adverse effect might have been reduced, but for a serious failure in the system established by the Financial Services and Markets Act 2000 or the operation of that system.

Independence will be built into the process of conducting an investigation and producing a report, the FCA said.

If necessary, parts of the investigation may be outsourced. Where investigations are not outsourced, they will be undertaken by (unconflicted) staff not part of the original events, and managed by areas not part of the frontline.

Independent reviewers may be part of the process if necessary.

Appropriate expertise, whether from internal or external resources, will be applied to the investigation.

The FCA said it expects firms and others to engage with it in an open and co-operative way when it is conducting investigations.

Where necessary or appropriate, it may also use the formal powers
available to it to gather information, it said.

Should it be necessary, those subject to potential criticism will be given an opportunity to make representations in response before the report is finalised and sent to the Treasury.

The FCA board will approve any report before sending it to the Treasury for publication. 

Given the changing regulatory landscape, including the change in the scope of the FCA to regulate Consumer Credit from April 2014, and the continuing development of the FCA’s strategy to meet its competition objective and duty, the regulator expects to review this policy after a year of the FCA’s operation

However the FCA has said it will not be able to prevent or control everything that causes harm to consumers and financial markets, as the costs of any attempt to do so would be prohibitive and such an approach would stifle innovation and competition, which would not be in the interests of consumers.

In addition not every instance of market failure resulting in consumer detriment will constitute a ‘regulatory failure’ within the terms of the statutory test.

Martin Wheatley, chief executive of the FCA said:”A regulatory system that removed all risk would be prohibitively expensive and could stifle innovation and competition.

“The instances where we investigate and report to Treasury will be significant events and serious failures, when things have gone badly wrong.”

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