RegulationJul 6 2021

Treasury committee warns govt on Fos interference with regulation

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Treasury committee warns govt on Fos interference with regulation

The Treasury committee has urged the government to consider how the decision-making processes of the Financial Ombudsman Service would interact with the future regulatory framework for the Financial Conduct Authority.

In its report 'The Future Framework for Regulation of Financial Services', published today (July 6), the committee said it has received written submissions urging that the Fos should be included in its framework review. 

The committee explained that given the aim of the Treasury’s consultation was to create a more coherent framework for how financial services are regulated, the Treasury should consider how the decision-making processes of the Fos would interact with the future regulatory framework for the FCA.

It said: “If parliament itself is to play a role in setting the regulatory principles of the FCA, it needs to be satisfied that the principles which it has set the FCA are not being undermined by decisions by the Financial Ombudsman Service.”

The Finance and Leasing Association (FLA) had told the committee how Fos decisions can set precedents that override Financial Conduct Authority principles.

It also warned its members were concerned that Fos decisions were “inconsistent” and did not seem to align with FCA rules. 

The report stated: “The Financial Ombudsman Service is an important part of the FSMA framework in delivering consumer redress. 

“Fos decisions sometimes set a precedent where the FCA has not previously considered an issue or where its principles-based regulation has not been prescriptive.

"As the Fos makes its decisions based on the individual merits of each case, this creates the risk that further ‘regulation’ is created without taking into account wider considerations.”

Trade body UK Finance also told the MPs that “where cases before the Fos have wider implications or would set precedents, there should be a more consultative and collaborative decision making process with effective rights of appeal.”

Decisions by the Fos form a critical part of the consumer element of the regulatory environment for financial services in the UK. 

The committee also said it believes that effective scrutiny of regulatory proposals should remain in place.

Regulatory proposals are currently put out for consultation, enabling industry stakeholders, civil society groups as well as parliament to put forward views.

It stated: "We believe that effective scrutiny of regulatory proposals should be carried out through a targeted approach.

"Each new proposal made by the Financial Conduct Authority or by the Prudential Regulatory Authority under the future financial services regulatory framework would be put out for consultation.

"Industry stakeholders and civil society groups would have an opportunity to put forward views, as would parliament, both through the select committee system and through the work of individual members of either house.

"If any matter of public interest were to arise that we deemed sufficiently important to scrutinise in more detail, or indeed challenge, we would do so."

However, the report added the committee did not see a clear need for the creation of a new committee or independent body to scrutinise financial regulations.

“It believes that a more efficient use of parliamentary resources would be to use the structures already available in both houses.”

The Treasury’s consultation had stated that the proposed blueprint for the future regulatory framework involved adapting the Financial Services and Markets Act model to create a more coherent and “democratically accountable framework for the development and application of future UK financial services regulation”.

However, the consultation made no reference to the Fos.

Post-Brexit world

In the report, the committee considered the future of financial services following the Brexit transition period and examined how financial regulations should be set and scrutinised by parliament.

The committee agreed with the Treasury the EU financial services rules that were on-shored during the process of leaving the EU should be moved into the regulators' rule books.

Keeping rules in statute could require parliament to amend or pass new legislation every time regulators wished to make changes, which would be “resource intensive and impractical”, it said.

The report explained that the independence of regulators from political interference was one of the key aspects of UK financial services regulation and it did not believe there was compelling evidence for legislating to allow ministers the absolute right to see regulators’ policy proposals before they are published for consultation. 

It said: “We understand the need for Treasury ministers to be well informed of the regulators’ policy intentions as a matter of routine.

"However, we have not been provided with compelling evidence to justify changing the law to allow ministers the absolute right to see financial services regulators’ policy proposals before they are published for consultation, as opposed to the current arrangements whereby significant interaction between ministers and regulators happens informally as a matter of routine. 

“By doing so, the perception of regulatory independence from government could be damaged. Regulators must continue to be free to choose what they share with the Treasury in this respect.”

The committee also said while it acknowledged there may be a role for the government to use ‘activity based’ principles to instruct regulators’ approach to specific business sectors, it recommended the government was “sparing” in this respect. 

It was concerned the creation of too many ‘activity based’ principles would add a further layer of issues to which regulators would have to have regard.

This comes as last month, the economic secretary to the Treasury pledged transparency around the government's dealings with financial services regulators post-Brexit, as he said a rules-based approach was here to stay. 

In a Treasury committee evidence session (May 26) for its inquiry into the future of financial services, John Glen was asked where the industry was headed from a regulatory point of view, and whether the UK would take a common laws approach - as historically has been - or whether it will be like the EU, which is a lot more rules-based. 

Commenting on the report today, Mel Stride MP, chairman of the Treasury committee, said: “As the UK forges a new post-Brexit future, the government’s approach to financial services regulation will be critical. It needs to get the balance right between effective scrutiny and ensuring that the regime is nimble and light touch where possible.

“It is not a good use of parliamentary time for MPs to be required to amend or pass new legislation every time regulators wish to make changes. Our regulators are well-equipped and should play a key role in designing the rules they enforce.”

Stride added: “Retaining the independence of our financial services regulators from political interference is essential to ensuring the UK remains a world-leading financial centre.”

sonia.rach@ft.com

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