ACCA is the world's largest global accountancy body, with over 140,000 qualified members and over 400,000 students around the world. Our members work in public practice, industry, the public sector and financial services.
Over the past two years ACCA has published a number of policy documents on the financial crisis and its aftermath. These include our publication of last year, The Future of Financial Regulation, which incorporated a set of principles which we believe should be central to any effective regulatory system. This work influences our response to this current document.
We do not propose to comment on all of the detailed issues raised by the document. We confine our response to a number of what we see as the main issues of principle.
At the outset, we would make two over-riding points which strike us as being central to the radical overhaul of the UK's current regulatory regime which is being proposed.
First of all, we welcome the proposed creation of the Financial Policy Committee (FPC). As the document rightly says, a macro-prudential regulator of this kind was badly lacking in the run-up to the financial crisis, with the result that debt bubbles, trade imbalances, over-leveraged business models and failures in risk and governance built up. We trust the FPC will work effectively with its counterparts in the EU and globally.
Secondly, while we understand that the remedial action being taken now must be seen in the context of the international response to the financial crisis, we have made the point, in The Future of Future Regulation, that effective regulation of the financial sector does not necessarily mean more prescription and more intrusive supervision. We would hope that, under the new regime, the regulatory pendulum will not continue to swing between light-touch and heavy-touch but will focus instead on ensuring that core regulatory outcomes are identified and achieved.
We have reservations about some other elements of the regulatory overhaul being proposed.
(i) The new regulatory structure
The key proposal being made is to introduce two new regulatory bodies, the Prudential Regulation Authority (PRA) and the Consumer Protection and Markets Authority (CPMA), under the Bank of England to replace the current single regulator, the Financial Services Authority (FSA).
The assertion is made consistently throughout the document that a 'single monolithic' regulator, the FSA, was unable to cope with the range of issues it was expected to face given that its client base ranged from large investment banks to small high-street operations. We would agree that proper targeting and risk-based assessment was an issue although this challenge is equally faced by regulators in many fields.
But we are not persuaded by the argument that 'prudential and conduct of business regulation require different approaches and cultures and combining them in the same organisation is difficult'. We would agree that the FSA can be criticised for its failings in the run up to the crisis, and it struggled in the early months of the crisis. In the past two years, however, it has become a much tougher and more effective regulator and its programme of controls regarding persons with significant influence functions has been in our view impressive.
Asserting a problem is not the same as demonstrating it, and we do not believe that the document has put forward persuasive evidence of the failure of the FSA to combine effectively prudential and business conduct supervision.
There is no reason why, in our view, effective supervision of prudential rules such as compliance with capital adequacy requirements cannot be consistent with the taking of a wider view of a company's overall business approach and ethics. The two are more likely to be complementary - ACCA research has shown that businesses which place greater store by governance and ethical standards are more likely to be well-run in other aspects (ref CFO 2007 survey - see ACCA's Risk and Reward paper). An integrated regulatory approach covering both conduct of business issues and prudential compliance appears to us to be the more cohesive and effective approach.
Our concern is that, on a practical level, having two regulators supervising the same businesses from different angles is likely to cause problems for regulated entities which outweigh the theoretical advantages ascribed to the proposed new approach. On pages 26-28 this problem is conceded - the document says it will need 'a significant degree of co-operation and co-ordination by the authorities to ensure that they avoid duplicating efforts or cutting across each other's work. The need for such co-ordination will be particularly acute where action taken by one authority directly or indirectly interacts with the other'.
Given that the two bodies will be setting out their own objectives from scratch, and recruiting considerable numbers of new staff, there is the possibility of considerable overlap, at least in the initial stages. The document goes on to say that the acknowledged problem could be 'managed through supervisory colleges' - this seems a rather bureaucratic approach.
The splitting of the FSA into two entities can also be said to run counter to the logic of, for example, bringing the Inland Revenue and Customs & Excise together to form HMRC in 2005. The point of that very ambitious merger was to save costs and to minimise burdens on businesses which, it was generally agreed, were being overloaded with tax investigations from both bodies, often asking similar questions of the same staff. We can foresee a similar situation in reverse, where an institution has undergone one visit from PRA only to face another one from CPMA shortly afterwards.
In our paper The Future of Financial Regulation, we argue that the basis of effective regulation is that both sides - the regulator and the entity being regulated - should understand what regulation is trying to achieve and see the benefits of the system. We are not convinced the regime being proposed here will meet that test, and given that it is made clear that the industry will continue to meet the costs of these new regulators, this buy-in is particularly important.
(ii) The approach to regulation
Another reason given for the proposed overhaul is that "one of the reasons for regulatory failure leading up to the crisis was an excessive concern for competitiveness leading to a generalised acceptance of a 'light-touch' orthodoxy, and that lack of sufficient consideration or understanding of the impact of complex new financial transactions and products was facilitated by the view that financial innovation should be supported at all costs."
It seems to us rather harsh to blame the regulator for adopting this approach when it was being strongly promoted by the government of the day as the way forward, and a key reason for the UK's success in financial services. In a booming pre-credit crunch economy could the FSA realistically have been expected to tell the Government that it intended to introduce a heavier-handed policy?
If, however, integral to the new framework is that the regulator will be independent of government pressure to follow particular regulatory practices at different points in time then we would agree that this must be a good thing.
As the document rightly points out, since 2009 the FSA "implemented a more intrusive and pro-active approach to the regulation of its firms" once problems became apparent. If the new regulators are to succeed in their task of anticipating future and breaking issues, rather than being focused on 'fighting the last war', they will need to be sure of freedom from political interference. A clear statement to that effect would be beneficial.
(iii) The FSA's remit to combat financial crime
The FSA currently has a specific remit to fight financial crime. In 5.26 the paper mentions that the government is considering transferring responsibility for prosecuting criminal offences to another new agency. We would suggest that it would be beneficial if the Bank of England, as the new regulatory power, also had the specific objective of combating economic crime. Such a fundamental responsibility should be clarified and not sub-contracted out as that would run counter to the logic of centralising power in the Bank's hands.
(iv) The transfer of market regulation to the FRC
Lastly, we would like to comment on the mooted (para 5.21) creation of a powerful companies regulator, akin to the US Securities & Exchange Commission, by merging the existing Financial Reporting Council with the UK Listing Authority (currently part of the FSA). ACCA is aware that there are a number of different views on the matter, with the Stock Exchange (among others) opposing this development.
In ACCA's view, there could be clear advantages to such a move if the new regulator were given additional powers in the field of, for example, corporate governance. Currently the FRC has limited tools to deal with any companies which fail to adequately 'comply or explain' with the UK Code on Corporate Governance. More teeth for the regulator here might help ensure that the revised Code was being adhered to, given the importance of governance failures in the creation of the financial crisis (see ACCA's paper Corporate Governance and the Credit Crunch). In this regard, ACCA also notes that the FRC itself has set out a number of synergies relating to standards in accounting and auditing in relation to listings. ACCA notes these synergies. While this outcome could, however, also be achieved through a stronger, more independent UK Listing Authority, on balance we see the benefits as outweighing the potential disadvantages. Through combining the work of FRC and UKLA, it could offer a natural focus for enhanced accountability and good governance within UK capital markets. We believe this is appropriate to the needs of the UK economy in the wake of financial crisis and a desire to encourage stewardship and more responsibility among business and investors alike.
If the FRC did become responsible for market regulation, we do have concerns as to the likely impact of that development on the regulation of non-listed entities, and on the accountancy and actuarial sectors. Inevitably most of the focus of the new companies regulator would be on the listed sector and there would be a danger of regulation of those other, important sectors, losing focus. However, ACCA is of the view that now is the right time more clearly to regulate according to the scale and complexity of business concerns. The banking crisis has demonstrated clearly that governance of a large financial services operation with multiple subsidiaries and complex products requires a different approach - from board to regulators - than smaller entities. As we argue in our paper Restating the value of audit, we believe that consideration should be given to a stratification of audit in relation to scale and complexity.
For these reasons, ACCA believes the idea of bringing together the FRC and UKLA merits serious consideration.
Our comments on specific consultation questions are as follows:
1. Should the Financial Policy Committee have a single, clear, unconstrained objective relating to financial stability and its macro-prudential role, or should its objective be supplemented with secondary factors?
As mentioned above, ACCA supports the creation of the FPC and believes the lack of a single body with clear responsibilities for monitoring macro-economic and financial developments was largely responsible for the build-up of dangerous debt and credit bubbles. The tripartite system, as has been well-documented, failed due to the lack of clarity of responsibility between the various bodies involved.
Given this backdrop, we would be in favour of a clear objective relating to financial stability. It would be sufficient, we believe, to have some reference to 'having due regard to the requirements of other bodies in the new regulatory framework'. It is essential that the effectiveness of the FPC is not stymied by being subject to too many structural constraints.
4. Should the PRA have regard to the primary objectives of the CPMA and FPC?
The issues outlined in question 4 illustrate clearly the reasons why splitting the current regulator into two would create problems. To keep a cohesive approach to regulation, the PRA will be obliged to have regard to the primary objective of the CPMA (and FPC) but this begs the question of why it would not be simpler to retain one integrated regulator.
As for the current principles of good regulation, we agree that it should not be part of a regulator's specific role to encourage innovation and relative UK competitiveness. (Although it should do nothing to damage those - the whole point of effective regulation is to let good businesses succeed within an agreed regulatory framework) The danger, as the document points out, is that this can easily lead to a 'light-touch' regime, where regulation becomes weaker rather than targeted. Having said that, we do believe it is harsh to blame the existing regulator for its role in the lead up to the crisis, given that the government of the day was heavily promoting the regulator's approach.
On the issue of whether each regulator should be responsible for all decisions within their remit on issues like authorisations and permissions or whether an integrated model would be preferable - once again, this simply calls into question the logic of the entire exercise. If there are two regulators, they will both have to take on such a role for their area of responsibility and try their best to co-ordinate. We do not believe that this would inspire confidence.
10. Should the CPMA have regard to the stability of firms and the financial system as a whole, by reference to the primary objectives of the PRA and FPC?
Again, we find it hard to see how one regulator can be tasked with 'ensuring market integrity' when another has the task of checking whether major individual firms are not in danger of collapsing and causing collateral damage in the market by serious over-leveraging for example. But given the proposed structural overhaul, then the CPMA would have to have regard to the objectives of both PRA and FPC.
Most of the current FSMA principles of good regulation seem to us to be worth carrying through to the CPMA. As discussed above, protecting innovation and the relative international competitiveness of the UK should not be explicit goals of a regulator. But promoting fair competition and upholding diversity by, for example, ensuring that mutuals are not disadvantaged relative to other institutions seems to us a fair objective.
The accountability mechanisms as outlined for the CPMA seem appropriate. Ditto the funding arrangements.
17. Do you agree with the proposed merger of the UKLA with the FRC, as a first step towards creating a companies regulator under BIS?
As stated above, we can see arguments for and against this suggestion. Inevitably most of the focus of the new companies regulator would be on the listed sector and there would be a danger of regulation of those other, important, sectors losing focus. However, ACCA believes that now is the right time more clearly to regulate according to the scale and complexity of business concerns. The banking crisis has demonstrated clearly that governance of a large financial services operation with multiple subsidiaries and complex products requires a different approach - from board to regulators - than smaller entities. As we argue in our paper Restating the value of audit, we believe that consideration should be given to a stratification of audit in relation to scale and complexity.
For these reasons, ACCA believes the idea of bringing together the FRC and UKLA merits serious consideration.
A decision to transfer powers to the FRC would, of course, have to be taken on the basis that the FRC would be able to satisfy compliance with the IOSCO principles, especially those which provide that
- The responsibilities of the regulator should be clear and objectively stated.
- The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.
To conclude, our principal comment on the proposals is that we consider that the scheduled transfer of powers from the FSA to the Bank could be achieved through the adoption of an integrated approach to the regulation of institutions. We believe that duplication of resources and functions must be avoided and the compliance obligations of entities rationalised in the interests of good and effective regulation.