Who are the FSA?

The Financial Services Authority (FSA) is an independent body which works to the statutory powers of the Financial Services and Markets Act 2000. It is a company limited by guarantee and financed by the financial services industry. The FSA Board consists of a Chairman, a Chief Executive Officer, three Managing Directors and nine non-executive directors (including the Deputy Chairman). The Board, appointed by the Treasury, sets overall policy; the Executive is responsible for day-to-day decisions and staff management.

The FSA is accountable to Ministers of the Treasury and thence to Parliament, but it operates independently of the Government and is funded by the firms that it regulates. Open and transparent, the FSA provides full information for firms, consumers and others about is objectives, policies, plans and rules.

The Act mentioned above gives the FSA four statutory objectives:

• Market confidence: to give consumers confidence in the financial system
• Public awareness: to help promote understanding of the financial system to the public
• Consumer protection: to secure an appropriate level of financial protection for consumers
• Reduction of financial crime: to reduce the possibilities for business to be used for purposes of financial crime

The FSA also works towards a set of principles of good regulation, which means working along these lines:

• Risk-based approach
• Working with the market rather than against it
• Restrict regulation to the areas where answers are needed and at reasonable cost
• Acceptance that a regulatory system can never avoid all failures.

The FSA’s objectives also provide political and public accountability. The annual report assesses how well objectives have been met. Parliamentary Committee can look at how the FSA achieves its objectives. The objectives govern the way the FSA operates with regard to making rules, giving advice and determining general policy and principles. The objectives also assist in providing legal accountability, so that decisions can actually be challenged in the courts by judicial review.

The objectives of the FSA are summarised into one overall aim of promoting efficient, orderly and fair markets and to help retail consumers get a fair deal.

The government has responsibility for the scope of the FSA, its activities and powers. The FSA sets standards which financial services markets, exchanges and firms must adhere to, and the FSA can take action against them if fall short.

In the UK, the FSA has been the sole regulator for financial services since late 2001. They currently regulate nearly 30,000 firms who have a range of different sizes and carry out different activities. All authorised firms carrying out business in the UK are given a handbook of rules and guidance.

The Government has widened the FSA’s scope in recent years, encompassing mortgage business in 2004, and general insurance activities since January 2005.

The FSA’s proposed approach to regulation was outlined in ‘A New Regulator for the New Millennium’ in January 2000, explaining the framework the organisation intended to operate within to enable it to meet the statutory objectives. The framework is now referred to as ARROW (Advanced, Risk-Responsive Operating framework, and it is the heart of its approach to regulation.

The FSA is a risk-based regulator which means that it has a clear statement of the limits and aims of regulation, recognising consumers’ responsibilities and firms’ management, while at the same time understanding that all risk and failure cannot and should not be eliminated from the financial system.

The handbook shows the standards that are expected of regulated firms and it is the best way to communicate those standards and the FSA’s vision and values as widely as possible. It includes a high-level view of rule-making; comments on senior management responsibility, and one proportionate and risk-based actions.

The Handbook does go into detail, as it has to bring together rules from previously divergent organisations. It also includes fresh material to allow for government decisions which may widen the FSA’s responsibilities. European directives, which are numerous, are also implemented via the Handbook.

The Handbook is kept under continual, targeted review, in both financial markets and the overall environment of regulation. The Handbook was first introduced in December 2001, and there have been many changes since then.

The Business Plan of 2005-6 suggested looking for changes where requirements:

• Are more restrictive than they might need to be
• Do not deliver enough benefit to justify the cost
• Are not consistent with the focus on responsibilities of senior management

The FSA Chairman is Callum McCarthy and he says that the organisation is determined to concentrate more on the costs and burdens that regulations place on firms. Simplification of the Handbook is seen as important and the way that requirements are expressed will particularly help smaller firms who lack access to expert advice.

Other FSA initiatives in hand are to make the FSA easier to do business with, including Firms Online, Integrated Regulatory Reporting and shorter application packs.