Financial Services Authority

Introduction

The Financial Services Authority, or FSA, is the main governing authority of the United Kingdom's financial market. The statutory objectives of the FSA are to:

1. Maintain market confidence
2. Promote public understanding of the financial system
3. Secure the appropriate degree of protection for consumers
4. Fight against financial crime

The FSA regulates around 29,000 firms and 165,000 individuals; these firms and individuals are based in the United Kingdom and abroad. The operating goals of the Financial Services Authority are to:

1. Promote efficient, orderly and fair markets
2. insurance transactions,
3. financial advisory among many other activities related to finance.
   This includes the activities taking place at the London Stock Exchange, Lloyd's of London, and the London Metal Exchange.

Source of Power

The Financial Services Authority gets its power from Parliament, and reports to Parliament. The Financial Services and Markets Act of 2000 gave the FSA the statutory power to oversee the financial markets and services provided by companies in the United Kingdom. The FSA in non-governmental and financed by the financial market itself. The majority of funds come from membership fees charged by the FSA for authorization to do business in the United Kingdom. The FSA also collects funds through fines and application fees. The Financial Services and Markets Act of 2000 also put into place the independent Practitioners and Consumer Panels to ensure the Financial Services Authority keeps the companies' and consumers' best interests in mind in making policies. There is also an independent Complainants Commission that investigates any officially submitted complaints against the FSA. The FSA publishes an annual report to Parliament in addition to FSA leaders making frequent appearances in front of the Commons Treasury Select Committee, which is determined by the House of Commons to examine spending, policy making, and administration of various public bodies such as the Financial Services Authority.

Management Structure

The Financial Services Authority senior management level is made up of a Board with a Chairman, a Chief Executive Officer, three business unit managers, staff members the report to the Chief Executive Officer and Chairman, and nine sector leaders.

Chairman

The current Chairman is Sir Callum McCarthy. His duties include leading the Board, establish the importance issues and policies facing the board, and represent the FSA to other major international financial institutes among other responsibilities.

The CEO

The current CEO of the FSA is Hector Sants. His duties include reporting to the Board on important financial issues, developing significant information in order to make recommendations to the Board, and develop the FSA both internally and internationally. The CEO also serves as a representative of the FSA.

Business Unit Managers

The three business unit managers work to create an efficient and fair market in each of their assigned market types. David Kenmir oversees the Regulatory Services, Clive Briault the Retail markets, and Thomas Huertas the Wholesale and Institutional markets.

Direct Reports

These FSA staff members report directly to the CEO and Chairman.  The Company Secretariat, currently Iain Brown, shares the workload of the Board, manages administrative cases, and ensures FSA compliance with statutory rules put into by Parliament in the Financial Services and Markets act.  There are also advisors in charge of internal auditing, enforcement of FSA laws, strategy and risk, general counsel, and communications.

Sector Leaders

The sector leaders work to solve any problems and issues concerned with their sector quickly and efficiently.  Like the Chairman and CEO, sector leaders also work to develop their sectors and represent the FSA externally.

Statutory Aims and Principle-based Regulation

The FSA operates by a system called principle-based regulation. In order to maintain and accomplish its statutory objectives, it makes use of 'Principles of Good Regulation' when dealing with companies.

Statutory Objectives:

• Market confidence: maintaining confidence in the financial system;
• Public awareness: promoting public understanding of the financial system;
• Consumer protection: securing the appropriate degree of protection for consumers; and
• The reduction of financial crime: reducing the extent to which it is possible for a business to be used for a purpose connected with financial crime.

Principles of Good Regulation:

• Efficiency and economy: the need to use resources in the most efficient and economic way, since the board is expected to report to the Treasury.
• Role of management: principle that states a firms senior management is ultimately responsible for the actions of the company. This prevents unnecessary regulation on the FSA's account and puts the responsibility on the firm.
• Proportionality: the restrictions placed on an industry must be proportionate to the benefits expected to be gained from restrictions. This takes into account the costs to both firms and consumers.
• Innovation: the desirability of facilitating innovation through regulation. Involves allowing a broad range of different compliances to regulation in order to not restrict new market entrances with new products and services.
• International character: maintaining the competitive position of the United Kingdom. While looking out for the interests of UK companies, they also work closely with foreign regulators and companies to make an efficient international marketplace.
• Competition: minimizing the adverse effects of regulation on competition and the fostering competition between companies. Essentially makes sure that there are little to no barriers to entry or market expansion.

Approach to Regulation: Risk Management

The FSA has a unique approach to regulation. The philosophy behind regulation in the United Kingdom is what sets the tone of the business world and truly allows the city of London to flourish while others struggle. Summing up the strategic aim in one sentence: to promote efficient, orderly and fair markets and to help retail consumers achieve a fair deal. The end result of this goal is a regulator with a truly hands off approach. As such, the method of regulation involves heavy use of risk management research to enable decisions to be made. If the solution to a financial or market problem is too costly or risky to implement, it will not be enacted.

ARROW and ARROW II

To achieve the statutory objectives, an operating framework was put into place at inception. This framework is called ARROW - Advanced, Risk-Responsive Operating framework. This framework is at the heart of everything the Financial Service Authority does. This risk/reward framework is what in turn causes one of the most favorable regulatory environments in the world - the one that London enjoys. "As a risk-based regulator, our approach is based on a clear statement of the realistic aims and limits of regulation; it recognizes the proper responsibilities of consumers and of firms' own management, as well as the impossibility and undesirability of removing all risk and failure from the financial system."

The FSA uses the ARROW and ARROW II approaches to determine the impact a firm will have on the market as well as how risky a firm is.  Deciding whether a firm is a high-impact/high-risk firm or a low-impact/low-risk firm determines the everyday relationship that firm has with the FSA.  A high-impact or high-risk firm is supervised more strictly than low-impact and low-risk firms, for example low-impact firms do not have regular visits and are usually required to send regulatory reports to the FSA only twice a year.

The FSA has two approaches to determine how to supervise firms through ARROW II: 

The ARROW Firms approach - used when assessing risks in individual firms ('vertical' supervision)

The ARROW Themes approach - used when assessing cross-cutting risks (i.e. those involving several firms or relating to the market as a whole ('horizontal' supervision)

The FSA uses these approaches on an individual and combined basis to determine the supervisory relationship they have with a firm. To understand this unique risk management approach fully, and how it fits into the risk-assessment process, see this chart in pdf form. How ARROW fits into the regulatory approach.

Criticisms and Differences

Due to its reactive nature, the FSA has received major critcism in recent years. Proponents of the FSA argue that the organization allows business to flourish and allows easy entry for new businesses. Critics claim that the FSA is not successful at identifying future areas of concern. The FSA has also failed to prosecute white collar crime like the regulators in the United States have. The organization demonstrates a conflict of interest here as well, since many of the FSA's employees orginate from the companies that they regulate. The competitive ability of the United Kingdom to remain a Global Financial Center, however, has largely hinged upon the loose nature of the regulatory environment. While the SEC has tightened its regulations, the highly individualized and hands off approach of the FSA has attracted more and more business to the city of London.

Several structural and functional differences exist between the United Kingdom's Financial Services Authority and a governing body such as the SEC of the United States. SEC Rules require adherence to the lengthy and detailed Generally Accepted Accounting Principles (GAAP), while the short FSA regulations are based on the principles of good regulation. A firm in the UK is fined by the FSA for simply breaking the rule of paying due regard to its customers and treating them fairly.

Importance of a Favorable Regulatory Climate

 The hands off approach is one of London's greatest advantages. The importance of a favorable regulatory climate was found to be the second most important factor that made a Global Financial Center, according to the City of London Study. There is also wider concern about the scale of regulation in all industries. Financial Director Magazine reported two surveys of CEO's that found that the issue that business leaders are most worried about is over-regulation and the costs of compliance in their industries. There is strong support in favor of a FSA style regulator over a SEC style. Since there are several regulators in the United States, many people feel there is inconsistency and difficulty in dealing with them to achieve a healthy and efficient marketplace.

"The trouble with regulation in New York is that it's not joined up -there are too many people asking you to do too many things and half the time they contradict each other. It would be great to have just one regulator." - Director, Major US Retail Bank
"The FSA listens to and understands our concern. In the USA regulators develop rules and expect you to stick to them." - Head of Equity Operations, Major US Investment Bank