The Financial Services Authority (FSA), the City's top regulator, has lost the respect and support of the financial community and is undermining the competitiveness of the UK as a financial centre with its heavy-handed regulations, a damning report on the watchdog published today claims.
The report, compiled by the Centre for Policy Studies (CPS), says the FSA is perceived as being easily swayed by "political influence", and "dancing to the tune" of the Treasury when it should be accountable to the industry it regulates.
The CPS, a think-tank headed by Ruth Lea, interviewed a group of City professionals, including chief executives of banks, fund managers, life insurance groups and trade associations, to produce the report, which it has published as an open letter to John Tiner, the chief executive of the FSA. It says the FSA is one of the most powerful but least accountable institutions created since the Second World War. "Its lack of accountability is now nurturing a sense of disengagement and growing disillusionment within the financial services industry," the report says.
Businesses regulated by the FSA believe it thrives on a culture of "prescriptive and increasingly complex regulation". The report says: "The industry needs to be confident that its regulator is there to complement and serve the markets. The FSA is felt to be remote, to be inflexible and risk-averse, to be increasingly pervaded by a 'civil service mentality' and to lack a sense that it is there to serve the industry and not the other way round." Businesses want instead a "light-touch" regulatory system, where senior executives are left alone to manage their own business risks.
The FSA comes under fire for its "combative" approach to enforcing rules, and for being too focused on consumer protection. "The pendulum has swung too far in concern for the consumer," business leaders told the CPS. The industry wants consumer education removed from the FSA's duties and the FSA to assign the responsibility for policing financial crime to the relevant criminal prosecution authorities. The FSA should instead "place the promotion of a competitive industry at the heart of its culture and remit".
The FSA's reputation was called into question when its enforcement processes were criticised earlier this year after it was taken to a tribunal by Legal & General.
Dismissing the report's conclusions, Stephen Timms MP, the Financial Secretary to the Treasury, said: "The FSA is an independent, world leading financial regulator and the City remains the envy of other financial centres."
Mr Tiner also rejected a number of comments in the report, particularly attacks on his staff. The CPS report claims that employees at the FSA, except for the most senior officials, are "inward-looking, risk-averse, demoralised by constant change, and operate in a blame culture". But Mr Tiner said: "A significant majority of the people we recruit are from the industry. We employ senior practitioners who pass on their knowledge and expertise to our regulators and have extensive training."
But he did admit that firms might be overburdened with unnecessary and costly regulation in some areas.
The FSA is already taking action to remedy this situation. Separate to the report, it announced yesterday a review of the costs of regulation to see whether any of the FSA's rules can be scrapped.
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