Should enforcement be separated from the FCA?

Once again, politicians are talking about splitting enforcement from the FCA, but will it make any difference?

The UK’s Treasury Select Committee has renewed calls for separating the enforcement arm of the Financial Conduct Authority from the main regulator.

These recommendations surfaced after the Treasury Select Committee looked at enforcement action relating to failed lender Halifax Bank of Scotland (HBoS).

It’s not the first time we’ve heard such a recommendation. The Parliamentary Commission on Banking Standards previously said a break-up of the regulator would be in the best interests of UK financial services.

This latest proposal, announced by Andrew Tyrie, chairman of the Treasury Select committee, stated “the case for separation merits serious re-examination” and recommended that HM Treasury conducts a further review.

The Treasury Select Committee’s reasons are centred on the fact that the enforcement activities of the FCA would benefit from greater independence because they would have greater clarity of their objectives.

The Treasury Select Committee also highlighted the fact that, currently, the FCA’s enforcement team has no remit to oversee enforcement relating to prudential activities.

The FCA’s predecessor – the Financial Services Authority – had this hived off to the Prudential Regulation Authority when the new regulator was established.

 Lose lose

Personally, I believe the failing here lies in the assumption that individual behaviours and corporate cultures would change if the threat of more comprehensive and independent enforcement action was more significant. I don’t believe that to be true.

Yes, only one senior HBoS figure has been sanctioned since the bank’s collapse so far.  However, the action relating to HBoS isn’t representative of the market as a whole.

Since the credit crisis, the consequences of not following regulation are starker than ever.  In 2015, Barclays was slapped with a £284 million fine from the FCA for Forex manipulation, with Deutsche Bank also hit with a £227 million ticket.

Individuals too are facing tougher penalties. 

Kweku Adoboli, the former UBS trader who racked up losses of $2.3 billion has not only been jailed for seven years but is currently fighting extradition, despite having lived in the UK for 24 years. Tom Hayes, an ex-UBS trader found guilty of fiddling Libor has also been sentenced to 14 years in jail.

Now, while there is a divide between criminal and civil law and between prudential and conduct regulation, there are already very real consequences for those who break the rules.

Would having an “independent” enforcement body with another big stick make any difference?  I don’t believe it would.  Nor does the FCA.

In a statement, the regulator said: “Much has already changed since the period considered in the HBOS report with the FCA learning valuable lessons from its predecessor including changing a number of its processes.

“As we have previously stated the ultimate responsibility for the failure of HBOS rests with the Board and senior management. They failed to set an appropriate strategy for the firm’s business and failed to challenge a flawed business model which placed inappropriate reliance on continuous growth without due regard to risks involved. In addition, flaws in the FSA’s supervisory approach meant it did not appreciate the full extent of the risks HBOS was running and was not in a position to intervene before it was too late.

“The FCA and the Prudential Regulation Authority (PRA) decided to start investigations into certain former HBOS senior managers and those investigations are continuing.” The FCA said it now intends to further consider the TSC’s recommendations.

 Consequential costs

Then there is the issue of fines. While the big fines levied on financial services companies make for impressive headlines, the money still comes from one place – customers’ pockets.

Think of it this way. If you have no regulation at all and firms do what they like, the customer will get screwed over at the point of sale. When you have strong regulation and the regulator fines a company for breaching the rules, companies will increase prices to their customers to ensure they can offset any financial losses. So, the latter is perhaps marginally better than the former, but neither are particularly palatable. 

So do we need to look at another way of funding an independent enforcement body? And would the British public have an appetite for that? Unlikely.

Also, what is the ultimate aim of having an independent enforcement body anyway? To have every business playing by the rules and “in the spirit” of regulations? The very nature of innovation doesn’t work like that. Businesses build their products and services by developing a competitive edge which utilises loopholes and keeps to the minimum standards required.

So, even if an independent enforcement body were to be established, a state regulator can never keep tabs on every individual bad practice.

The City’s largest financial institutions have deep pockets – far deeper than any regulator – and that means they can afford to employ the best talent. No matter how menacing an independent enforcement body would be, there will always be well-paid, highly-informed, individuals looking for ways to circumnavigate regulation.  There is a whole consultancy industry based on it and that isn’t about to change.

So, while the Treasury Select Committee’s suggestions are extremely well meaning, I doubt many in the City are trembling just yet.