United Kingdom Parliament Treasury Committee Update: Response From Tim Parkes, Chair Of FCA's Regulatory Decisions Committee

• Response from Tim Parkes, Chair, FCA's Regulatory Decisions Committee, dated 17 May 2016 ( PDF 67 KB)
• Inquiry: Appointment of Tim Parkes as Chair of Regulatory Decisions Committee
• Treasury Committee

Chair's comments

Commenting on the follow-up report, Mr Tyrie said:

"Decisions made by the RDC must be taken on their merits. So the Committee needs to be independent from the FCA, and demonstrably so. This is all the more important if enforcement is to become a credible last line of defence in regulatory armoury.

The Treasury should commission an independent review of how enforcement is undertaken at the regulators, as previously recommended by the Treasury Committee. The appropriate structure for the RDC should form part of this review."

Background

The Committee held a pre-appointment hearing with Tim Parkes on Friday 22 January 2016.

During this hearing, members of the Committee raised a number of questions which Mr Parkes undertook to consider and respond to, in writing, at a later date. These related to the following:

1. Entrenching demonstrable independence.
2. RDC membership – composition and recruitment.
3. RDC involvement in settled cases.

Parliamentary Commission on Banking Standards report

In its final report ( PDF 2.5 MB) published in 2013, the Parliamentary Commission on Banking Standards concluded that:

1201. We have, however, concluded that the body responsible for making enforcement decisions arising from the work of the Enforcement and Financial Crime Division of the FCA, namely the Regulatory Decisions Committee, is not best-suited to the specific enforcement needs of the banking sector. At the moment, the Committee’s composition seems to offer the worst of all worlds; it appears to contain neither a depth of banking expertise nor a clear lay element separate from banking and allied financial services sectors.

1202. The Commission recommends the creation of an autonomous body to assume the decision-making role of the Regulatory Decisions Committee for enforcement in relation to the banking sector. The body should have a lay (non-banking or financial services professional) majority, but should also contain several members with extensive and senior banking experience. The body should be chaired by someone with senior judicial experience. The body should have statutory autonomy within the FCA. It should be appointed by agreement between the boards of the FCA and PRA. The body should also assume responsibility for decision-making in respect of enforcement action brought by or under the auspices of the PRA. The new body should publish a separate annual report on its activity and the lessons for banks which emerge from its decisions, and the chairman should appear before Parliament, probably the Treasury Committee, to discuss this report. The Commission further recommends that the FCA and the PRA be required to publish a joint review of the working of the enforcement arrangements for the banking sector in 2018. This should, as part of its work, consider whether a separate statutory body for enforcement as a whole has merit.

In its response to the Parliamentary Commission on Banking Standards' report (PDF 727 KB), published in July 2013, the Government concluded that it did not agree with Commission's conclusion that a new autonomous body was required:

5.40 The Commission also recommends that a new autonomous body be created to assume the decision -making role of the Regulatory Decisions Committee (RDC) in relation to the banking sector (1202). While the Government welcomes the Commission’s consideration of this issue it does not agree with its conclusion. The current system gives the regulators discretion to design their decision making framework in a way that best suits their resources and regulatory approach. It is the case that an external RDC would be performing a role similar to that of a tribunal, and regulatory issues are already dealt with by the Upper Tribunal. The benefit of adding an extra layer of quasi-judiciary process is not clear and would likely lead to increased costs. This was a matter aired at some length during the passage of the Financial Services Act 2012. At this stage, the Government does not consider that change is required.

Review of the reports into the failure of HBOS

The Treasury Committee published its 'Review of the reports into the failure of HBOS' on 26 July 2016, in which it concluded that the case for structural separation of the FCA's supervision and enforcement functions has merit. The Treasury Committee now expects the Treasury to appoint an independent reviewer to re-examine the case for a separate enforcement body. The Committee justified its conclusion in the following extracts from the report:

Structural reform

• In its final report, the Parliamentary Commission on Banking Standards identified some of the problems that arose as a result of keeping both the enforcement and supervision functions within a single regulator. The PCBS noted that both functions had different objectives which, at times, could be a source of tension, especially if the Enforcement division had to reach judgements about matters in which supervisors were involved at the time. There was also the danger that insufficient priority would be placed on enforcement within a larger organisation, reducing its effect as a credible deterrent. One solution discussed by the PCBS was to place the enforcement function into a separate statutory body. This option was subsequently rejected by a Treasury-led review. (Paragraph 158)
• Nonetheless, the findings of the Green report reveal that the relationship between enforcement and supervision within the FSA was indeed highly problematic. Keeping both functions within the same organisation did not result in a high degree of co-operation, undermining the argument that the two functions should remain under the same roof. In the light of this, the Committee believes the merits of structural separation bear re-examination. (Paragraph 159)
• First, the Committee notes that the collapse of HBOS, along with other UK financial institutions during the crisis, was the result of prudential failings. It is far from satisfactory that the bulk of enforcement staff and expertise still lies within the FCA, which has no role in prudential supervision of banks. An independent enforcement function could and should sit equidistant between the PRA and FCA. (Paragraph 160)
• Secondly, a separate statutory body would bolster the perception of the enforcement function’s independence. The current system, whereby the same organisation both supervises, applies and prosecutes the law is outdated and can be construed as unfair. By moving enforcement away from supervision, it can focus independently on undertaking its key functions: interrogating evidence and assessing whether a regulatory breach has been committed. This could increase confidence in the impartiality of regulatory enforcement decisions, and facilitate objective scrutiny of supervisors’ actions by enforcement staff. (Paragraph 161)
• Thirdly, separation would allow all three regulators - the FCA, PRA and an enforcement body - to enjoy much greater clarity over their objectives. There is a danger, especially with the FCA, that its multitude of objectives and initiatives are leading to regulatory overload. An FCA with fewer objectives, and a single separate body responsible for enforcement, would probably result in better accountability and better outcomes. (Paragraph 162)
• The Committee concludes that the case for structural separation has merit. The Treasury Committee expects the Treasury to appoint an independent reviewer to re-examine the case for a separate enforcement body. (Paragraph 163)

Further information

• About Parliament: Select committees
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