The Post-Brexit Accountability of the Financial Conduct Authority: Developing Parliament’s Institutional Capability

The Financial Conduct Authority (FCA) came into being in 2013, in the aftermath of the global financial crisis of 2007-2008. At that point there was an institutional ‘rearranging of the deckchairs’ in response to the perceived failings of its predecessor, the Financial Services Authority (FSA). It was considered that there were serious flaws in the allocating and coordinating of functions across the Bank of England, HM Treasury (HMT), and the FSA, and that the FSA’s responsibilities were too broad to enable sufficient focus on the stability of firms. Amidst other reforms, the FCA was created and made responsible for conduct regulation.

The Financial Conduct Authority (FCA) works in a highly dynamic field; a vast and complex body of provisions apply to financial services. Over the decades, the regulatory framework has also evolved to factor in the UK’s membership of the EU, during which an increasing amount of financial regulation was set at the EU level. The UK’s departure raises the question as to how important policy and regulatory functions, which were formerly conducted at the EU level, should operate in a standalone UK regime. The FCA is to be granted greater rule-making powers and as a quid pro quo, it will be subject to an enhanced accountability framework. This is a delicate issue; given the greater responsibilities being transferred to the regulator, sufficient accountability and transparency is necessary, however, it is important not to undermine its independence. It is also not a straightforward task to pin down a ‘correct’ accountability framework, and it is unlikely that there is one ‘right accounter’ of the FCA.

My forthcoming article in the Law Quarterly Review analyses the existing FCA framework, considers Governmental proposals as these apply to the FCA, and makes normative proposals regarding a framework governing its future accountability. The article illustrates that the regulator already operates in a multiple-principal environment and is subject to a range of oversight mechanisms, including constitutional and legal avenues, as well as broader accountability to the supervised industry and the public at large. Although the current system is not perfect, it likely strikes a sensible balance between independence and accountability. Moreover, an examination of the Government proposals for the FCA (to be implemented via the 2022-23 Financial Services and Markets Bill), suggests that a number of its proposals generate concerns, not least in terms of increasing the regulator’s operational burden, and that they could require the FCA to make difficult assessments between competing objectives. In addition, the rebalancing of the FCA/HM Treasury (HMT) relationship could impact on the FCA’s relative independence. In comparison, the proposals regarding future parliamentary scrutiny are very light-touch. The article argues that rather than focusing on the FCA/HMT relationship, it would be preferable to develop Parliament’s institutional capability to scrutinise the regulator. As the FCA will be producing and amending a significant body of regulation that can have an impact on the whole of society, technical democratic oversight is vital.

The article suggests that a joint parliamentary committee should be created with a mandate focused on scrutinising financial services and its regulation, as well as overseeing the regulator’s operational functions. It also draws insights from the Joint Committee on Human Rights as well as the comparative example of the Australian Joint Committee on Corporations and Financial Services to inform the discussion of institutional design. In particular, for such a committee to have the ability to operate effectively, it should be cross-party, apolitical, and will need to be properly resourced so that it can grapple with the highly technical and dynamic nature of financial regulation. Scrutiny of regulation would be both ex ante with respect to draft texts, drawing on expert analysis, and the input of stakeholders, as well as there being ex post reviews regarding the impact of regulations. With respect to holding the regulator accountable, establishing a set of benchmarks against which the FCA’s work could be objectively measured would be valuable. Committees that are pro-active and effective in their work also meet frequently and provide strong levels of transparency. This includes publishing communications with those they are overseeing; holding regular public hearings and inquiries; and publishing reports to Parliament. Committees that are effective in their accountability work also seek to evaluate their own work and to learn from their successes and failures. At the same time, it is clear that no framework will be perfect, and that the broader political and legal environment may affect a committee in practice, including regarding the informal interactions with those they are overseeing. Given this, an important aspect is the relationship that the scrutiny body manages to develop with the regulator over time. In particular, where there is respect and understanding for each other’s roles (rather than this being a combative association), the parliamentary oversight model can have the potential to have a significant effect on the scrutinised body. Overall, the article concludes that strengthening Parliament’s institutional capabilities could deliver important benefits to the UK’s new regulatory environment; particularly if a new joint committee seeks to build an effective relationship with the regulator, whilst not being afraid to flex its muscle.

Elizabeth Howell is an Assistant Professor of Law at the London School of Economics and Political Science.