The Financial Conduct Authority (FCA) has published its approach to investigating and reporting on regulatory failure.
This is required by the Financial Services Act 2012.
The paper can be found on the FCA website.
The Act requires the FCA to publish a statement of policy setting out the matters it will take into account to decide whether it should carry out an investigation into possible regulatory failure, and give a report of its findings and recommendations to the Treasury for publication.
The Financial Services Authority published three reports in which it considered the effectiveness of its regulation of firms and markets. At that time, there was no framework setting out what should and should not be regarded as a regulatory failure. The Act sets out a new statutory framework and this paper explains how the FCA will meet its new statutory requirement to investigate possible instances of regulatory failure and provide reports to the Treasury for publication.
This paper makes clear when this level of scrutiny would and would not be justified and sets out the criteria for determining when the two conditions in the Act have been met. The two criteria are:
- a significant failure to either secure an appropriate degree of protection for consumers; or a failure that had or could have had a significant adverse effect on the integrity of the UK financial system or on effective competition in the interests of consumers; and
- the events occurred, or were made worse, because of a serious failure of the regulatory system or on the part of the FCA.
A formal statutory investigation and report for the Treasury is expected to occur only in exceptional cases.
Martin Wheatley, chief executive of the FCA said:
“A regulatory system that removed all risk would be prohibitively expensive and could stifle innovation and competition. The instances where we investigate and report to Treasury will be significant events and serious failures, when things have gone badly wrong, and this paper sets out how we will identify and deal with these exceptional cases.”