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Friday, 30 November, 2001, 15:57 GMT
City watchdog: New powers explained
FSA Chairman Howard Davies
Howard Davies - leading the FSA into a new chapter
The UK's financial services watchdog finally gets its full range of powers this weekend, which will put it at the heart of financial regulation.

The Financial Services Authority (FSA) will take over many activities previously carried out by several different bodies, and it will also be able to hand out tougher penalties to those who break the rules.

It is hoped the move will help prevent financial crises, such as the ongoing debacle at Equitable Life.

Super regulator

From 1 December, the FSA formally acquires legal powers under the Financial Services and Markets Act 2000.

The FSA will take over the powers of:
Investment Management Regulatory Organisation (IMRO)
Securities and Futures Exchange (SFA)
Personal Investment Authority (PIA)
Building Societies Commission
Friendly Societies Commission
Registry of Friendly Societies
The authority replaces a gaggle of self-governing industry bodies which, some have argued, have not always regulated consistently or with sufficient bite.

The FSA will be able to impose fines, and can name and shame individuals or companies who misbehave.

Although the FSA was first established in October 1997, it has taken this long to knit together the various regimes into one overall body.

The newly empowered watchdog has four statutory duties:

  • maintaining market confidence
  • promoting public understanding of the financial system
  • protecting consumers; and
  • fighting financial crime

Crime fighter

The last of these aims - fighting financial crime - is one which may push the FSA into the limelight.

It will get new powers to tackle crimes such as money laundering, which is set to remain in the spotlight following the events of September 11 and subsequent attempts by governments world-wide to crackdown on terrorist funds.

The FSA will also fight "market abuse", such as misuse of information, creating false or misleading impressions, or distorting the market.

One aspect that the watchdog is keen to crackdown on is so-called 'pumping and dumping', where someone deliberately posts false information about a company on the internet in order to ramp up its share price.

Under the new regime, the FSA should "have more teeth" as it will be able to pursue those suspected of market abuse through the civil courts, unlike its predecessors.

The new powers also introduce a new regulatory regime for the Lloyd's insurance market, along with more powers to demand information from the banks, insurers, investment businesses and other firms under its remit.

One-stop shop

From the public's point of view, the most striking change is that they will have a single Financial Ombudsman Service instead of several different ones.

The Financial Ombudsman Service replaces:
The Banking Ombudsman
The Building Societies Ombudsman
The Insurance Ombudsman
The Investment Ombudsman
The Personal Investment Authority (PIA) Ombudsman
The Securities and Futures Authority (SFA) Complaints Bureau
The various compensation agencies have also been whittled down into one Financial Services Compensation Scheme.

One of its most high profile duties will be the regulation of mortgage sales. But this new power will not start until 1 September next year, and does not cover mortgage advice.

The FSA says that its new role - a single regulator, single Ombudsman and single compensation scheme - will ensure a better deal and one-stop shop for consumers.

It will also offer guidance and warnings to consumers about certain financial products, as it must promote understanding of financial services among consumers.

Will it work?

The creation of a regulator with such a broad reach is extremely ambitious - only Sweden and Ireland have similar regulation, under one watchdog.

Some critics claim the FSA is not up to the job, and point to the Equitable Life saga as one case where it should have spotted problems earlier.

Doubts have also been cast on the ability of the FSA's resources and staff to monitor thousands of firms each year.

And some people feel that with its new functions, the FSA will have too much power, and will act as 'judge, jury and executioner.'

This last claim has been refuted by the watchdog, which points out that any disputed case will be heard before an independent tribunal.

The FSA has said it does not want to overburden companies with excessive bureaucracy and 'box-ticking' style regulation, and instead aims to focus on specific areas where problems are most likely to occur.

At the same time though, the authority will want to assure consumers that they are carrying out sufficient checks to protect them from trouble.

As ever, striking the balance between the interests of business and the consumer will be a tricky one to achieve.

See also:

30 Nov 01 | Business
17 Oct 01 | Business
12 Oct 01 | Business
21 Aug 01 | Business
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