Chancellor Philip Hammond has been urged to commission an independent review of financial services regulation with a view to setting up a separate enforcement body with greater clout.
The current system – under which the Financial Conduct Authority supervises, applies and prosecutes the law – is “outdated and can be construed as unfair,” warns the House of Commons Treasury select committee in a report published today.
A separate body would bolster the perception of the enforcement function’s independence and provide regulators with greater clarityAndrew Tyrie, Treasury Committee chairman
In the report, MPs call on Mr Hammond to revisit predecessor George Osborne’s rejection of a recommendation in 2013 by the Parliamentary Commission on Banking Standards, which said that the system could be improved by dividing enforcement and supervision functions into two separate bodies.
The report said: “The case for separation merits serious re-examination.”
The committee’s call comes as part of the publication of its review of the failure of HBOS, the bank that collapsed into the arms of Lloyds Bank and part-taxpayer ownership in the financial crash.
One of the HBOS reports studied by the committee was an independent study by barrister Andrew Green QC, which found that the relationship between enforcement and supervision within the FSA had been “highly problematic” and did not deliver the expected degree of co-operation.
Committee chairman Andrew Tyrie said: “The case for placing the FCA’s enforcement function in a separate body… has been strengthened by the findings of Andrew Green’s report.
“A separate body would bolster the perception of the enforcement function’s independence, and provide the regulators with greater clarity over their objectives.”
Mr Tyrie said that the Treasury should appoint an independent person to undertake a review.
Among the committee’s raft of criticisms of the FSA were that it “paid inadequate attention” to the poor quality of HBOS’s loanbook, highlighted by bad debts as a percentage of overall loans being twice as high in the financial crisis as those at Royal Bank of Scotland, which was also bailed out by the taxpayer.
The Treasury select committee report also said that it was “wholly unacceptable” the enforcement division of the FSA had decided in early 2010 that Andy Hornby, chief executive of HBOS from 2006 to 2009, had met the statutory threshold test for being investigated but failed to communicate the fact to the regulator’s chief executive Hector Sants and did not proceed with any investigation of the former bank boss.
“These oversights add to the already extensive evidence that the FSA was not up to the job,” the report said, adding that the regulator was a “highly dysfunctional institution”.
Despite the FSA’s subsequent replacement in 2013 by the FCA and the Prudential Regulation Authority the committee found that the process of creating a better alternative is “still work in progress, particularly at the FCA”.
The MPs also branded as a “serious mistake” the decision of the Financial Reporting Council not to investigate the auditing of HBOS prior to the completion of the FCA/PRA report into the issue.
The decision was “better late than never” but suggested “a lack of curiosity and diligence,” the committee said.