Following the Treasury Select Committees (“TSC”) recent publication of it’s review into the FSA’s enforcement action following the failure of HBOS, there have been renewed calls by the TSC for the government to consider the creation of a separate enforcement body that is independent from the PRA and the FCA (as the FSA is now known).

In response, berg Chief Executive Alison Loveday, has also called for the creation of a separate regulatory body to enforce punishments against bad banks, as SMEs are at risk from the same type of damage inflicted on thousands of them in 2008.

Original recommendation for a separate enforcement body came from the Parliamentary Commission on Banking Standards report published in April 2013. However following a Treasury led review of this matter the proposal was subsequently rejected by the then Chancellor of the Exchequer, George Osborne.

HBOS report and review

The creation of a separate enforcement body was again called for in the report into FSA’s enforcement actions following the report on the failure of HBOS by Andrew Green QC in November 2015.

The TSC have endorsed this suggestion in its “Review of the reports into the failure of HBOS” which was published on 26 July 2016 and draws together several different reports into the failure of HBOS including Andrew Green QC’s report.

The TSC stated in its overview of its findings that “A separate body would bolster the perception of the enforcement function’s independence, and provide the regulators with greater clarity over their objectives. The case for separation merits serious re-examination. The Treasury should appoint an independent person to undertake a review.”[1]

The TSC state that a separate body would build public confidence in the independence of this enforcement body, as opposed to the current system in which the FCA both supervises, applies and prosecutes the law. The report states that this system is “outdated and can be construed as unfair”.

Also a separate body would allow all three regulators, the FCA, the PRA and the new enforcement body to have clearly defined roles and avoid one body suffering “regulatory overload”.

Bailey under questioning

The suggestion from the TSC follows on the back of evidence it heard from the FCA’s new Chief Executive, Andrew Bailey.[2]

Andrew Bailey appeared before the TSC on 20 July 2016 as part of their consideration of his appointment as the FCA’s Chief Executive.

Mr Bailey discussed the difficulties the FCA faced when implementing its review into the sale of Interest Rate Hedging Products. He accepted that the fact the Banks carried out the process of the review overseen by what he described as “a so-called skilled person, which is typically an accounting firm,” was “enormously controversial”.

Mr Bailey stated that he did not “think the FCA was really established or conceived to be an adjudication body. It is a regulatory and supervisory body.” As a result it was required to create “ad-hoc processes” to deal with this is and that he did not consider that these schemes had been a success.

What should be done?

Given both the TSC and the FCA’s own chief executive have questioned the enforcement powers the FCA currently have and their capability of implementing them it is surely now pressing for the government to immediately revisit these issues.

It is important for market confidence that the UK has a strong enforcement body capable of holding the banks to account for their wrongdoing. It is apparent that the present system does not appear to inspire such confidence in consumers and so the suggestion that a separate enforcement body be created to try and rectify this issue is of the upmost importance.