By Daniel Hunter
The Financial Services Authority (FSA) has published its annual report for 2011/12. The annual report is a key component of the FSA’s accountability framework. The report outlines how the FSA has performed against the priorities set out in its 2011/12 Business Plan and its statutory objectives.
This is likely to be the final annual report the FSA produces before the transition to the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). This change will occur in early 2013. Until then the FSA will continue to deliver on its statutory objectives and implement the major initiatives that are already underway.
In his foreword, Adair Turner looks back over his term as FSA chairman, highlighting the FSA’s transformation in its prudential regulatory approach. He emphasises the FSA’s successful transition to an internal twin peaks model and the organisation’s commitment to a new more effective supervisory approach.
“Over the last four years, the FSA has changed radically its prudential supervisory approach, fixing the deficiencies which became clear in the financial crisis. That transformation has had to be implemented while also ensuring strong focus on major current financial stability risks," Adair Turner, FSA chairman, said.
“I am convinced that a ‘twin peaks’ model will deliver major benefits. The PRA will have a mandate to focus on prudential issues even when most people assume, as they did before the crisis, that prudential risks are low: and it will be located within the Bank of England, facilitating important synergies between macroeconomic and prudential analysis and insight. The FCA will have a dedicated focus on customer and investor protection challenges in both the retail and wholesale markets.
“Our successful transition to an internal twin peaks model and our advanced preparation for legal separation next spring wouldn’t have been possible without the hard work and commitment of our staff.”
Hector Sants, FSA chief executive, said:
“Central to the success of a regulator is a willingness to be transparent and accountable for its performance. Our annual report lays out clearly how we perform in relation to our objectives as set out in the Business Plan.
“Despite a challenging environment we have successfully moved to an internal twin peaks model within the FSA from April 2012, maintaining the momentum required to deliver the new regulatory structure from early 2013.
“It is critical that as we progress with regulatory reform, the FSA delivers its own regulatory objectives. We have remained focused on maintaining a high level of supervisory activity as well as taking forward key policy initiatives to ensure the stability of firms in the system.
“In addition we made considerable progress in advancing our new proactive approach to consumer protection.”
The Annual Report reviews the FSA’s performance during 2011/12 against its five key objectives:
1. Executing the Government’s regulatory reform programme:
Working with the Bank of England, the FSA has completed the high level design work for the PRA and FCA;
Established internal twin peaks within the FSA from April 2012;
The programme remains on track for the creation of the two new authorities from early 2013.
2. Executing a credible deterrence and enforcement approach throughout 2011/12:
· Five significant criminal cases came to court in 2011/12;
1 16 defendants went on trial in 2011/12 on charges of insider dealing or misleading the market, while another 5 are currently awaiting trial;
2 Highest ever fine for market abuse: $9.6 million fine for Rameshkumar Goenka under the FSA’s new penalty framework.
3. Delivering the FSA’s financial stability objective:
Supporting the interim Financial Policy Committee (FPC) and delivering on its recommendations;
Ensuring that the major financial institutions have adequate capital and liquidity and working with the banks to ensure they have effective recovery and resolution plans;
Continuing to influence the international and European policy agenda, with a focus on the two biggest policy initiatives: Solvency II and Basel III.
4. Delivering efficient, clean, orderly and fair markets that remain attractive and sustainable:
Maintaining high quality, transparent and open markets, vital to the UK’s position as a leading international financial centre. The level of abnormal price movements prior to company announcements, which the FSA uses to measure market cleanliness, continued to decline from 21.2% in 2010 to 19.8% in 2011. The 2010 and 2011 levels are the lowest since 2003;
Continuing to reform OTC derivatives to reduce systemic counterparty risk;
Implementing and embedding the existing European regulatory regime for Credit Rating Agencies and participating in policy negotiation to revise that regime.
5. Continued progress in developing a new consumer protection strategy:
Progressing our work on major policy initiatives such as the Retail Distribution Review (RDR) and Mortgage Market Review (MMR), while reviewing the areas of life insurance and packaged bank accounts;
Securing greater redress for consumers in the areas of structured products, UCIS, Payment Protection Insurance (PPI), mortgage advice and the treatment of mortgage customers with mortgage arrears, and the protection of client money.
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