Managing my financial journey
Managing my financial journey

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1.3.1 The rise and fall of the FSA

The experience gained through the operation of the 1986 Act, together with the break-up of the traditional boundaries between different financial services firms and the perceived need to reinforce investor protection, then paved the way for the replacement of the multiple regulatory bodies by a single statutory body.

The unification of the regulation of financial services in the UK under the FSA came in stages after 1997. In 1998, the responsibility for the supervision of the banking sector was transferred to the FSA from the Bank of England. In 2000 the FSA then took over responsibility for the UK Listing Authority (UKLA) – the body responsible for supervising and regulating the issue of listed securities by firms – from the Stock Exchange.

The final piece in the new regulatory jigsaw came with the enactment of the Financial Services and Markets Act 2000 (FSMA 2000). FSMA 2000 led to the completion of the consolidation of regulation of financial services under the FSA from 2001. The range of the FSA’s responsibilities, which were taken on from pre-FSA regulatory bodies, is set out in Table 2.

Table 2 The FSA’s responsibilities
Pre-FSA regulatory bodyResponsibilities of the body
Building Societies Commission (BSC)Building societies
Friendly Societies Commission (FSC)Friendly societies
Insurance Directorate (ID) of the Department of Trade and Industry (DTI)Insurance
Investment Management Regulatory Organisation (IMRO)Investment management
Personal Investment Authority (PIA)Retail investment business
Registry of Friendly Societies (RFS)Credit unions’ and other mutual societies’ supervision
Securities and Futures Authority (SFA)Securities and derivatives business
Securities and Investments Board (SIB)Investment business (including supervision of exchanges and clearing houses)
Supervision and Surveillance Division (S&S) of the Bank of EnglandBanking supervision (including the wholesale financial markets)

Subsequently, in 2004, the FSA took on responsibility for the regulation of mortgages, and in 2005 the regulation of general insurance business was added to its responsibilities.

A further development that took place during this period was the decision of the incoming Labour government in 1997 to pass responsibility for monetary policy – and, specifically, the setting of the UK’s official interest rates – to the Bank of England. Previously, such decisions had sat with the government, with the Chancellor of the Exchequer normally taking lead responsibility. The move brought the UK into line with the eurozone and the USA (and most other major economies), where monetary policy is conducted away from the world of politics by the central banks. With the Bank of England in charge of setting interest rates, it arguably could not also perform the role of banking supervisor, given the possibility of conflicts of interest between the management of the economy (particularly inflation) and the best interests of the banking industry. This provided the rationale, at that time, to move banking supervision to the FSA.

The establishment of the FSA therefore resulted in a move away from the self-regulation of financial services, where certain sectors within the financial services industry regulated themselves, as opposed to being regulated by a separate and wholly independent body. Regulation by the FSA, therefore, alleviated the conflicts of interest that can potentially arise when sectors of the financial services regulate themselves.

More recently, following the 2007/08 global financial crisis (which you will cover in the next sections), plans were introduced by the coalition government in 2010 to abolish the FSA and redistribute its responsibilities to other, new, regulatory bodies. The two new bodies – the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) – formally took over the FSA’s responsibilities from April 2013. The responsibilities and activities of the PRA and the FCA are examined in Week 2 and Week 4.

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