Better regulation
The FSA views better regulation in the EU as a strategic priority.
We are committed to better regulation principles in the UK context and are committed to promoting these in the EU also. By better regulation we mean:
- introducing of new regulation only where there is a demonstrable market failure and where the cost of regulation can be shown to be less than that of allowing the market failure to persist; and integrating the economic assessment of the likely effects of legislative proposals into the policy-making process;
- consulting at all stages in the introduction of new regulation;
- always considering non regulatory solutions such as competition or codes of conduct;
- considering one-off regulatory interventions (such as thematic or catalytic work) rather than introducing new formal regulations;
- subsequent evaluation.
Impact assessment
We only consider introducing new regulation (on a discretionary basis) when a strong case for intervention can be made. The case must consist of evidence of material market failure (for example, where the incentives of product providers are not aligned with those of their customers, leading to inappropriate sales, or where the actions of a firm unintentionally impact upon other firms), an explanation of why the market failure poses a threat to our statutory objectives, and reasons why there is no prospect of the market resolving the problem on its own. However, even then the case is not complete because we only intervene if it is clearly the case that the costs of intervening are outweighed by the benefits.
Once the case for regulatory intervention has been made it is crucial for policy to be informed by an understanding of the impact which different policy options may have on particular markets. Impact assessment is designed to help policy makers and legislators make better choices. At their best impact assessments will properly explain the problem being addressed and attempt to assess the costs and benefits of different policy options offered both in the round (the cost of a legislative option as opposed to a non-legislative one) and in respect of specific provisions, e.g. the cost and benefits of requiring firms to hold more capital or to send out revised terms and conditions to all their customers. Our experience in the UK (where we have been committed to undertaking cost-benefit analysis of new proposals for several years) has been that process requirements have to be built into the policy-making process from the very beginning if economic analysis is properly to inform choices. The Commission is committed to improving the quality of its impact assessments and has established an Impact Assessment Board, composed of very senior Commission officials, to assess the quality of its impact assessments.
One point frequently made is that better regulation disciplines do not currently apply to the EU's other legislative institutions, and that the European Parliament and the Council may propose amendments without having to consider the costs or benefits of their proposals for EU firms and their customers. As a general matter we would support the extension of impact assessment wherever feasible. There may however be particular complexities about introducing it in bodies such as the European Parliament.
The Lamfalussy Level 3 Committees have decided to undertake impact assessments, where appropriate, to inform the advice they give to the Commission (at so called 'Level 2'). The Committees have adapted the Commission's impact assessment methodology.
Consultation
The Commission enhanced the level of consultation on policy initiatives following the Lamfalussy report in February 2001 (the Report by the Committee of Wise Men on the Regulation of European Securities Markets, chaired by Baron Lamfalussy). Typically, the Commission now appoints an expert group comprising industry, academics and consumers as a first stage in formulating policy. There is also extensive consultation with regulators through the Lamfalussy Level 3 Committees, including formal Commission calls for advice on specific issues – the Committees will often consult before offering advice to the Commission. The Commission has also set up two more permanent consultative user groups, Fin-Use and the Financial Services Consumer Group. The latter is a sub-group of the European Consumer Consultative Group.
Non-legislative tools
Legislation is often not the best tool to use even where market failures can be shown to exist. Legislation may be:
- inflexible and difficult to amend or repeal where it fails to have the intended results;
- subject to political special pleading;
- disproportionate and costly to implement where firms have to update systems to comply with new requirements.
It therefore makes sense, where feasible, to tackle obstacles to the single market by considering first whether non-legislative action can better address market failures. In particular, there may well be a role for EU and national competition authorities to use their powers to attack anti-competitive practices, abuses of dominant positions or barriers to entry. In other areas, codes of conduct may have a useful role to play. Non-legislative approaches have recently been followed in the areas of clearing and settlement and the sectoral enquiries into payments and business insurance.
Evaluation
It is frequently difficult to assess in advance whether a particular policy or legislative requirement will succeed in delivering the expected outcome. Indeed, the history of financial regulation demonstrates that misbehaviour occurs despite the fact that there are rules in place designed to prevent such practices. It is therefore very important to determine whether a particular policy has worked, and evaluation of a measure necessarily forms part of better regulation. The Commission has embarked on a detailed evaluation of the FSAP.
Principles based regulation
European law takes priority over domestic law. It is therefore critical that European legislation does not undermine the FSA's ability to continue with its policy of moving to a more principles-based approach, where it is appropriate to do so. The FSA's experience has been that ever more detailed and prescriptive rules tend to be ineffective at preventing misconduct, do not allow for innovation and development in the market, and tend to encourage staff to comply with the letter of the rule but ignore what the rule is designed to achieve. In our view it is important that high standards are viewed as everyone's business, with a particular emphasis on senior management responsibility.
Much European legislation is in the form of Directives. These express the objective to be achieved but leave Member States to determine the manner and form. In principle, therefore, European directives are principles based, and should not generally prevent the FSA from pursuing its policy of principles-based regulation. However, there has been a tendency for some directives to contain increasing levels of detail, and it will be important to ensure that future legislation remains focused on objectives, is not excessively detailed, and does not prescribe ways in which directive objectives are to be met.