Financial Services and Markets Act 2000: the Financial Services Authority
The introduction of statutory supervisory arrangements since 1979 marked the beginning of an era of relatively frequent overhauls of regulatory architecture. The Banking Act 1979 was a response to the secondary banking crisis of 1973-1975. The original 1979 structure put in place a two-tier system whereby banks of high reputation and standing were not
Regulatory architecture of the UK banking system 33 subject to licensing and supervisory requirements, whereas smaller deposit-takers were. A formal deposit protection scheme was also introduced. This structure attracted heavy criticism after the collapse of Johnson Matthey, an established bank, in 1984. As a result, the Banking Act 1987 introduced a comprehensive regime of authorisation and supervision for all deposit takers as well as the requirement that both firms and senior persons are fit and proper to engage in banking. At the same time, insurance companies were regulated by the Department ofTrade and Industry and other financial sector firms were regulated by five self-regulating organisations, which were overseen by the Securities and Investment Board (SIB). The SIB was a statutory body under the Financial Services Act 1986, which, as we will see, in due course evolved into the FSA, and eventually into the present-day FCA.
By the mid-1990s, the heavily fragmented and partially self-regulatory nature of financial supervision was perceived as highly problematic, especially in the light of the collapse of the Bank of Credit and Commerce International in 1991 and Barings Bank in 1995. It is of little surprise that the Labour administration which came into power in 1997 set out to rectify this problem by creating a single financial regulator, especially given the trend of integration in the financial services sector. Indeed, the SIB was renamed in October 1997 as the FSA, and assumed the de facto role of regulating investment firms and insurance companies. In June 1998, the responsibility for regulating banks was transferred from the Bank of England to the FSA by virtue of section 21 of the Bank of England Act 1998. At the same time, the Act made the Bank of England independent from the Treasury in matters of monetary policy. Eventually, in December 2001, the FSA was given full regulatory and supervisory authority over the whole financial industry sector - including banking, insurance and investment business - by virtue of the Financial Services and Markets Act 2000 (FSMA 2000). This was a period characterised by a profound belief in the ability
of market discipline - in most circumstances - to ensure customer protection and financial stability, and hence by a dominant conception of the appropriate role of regulation as one exclusively concerned with tackling market failures.
The FSA was conceived as a comprehensive regulator for the whole of the financial services sector and for all purposes. It was envisaged that its creation would enhance the effectiveness of supervision, reduce cost due to economies of scale and scope and enable the Bank of England to focus exclusively on monetary policy. This model proved popular internationally and was followed, to a greater or lesser extent, by countries such as Japan, Germany, Ireland and Austria. It reflected the increasing integration of the financial services industry with firms’ activities spanning across the conventional boundaries of retail banking, investment banking, insurance and investment management. In modern integrated financial sectors, having multiple sectoral regulators has been argued to make little sense, as it is necessary for regulators to be able to monitor the overall level of risk taken by each financial conglomerate. For instance, Alan Greenspan, Chairman of the US Federal Reserve Board, stated in 1998 that ‘Risks managed on a consolidated basis cannot be reviewed on an individual legal entity basis by different supervisors’. However, as the 2008-2009 financial crisis revealed, regulating firms for all purposes including both prudential regulation and conduct of business regulation came at the cost of diluting emphasis on prudential concerns. This issue will be discussed further in Section 3.5.
-  See Andenas and Chiu (n 2) 5. 2 Banking Act 1979, s 29 (as originally enacted) provided for a protection limit of £10,000 of which 75% could be claimed. 3 Banking Act 1987, ss 8-14 (as originally enacted). 4 A detailed examination of the Act can be found in Graham Penn, Banking Supervision: Regulation of the UK Banking Sector under the Banking Act 1987 (Butterworths 1989). 5 The five self-regulating organisations, known as SROs, were the following: the Association of Futures Brokers and Dealers (AFBD); the Financial Intermediaries, Managers and Brokers Regulatory Association (FIM-BRA); the Investment Management Regulatory Organisation (IMRO), the Life Assurance and Unit Trust Regulatory Organisation (LAUTRO), and The Securities Association (TSA). In 1991, the AFBD and TSA were replaced by the Securities and Futures Authority (SFA), and in 1994, the FIMBRA and LAUTRO were replaced by the Personal Investment Authority (PIA), thus reducing the number of SROs to three. On this point, see Eilis Ferran, ‘Examining the UK’s Experience in Adopting the Single Financial Regulator Model’ (2003) 28 Brooklyn Journal of International Law 257, 266-267. 6 For a discussion of the events surrounding the failure of these banks and especially Barings, see Christos Hadjiemmanuil, ‘The Bank of England and the Lessons from Barings: UK Banking Regulation under Parliamentary Scrutiny’ (1996) 1 Yearbook of International Financial and Economic Law 333. 7 For an analysis of the policy rationales for the creation of the FSA, see Eilis Ferran (n 14) 270-271. 8 See E. Peter Ellinger, Eva Lomnicka and Christopher V.M. Hare, Ettinger's Modern Banking Law (5th edn, OUP 2011)28. 9 Bank of England Act, ss 10-19. An in-depth discussion of the concept of independent regulatory agencies can be found in Kirti Datla and Richard Revesz, ‘Deconstructing Independent Agencies (and Executive Agencies)’ (2013) 98 Cornett Law Review 769. 10 FSMA 2000, s 19 contains a general prohibition for any person to carry on a regulated activity unless it is authorised and Sch 2 provides a list of regulated activities covering inter alia deposit taking, insurance and dealing in financial instruments as principal or agent.
-  See Harry McVea, ‘Financial Services Regulation under the Financial Services Authority: A Reassertion of the Market Failure Thesis?* (2005) 64 Cambridge Law Journal 413. 2 A detailed evaluation of the introduction of the FSA as a single regulator from the perspective of regulatory effectiveness, which is supportive of the idea of single financial regulators, can be found in Richard Dale and Simon Wolfe, ‘The UK Financial Services Authority: Unified Regulation in the New Market Environment’ (2003) 4 Journal of International Banking Regulation 200. 3 See Alan Greenspan, Statement before the Subcommittee on Financial Institutions and Consumer Credit, Committee on Banking and Financial Services (United States House of Representatives 13 February 1998) 10. 4 See Robert Baldwin and Julia Black, ‘Really Responsive Regulation’ (2007) LSE Law, Society and Economy Working Papers No. 15, 3-4. 5 See Julia Black, ‘Paradoxes and Failures: “New Governance” Techniques and the Financial Crisis’ (2012) 75(6) Modern Law Review 1042-1045.