Ferran, The New Mandate For The Supervision of Financial Services Conduct'

Current Legal Problems, Vol. 65 (2012), pp.
411–453
doi:10.1093/clp/cus011
Downloaded from https://academic.oup.com/clp/article/65/1/411/356878 by Queen Mary University of London user on 09 December 2020
The New Mandate for the Supervision
of Financial Services Conduct
Eilı́s Ferran *
Abstract: The UK is redesigning the institutional architecture of financial
services supervision. The Financial Conduct Authority is meant to play a
central role in the reformed system by delivering a new policy approach to the
supervision of financial services conduct, which places considerable emphasis
on competition as a force for the promotion of good consumer outcomes.
The article examines the Financial Conduct Authority’s statutory mandate,
and focuses in particular on the interaction of the competition and consumer
protection objectives. It accepts that putting a heavy responsibility on a
financial regulator to create the right environment for competition in finan-
cial services to flourish has the potential to help consumers, but it is skeptical
about the likelihood of success. The article examines the risk of lighter
forms of regulation once again coming into favour as, over time, the current
drive for more consumerprotection increasingly gives way to a competition-
promoting, business-friendly agenda. It explains why a statutory mandate is a
weak mechanism for preventing this result.
Another New Approach to Financial Regulation

The British public has learnt, to its immense cost, what can happen if
booms are allowed to spiral out of control. Society, in no mood to tolerate
continued financial sector excess, wants a crackdown. To put it simply, we
do not want ever again to have to bail out institutions run by greedy and
reckless bankers, and taking advantage of the window of opportunity
opened up by the banking crisis, we want an end to being ripped off by
the financial industry. Stability, safety, and resolvability on the prudential
side, and competition and fairness for consumers on the conduct side, are
among the current buzzword concepts in the regulatory policy lexicon,
* Eilı́s Ferran, Professor of Company and Securities Law and JM Keynes Fellow,
University of Cambridge. Email: evf1000@cam.ac.uk. I have benefited from being able
to present an early version of this article as a Current Legal Problems lecture. I am very
grateful to past and present Cambridge colleagues (Albertina Albors-Llorens, Bill Allan,
Angus Johnston, and Oke Odudu) for their patient guidance on matters of competition
law and for their insightful comments on draft versions of these papers. I have also bene-
fited from comments from two anonymous referees. The usual disclaimer applies.
ß The Author 2012. Published by Oxford University Press. All rights reserved.
For permissions, please e-mail: journals.permissions@oup.com
412 Eilı́s Ferran
especially in relation to banks, which are regarded as the source of the
most serious current problems.
The Financial Services Bill (Bill or FSB), which is making its way
through Parliament at the time of writing (July 2012), is the UK’s official
response.1 The Bill has ambitious aims: ‘we will reform the regulatory
system to avoid a repeat of the financial crisis.’2 The Bill dismantles the
integrated supervisory model. It vests control of prudential supervision,
both micro and macro, in the Bank of England and converts what will
remain of the Financial Services Authority (FSA) into the Financial
Conduct Authority (FCA). The Bank of England’s immense range of
powers and responsibilities under the new regime has, rightly, attracted
much attention. Yet it is also important to look closely at the FCA since it
is the body that is intended to play a central role in delivering a new policy
approach to the supervision of financial services conduct, which places
considerable emphasis on competition as a force for the promotion of
good consumer outcomes.
The FCA’s mandate, the innovative inclusion of the promotion of
competition in the statutory objectives, the interaction and potential
frictions between the competition and consumer protection objectives,
and ultimately, the limitations of a statutory mandate as a controlling
influence over supervisory behaviour, are the key issues examined in this
article.
Moderating Society’s Demands

What society wants, society gets? At one level, the answer must be an
unequivocal ‘yes’ because that is democracy: ultimately financial regula-
tion is society’s servant, not its master. Going back to first principles
of financial regulation, consumer demand is an important part of the
1
This was developed in a series of ‘new approach’ consultation papers issued by HM
Treasury: A New Approach to Financial Regulation: Judgement, Focus and Stability (Cm
7874, 2010); A New Approach to Financial Regulation: Consultation on Reforming the
Consumer Credit Regime (2010); A New Approach to Financial Regulation: Building a
Stronger System (Cm 8012, 2011); A New Approach to Financial Regulation: The
Blueprint for Reform (Cm 8083, 2011); A New Approach to Financial Regulation:
Securing Stability, Protecting Consumers (Cm 8268, 2012).
2
Financial Services Bill, Explanatory Notes, para 3, quoting from the Government
publication: The Coalition: Our Programme for Government. The version of the Bill and
accompanying Explanatory Notes referred to in this article is as brought from the House of
Commons on 23 May 2012.
Supervision of Financial Services Conduct 413
economic case for intervention in financial markets.3 Purchasers of finan-
cial products and users of financial services are in a weaker position than
consumers in many other markets because of the experience nature of
financial products and services,4 the large amounts often involved, the
long duration of many financial transactions and the infrequency with
which they are entered into by most consumers, the great informational
imbalances, and typical industry incentive structures. Much has to be
taken ‘on trust’. Trust, along with ‘confidence’, is a term that is widely
used to embody the indispensible core attributes that potential users must
see in a financial system if it is to have any hope of flourishing.5 Trust and
confidence in financial markets can develop informally, but not always.6
This gives rise to a need for the State to supply regulation that sets and,
through a system of public supervision and enforcement, ensures the
effective implementation of boundaries between acceptable and un-
acceptable behaviour.
State provision of regulatory requirements and supervision is not ne-
cessarily inimical to firms’ interests because it can reduce transaction costs
and bolster the credibility of the regulated industry’s soundness and re-
liability, thereby mitigating the ‘lemons’ problem.7 Indeed, idealistic
views of the purposes served by regulation are challenged by powerful
economic analysis that characterizes regulation as a set of requirements
that, though publicly administered, actually serve private industry inter-
ests by acting as barriers to entry for new players and thereby shielding
3
D Llewellyn, The Economic Rationale for Financial Regulation (FSA Occasional
Papers, 1999) 30–32.
4
Experience goods being goods whose characteristics, such as quality or price, cannot
be easily ascertained in advance: P Nelson, ‘Information and Consumer Behavior’ (1970)
78(2) Journal of Political Economy 311.
5
L Zingales, A Capitalism for the People: Recapturing the Lost Genius of American
Prosperity (Basic Books 2012) 166–69. The vital importance of trust is embedded in
public sector thinking, as evidenced by the US Treasury’s description of its role as being
to strive ‘to maintain public trust and confidence in U.S. and international economic and
financial systems’: US Department of Treasury, Strategic Plan Fiscal Years 2007-2012, 5.
6
One example is that some authors have attributed the rise of dispersed share owner-
ship in the UK, which occurred before the enactment of extensive investor protection laws,
to informal relations based on trust: C Mayer, ‘Trust in Financial Markets’ (2008) 14
European Financial Management 617; J Franks, C Mayer and S Rossi, ‘Ownership:
Evolution and Regulation’ (2009) 22 Review of Financial Studies 4009. However,
Cheffins describes the use of ‘trust’ in this context as ultimately unhelpful because its
meaning depends on the context and once the context is known, it is analytically reducible
to other more precise concepts: BR Cheffins, Corporate Ownership and Control (OUP
2008), in particular at 41–44.
7
GA Akerlof, ‘The Market for “Lemons”: Quality Uncertainty and the Market
Mechanism’ (1970) 84 The Quarterly Journal of Economics 488.
414 Eilı́s Ferran
established firms from unwelcome competition.8 In view of the promin-
ence of the interplay between competition and regulation in current
policy discourse with respect to financial services in the UK, the potential
for regulation to inhibit competition is worth highlighting at this early
stage in the discussion.
The critical need for public intervention to restore trust and confidence
has been a constant refrain in policy debates in the aftermath of the
financial crisis. Early on in the crisis, the Chairman of the Federal
Reserve, Ben Bernanke, singled out ‘loss of confidence by investors and
the public in the strength of key financial institutions and markets’ as
being ‘at the root of the problem’ and predicted that ‘the crisis will end
when comprehensive responses by political and financial leaders restore
that trust, bringing investors back into the market and allowing the
normal business of extending credit to households and firms to
resume’. Other officials have echoed this sentiment.9 Scholars have also
stressed the damage to trust and confidence wrought by the financial
crisis, and have focused on the urgent need for reforms to restore these
key features.10 Providing a broader, historically informed context for the
current emphasis on the need to restore trust and confidence, George
Akerlof and Robert Shiller point out that that boosting confidence was
also a priority in the discourse that followed the stock market crash of
1902 and during the Great Depression of the 1930s.11
However, the general public’s demand for strengthened, confidence-
restoring financial regulation is a blunt instrument and the clamour
provoked by a crisis must always be moderated. Account must be taken
of an array of competing considerations, including accumulated know-
ledge on what makes for good regulatory and supervisory design, and the
inevitability of resource constraints. Irrational preferences, into which
category must certainly go the notion that a regulatory fix can provide
8
GJ Stigler, ‘The Theory of Economic Regulation’ (1971) 2 Bell Journal of Economics
and Management Science 3.
9
S Ingves, ‘A Cure for Crises – Confidence, Confidence and Trust’, speech by the
Governor of the Sveriges Riksbank, at the Eurofi Forum, Gothenburg, 29 September 2009
<http://www.bis.org/review/r091005b.pdf> accessed 19 July 2012. Having come
through their own banking crisis in the early 1990s, Swedish officials are particularly
well-placed to reflect on the fundamental causes of market turmoil and the critical com-
ponents of cures.
10
F Tonkiss, ‘Trust, Confidence and Economic Crisis’ (2009) 44 Intereconomics 196;
F Roth, ‘The Effects of the Financial Crisis on Systemic Trust’ (2009) 44 Intereconomics
203; J Springford (ed), A Confidence Crisis? Restoring Trust in Financial Services (The Social
Market Foundation 2011).
11
GA Akerlof and RJ Shiller, Animal Spirits: How Human Psychology Drives the Economy,
and Why It Matters for Global Capitalism (Princeton University Press, 2009) ch 1.
a permanent and rock solid guarantee against future failure, and the idea
that regulation can eliminate the risks that are inherent in economic
activity, need to be excluded. To allow the belief to take hold that com-
prehensive protection from harm can be provided would be an unwise
and ultimately counterproductive step because if everyone mistakenly
feels that they are operating in a risk-free environment, excessive
risk-taking is the all-too-likely outcome. Restoring confidence in finan-
cial markets must not be allowed to morph into the promotion of
over-confidence.12
Moreover, little more than a moment’s reflection on the issues that lie
behind populist headlines that are fuelled by political rhetoric that seeks
to capture the public mood by extolling the virtues of ‘responsible’ or
‘moral’ capitalism13 soon reveals the need for this regulatory overhaul to
be done in a sophisticated and nuanced way so as not to inflict unneces-
sary damage on a vital sector of the domestic economy. To intervene to
such an extent that large swathes of worthwhile financial services activity
would be stultified and economic growth stalled would not benefit society
in the long run. The dangers of misjudging the reach of regulation are
especially acute because the UK specializes in financial services and has
done so for a long time. On standard measures, output in the financial
sector between 1997 and 2007 grew at over 6 per cent compared to
3 per cent growth in overall GDP.14 Even in the peak crisis year of
2008, financial sector exports still accounted for a third of the UK’s
services exports, or 4 per cent of GDP.15
Notwithstanding difficult market conditions in the subsequent years,
during which period financial services exports have fallen, the sector has
continued to be a major employer and to make a large contribution to the
government’s overall tax take.16 It is not necessary to dwell very long on
the economic figures to be able to appreciate that however much we may
aspire to reduce the economy’s dependency on the financial sector in the
12
This has long been recognized: FSA, Reasonable Expectations: Regulation in a Non-zero
Failure World (September 2003).
13
For incisive commentary on the political rhetoric: W Hutton, ‘Words Won’t Change
Capitalism. So Be Daring and Do Something’ The Observer 22 January 2012, 42.
14
S Burgess, ‘Measuring Financial Sector Output and Its Contribution to UK GDP’
(2011, Q3) Bank of England Quarterly Bulletin 234. See also A Haldane, S Brenna and
V Madouras, ‘What is the Contribution of the Financial Sector?’, in A Turner and others,
The Future of Finance: The LSE Report (LSE 2010).
15
K Kamath and V Paul, ‘Understanding Recent Developments in UK External Trade’
(2011, Q4) Bank of England Quarterly Bulletin 294, 299.
16
It employed around 1.1 million people as of September 2011 and contributed more
than 12 per cent of the total tax take during the previous financial year: Treasury Select
Committee (TSC), The Financial Conduct Authority (HC 1574, 2012) 67.
416 Eilı́s Ferran
longer term, and however pressing the need to reorient the industry
towards more socially worthwhile and less risky activities, we still
cannot afford to cut it down too much.
The need for balance is not new, as reports from previous era on the
financial system and on regulatory reform amply demonstrate.17 That
nothing is free, that new regulatory burdens and more intrusive super-
visory styles will generate costs as well as benefits, is the perennial
dilemma in financial regulation, and trade-offs always have to be struck.
Drivers of Change
So what changes? Theory tells us there is a role for financial regulation to
correct market failures.18 However, while market failure analysis provides
a basis for action, once past the starting point, the fashioning of detailed
reforms tends to be an exercise that is driven largely by empiricism. Each
new scandal or crisis reveals failures that are different in nature or extent
from what was previously assumed. The relative value of the many factors
that go into the balancing equation changes accordingly. Shifting political
preferences are also in play, as political leaders search for new initiatives
that will satisfy the public demand for decisive action without destroying
vital industry competitiveness.
The development of financial regulation as an empirical and incre-
mental process based on trial and error and strongly influenced by politics
has been much in evidence in the UK in the aftermath of the financial
crisis. Taking the political influences first, since redesigning financial
supervisory architecture has long been a popular option for British pol-
iticians keen to make an impact, it is no surprise that we have embarked
yet again on an institutional revamp.19 Institutional redesign seems to
17
Committee to Review the Functioning of Financial Institutions (Wilson
Committee), Report (Cmnd 7937, 1980) 289 (‘The dilemma for the regulatory
authorities . . . is to devise effective methods of regulation which do not so stifle competi-
tion between the financial institutions as to lose their customers the advantages usually
associated with it in terms of price, innovation and quality and variety of service’); LCB
Gower, Review of Investor Protection (Cmnd 9125, 1984) 7 (‘But inevitably there is a
tension between market efficiency and investor protection which often pull in different
directions . . . One has to make a value judgment on the relative weight to be attached to
market freedom and to investor protection’).
18
J Stiglitz, The Role of the State in Financial Markets (World Bank, Washington DC
14334, 1994); FSA, A Guide to Market Failure Analysis and High Level Cost Benefit Analysis
(2006).
19
E Ferran, ‘The Break-up of the Financial Services Authority’ (2011) 31 Oxford
Journal of Legal Studies 455.
have enduring appeal as a handy (if rather costly) way of meeting the
political desire to be seen to be doing something bold.20 But that domes-
tic reform efforts are being so concentrated in this direction must also
now be viewed through the prism of the UK’s changed position vis-à-vis
the EU with respect to the location of regulatory competences. Although
some of the recent, politically charged, alarm calls about an EU takeover
of financial regulation may be overstated, it is undeniable that the applic-
able legislative and regulatory framework (ie ‘regulation’ in the narrow
rule-making sense) has become increasingly uniformly pan-European.
For instance, according to one estimate, the portion of capital markets
law that is directly applicable European law (ie in the form of
Regulations) is approaching 70 per cent.21 With respect to financial ser-
vices directives, moreover, ‘maximum harmonization’ has moved into the
ascendancy as the preferred regulatory approach, a development that has
been facilitated by a more sophisticated rulemaking machinery that can
now run the gamut from ‘framework’ primary legislation through to
binding technical standards on matters as detailed as the type and
format of reporting requirements.22 Member States have not been
reduced to the role of mere passive takers of standards imposed from
above, but they must act in a strategically different way from not that long
ago because, more often than not, they have to work through the EU in
order to make their views on significant matters of substantive financial
regulation count. The limited room for manoeuvre on the rule-making
side is in quite sharp contrast to the position with respect to supervision
because, for now at least, implementation, oversight, and enforcement
remain national level responsibilities, albeit with an EU overlay. These
20
The expected transition costs have been put in the region of £275 million, split £175
million (adaptation costs for the public authorities involved in the restructuring) and £100
million (industry adaptation costs): HMT, A New Approach: Securing Stability (n 1) Annex
D, impact assessment.
21
R Veil and P Koch, ‘Towards a Uniform European Capital Markets Law: Proposals of
the Commission to Reform Market Abuse’ (2012) Bucerius Law School Working Paper
No 1/2012 <http://ssrn.com/abstract=1998376> accessed 19 July 2012.
22
On the new rule-making machinery for financial services regulation: E Ferran,
‘Understanding the New Institutional Architecture of EU Financial Market
Supervision’ in G Ferrarini, KJ Hopt and E Wymeersch (eds), Rethinking Financial
Regulation and Supervision in Times of Crisis (OUP 2012); N Moloney, ‘The European
Securities and Markets Authority and Institutional Design for the EU Financial Market –
A Tale of Two Competences: Part (1) Rule-Making’ (2011) 12 European Business
Organization Law Review 41.
Maximum harmonization is also a general trend in the related field of the EU consumer
law: B Keirbilck, The New European Law of Unfair Commercial Practices and Competition
Law (Hart Publishing 2011) 182–95.
418 Eilı́s Ferran
developments with respect to distribution of competences may have had
the incidental side-effect of magnifying the appeal of organizational
reform to national politicians, simply because it is one area where the
taking of seemingly audacious steps is still within their full control.
As for empirical evidence of past mistakes, much has certainly been
revealed by the financial crisis about regulatory and supervisory policies
that did not go far enough, or which were otherwise flawed. The fate of
the one-time flagship FSA policy initiative on ‘treating customers fairly’
provides an apt illustration of a serious miscalculation in pre-crisis regu-
latory thinking. During the 2000s, the FSA built a large part of its super-
visory approach on the assumption that ‘the vast majority of firms intend
to treat their customers fairly’.23 With up to £9 billion now due to be paid
out in redress to customers who were mis-sold payment protection in-
surance (PPI) and with other reprehensible instances of selling of unsuit-
able products to older and vulnerable customers having now come
to light,24 it is clear that supervisors over-estimated the extent to which
it was safe to seek to capitalize on firms’ self-interest in behaving well.
Events delivered a sharp reminder of how the private costs that firms incur
in absorbing the fallout from ‘bad’ behaviour may be considerably less
than the social costs generated by that conduct. The approach now
espoused of intrusive supervisory product intervention,25 which, in the
UK and eventually at the EU level, will be backed by new legal power for
supervisors to ban products, is a clear manifestation of learning from
experience in this respect.26
Although events and politics rather than ideas are in the driving seat,
the quest for new solutions can lead policymakers to be more skeptical
about received wisdom and to embrace alternative theoretical
approaches. Crisis situations provide a window for policymakers, in
the jargon, to ‘think outside the box’. With the once totemic notion
of market efficiency and the largely unquestioned idea of financial
23
FSA, Treating Customers Fairly - Towards Fair Outcomes (2006) 7.
24
Discussed in E Ferran, ‘Regulatory Lessons from the Payment Protection Insurance
Mis-selling Scandal in the UK’ (2012) 13 European Business Organization Law Review
247.
25
FSA, Product Intervention (DP11/1), 45–46; FSA, Feedback on DP11/1 (FS11/3).
26
FSB, cl 22 inserting Financial Services and Markets Act 2000, s 137C (FSMA). There
will also be a new power for the FCA to direct firms to withdraw or refrain from approving
mis-leading financial promotions: FSB, cl 22 inserting FSMA, s 137Q.
The MiFID II Proposal for a Regulation adopted by the Commission in October 2011
proposes (arts 31–33) product intervention powers for national competent authorities and
for the European Securities and Markets Authority (ESMA): COM(2011) 652.
innovation as being invariably a force for good now discredited,27 the way
has been cleared for behaviourally informed thinking to break through
into the policy mainstream.28 Relaxing the assumption of investor ra-
tionality can be explained in economic terms as simply the logical pro-
gression from the relaxation of the assumption of perfect information that
has become firmly embedded in the standard thinking about regulation
and which has spawned a large corpus of disclosure-based mandatory
requirements designed to correct information asymmetries-related
market failures.29 However, because intervention to correct consumer
irrationality is so openly aimed at protecting people from their own
mistakes, it has strong paternalistic connotations that for a long time
have been largely absent from the debate about the appropriate inter-
action between regulation and financial markets.30
Equipping the Supervisor to Deliver a Rebalanced

Approach—The Need for a Clear Statutory Mandate
Early pronouncements by key personnel have made it clear that the FCA
intends to take a behaviourally informed approach and that it will be
ready to step into the footprints of financial consumers since they cannot
be counted on to make rational choices for themselves.31 The new stance
with respect to product intervention is an important part of this trend.
27
SA Lumpkin, ‘Regulatory Issues Related to Financial Innovation’ (2009) 2 Financial
Market Trends <http://www.oecd-ilibrary.org/finance-and-investment/oecd-journal-
financial-market-trends/volume-2009/issue-2_fmt-v2009-2-en> accessed 19 July 2012.
28
Charting the rise of behavioural finance in financial regulation: J Black, ‘Financial
Markets’ in B Kritzer and P Cane (eds), Oxford Handbook of Empirical Legal Research
(OUP 2010).
29
C Camerer and others, ‘Regulation for Conservatives: Behavioral Economics and the
Case for “Asymmetric Paternalism” ’ (2003) 151 University of Pennsylvania Law Review
1211, 1218.
30
A growing body of recent literature has favoured more paternalistic intervention
across a range of areas. Prominent papers and other publications include: C Jolls, CR
Sunstein and R Thaler, ‘A Behavioral Approach to Law and Economics’ (1998) 50
Stanford Law Review 1471; RB Korobkin and TS Ulen, ‘Law and Behavioral Science:
Removing the Rationality Assumption from Law and Economics’ (2000) 88 California
Law Review 1051; RH Thaler and CR Sunstein, ‘Libertarian Paternalism’ (2003) 93
American Economic Review 175; C Jolls, ‘Behaviorial Law and Economics’ (2007)
NBER Working Paper No 12879; JD Wright, ‘Behavioral Law and Economics,
Paternalism, and Consumer Contracts: An Empirical Perspective’ (2007) 2 NYU
Journal of Law & Liberty 470; RH Thaler and CR Sunstein, Nudge: Improving
Decisions about Health, Wealth and Happiness (Yale University Press 2008).
31
B Masters, ‘Watchdog to Protect “Irrational” Investors’ Financial Times 24 January
2012, 1.
420 Eilı́s Ferran
Such statements of intent herald a quite different style of supervision from
the one that we have been used to.
The FCA (to be)’s embrace of a more paternalistic style of supervision
is rooted in a well-meant desire to promote fairness in financial dealings,
and who would not welcome that? The now-famous contrast drawn by
Harvard professor Elizabeth Warren between the impossibility of buying
a toaster that has a significant chance of burning your house down,
and the ease with which it is possible to buy risky financial products
that could destroy your financial well-being and result in you losing
your home, has compellingly encapsulated the need for a new
approach.32 Moreover, that the FCA’s management-elect has assumed
such a prominent role in the articulation of a move in this direction is
consistent with the established modes of behaviour by financial super-
visors. Julia Black, a close observer of the conduct of supervision, has
described an approach in which authorities ‘develop their own percep-
tions of their role, and seek strategically to manage the competing role
perceptions and demands for legitimacy that others make through this
interpretation and articulation of their role and relative institutional
position’.33
Supervisory self-determination is broadly to be welcomed because it
accords with the fundamental principles of independence and autonomy
that are now seen to be crucial to effective financial market supervision.34
Financial supervisors should develop a strong internal sense of identity in
order to insulate themselves from the destabilizing influence of short-
term political preferences and from industry lobbying. Nevertheless, a
degree of caution is warranted. As every lawyer knows, fairness is a stand-
ard that is context-dependent—‘more easily recognized when found than
exhaustively analysed in the abstract’.35 A thicket of regulatory rules and
requirements goes some way towards defining in a concrete way the
standards of fair play expected in particular situations, but rules do not,
and cannot, cover everything that a supervisor is likely to encounter.
32
E Warren, ‘Unsafe at Any Rate’ (Summer 2007) Democracy 8. See also O Bar-Gill
and E Warren, ‘Making Credit Safer’ (2008) 157 University of Pennsylvania Law
Review 101.
33
Black, ‘Financial Markets’ (n 28).
34
M Quintyn and M Taylor, ‘Robust Regulators and their Political Masters:
Independence and Accountability in Theory’ in D Masciandaro and M Quintyn (eds),
Designing Financial Supervision Institutions: Independence, Accountability, and Governance
(Edward Elgar 2007).
35
Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773 [93] (Lord Clyde). On the
risks associated with a fairness-based approach in the financial services regulatory context,
see N Moloney, How to Protect Investors (CUP 2010) 217–19.
A pertinent illustration of the limitation of rules is that the existence of
a detailed rulebook did not prevent the FSA from failing in the opinion
of its top officials to meet the expectations of society with respect to
consumer protection.36 The FCA will itself have rulemaking powers
(in areas not (yet) comprehensively covered by uniform EU rules) and
it will have to make supervisory judgments on a more or less daily basis
on the application of rules to particular circumstances and about the use
of discretionary powers. Much could go wrong.
The most obvious risk in the short run is that well-meant but poorly
targeted interventions by the FCA could undermine market efficiency
and, at worst, could lead to outcomes that undermine rather than im-
prove the position of those they were meant to help.37 The libertarian free
market values of the classical law of contract and the narrow confines
of common law protections from others’ sharp practice or our own
incompetence are below the modern standards of fairness that must
obtain if trust and confidence in financial markets are to be maintained.
Nevertheless, the wisdom embedded in the interrelated notions that per-
sonal autonomy includes the freedom to make mistakes and that people
grow by learning from their mistakes has not been totally eclipsed.
Furthermore, supervisors are themselves not immune from the cognitive
biases that afflict the rest of us. Studies about how flawed heuristics could
affect supervisory behaviour are already starting to emerge.38
Add to this the recognition that maintaining regulatory and supervis-
ory ardour is likely to become progressively harder once economic con-
ditions improve, and the true immensity of the FCA’s challenge becomes
clear. This analysis points towards an interim conclusion that the delivery
of ‘good’ supervision, which is now perceived to be characterized by an
approach that is ‘intrusive, skeptical, proactive, comprehensive, adaptive,
and conclusive’,39 is simply too complex and too important a task for
36
H Sants, ‘Creating the FCA’, Speech, BBA Conference 2 March 2011 <http://www
.fsa.gov.uk/library/communication/speeches/2011/0302_hs.shtml> accessed 19 July
2012.
37
It remains to be seen whether the FSA’s Retail Distribution Review will become a
classic example of this law of unintended consequences. This initiative has led to reforms
that ban the payment of commissions by fund managers to independent financial advisers.
This is meant to improve transparency for retail investors and to generate more compe-
tition on fees among advisers but there is a danger that it could lead to withdrawals from the
advice business and/or the greater exposure of retail investors to potentially more risky
investments.
38
JC Cooper and WE Kovacic, ‘Behavioral Economics: Implications for Regulatory
Behavior’ (2012) 41 Journal of Regulatory Economics 41.
39
J Viñals and J Fiechter, ‘The Making of Good Supervision: Learning to Say “No” ’,
IMF Staff Position Note, 18 May 2010, SPN/10/08.
422 Eilı́s Ferran
even the most self-confident and sure-footed supervisory authority not to
need significant support. Buttressing is required to empower, legitimize,
and control. International Monetary Fund (IMF) officials have identified
the features that should be present in a financial regulatory system in
order to support the supervisory ‘will to act’ and the delivery of good
supervision as being a clear and unambiguous mandate, operational in-
dependence coupled with accountability, skilled staff, and a relationship
with industry that avoids regulatory capture.40
In the current period, when the legislative framework governing finan-
cial regulation is being redrawn, the mandate for action merits particu-
larly close attention. In the literature on financial supervisory design, a
distinction is often drawn between ‘goal independence’ and ‘instrument’
or ‘operational independence’ in order to make the point that it is proper
for goals to be set in the law establishing the authority, while the actual
formulation and implementation of supervisory policies should be left to
the independent judgment of specialist officials.41 The distinction be-
tween goal independence and operational independence is helpful for the
inquiry pursued in this article. Applying the distinction, the adoption of a
statutory mandate can be viewed as being aimed at providing a demo-
cratically legitimate statement of the fundamental goals of financial regu-
lation and setting boundaries within which operational independence
can operate freely. Getting the mandate right is therefore of foundational
importance.
The Desirable Features of a Statutory Mandate for the FCA

A good statutory mandate would provide a useful and comprehensible
guide to what society expects from supervision, expressed in language that
is sufficiently clear to guide the FCA but without unduly cramping its
supervisory style or imposing rigidly prescriptive, ‘one size fits all’ re-
quirements that would be hopelessly inappropriate given the range of
actors, situations, and transactions for which the FCA will have conduct
of business oversight responsibilities.42 It would be a well-judged
40
ibid.
41
S Fischer, ‘Modern Central Banking’ in F Capie and others (eds), The Future of
Central Banking: The Tercentenary Symposium of the Bank of England (CUP 1994);
Quintyn and Taylor (n 34) 13–14.
42
The boundary line between PRA and FCA responsibility for prudential supervision is
to be set by HM Treasury Order. A draft version of the Order has been published to assist
Parliamentary scrutiny: The Financial Services and Markets Act 2000 (PRA-Regulated
distillation into achievable goals of the myriad post-crisis and, therefore,
battle-hardened views on what financial regulation should look like.
It would provide an unambiguous basis for action, thereby conferring
legitimacy, and would serve to motivate individuals to act, that is, it
would be framed with a view to having behavioural and cultural effects.
It would also be part of the framework of accountability.
How well does the FCA’s actual mandate shape up when assessed with
these criteria in mind? To address this question it is worthwhile, first, to
identify lessons that can be drawn from past experience on the scope of
financial supervisory mandates.
The Statutory Mandate: What We Have Learnt from

Experience About Why and How it Matters
A formal statutory mandate, in the form of explicit regulatory objectives
and regulatory principles, was an innovation in the original Financial
Services and Markets Act 2000 (FSMA). The FSA’s predecessor, the
Securities and Investments Board, had derived its powers via delegation
from government and was under more direct political control.43 At the
time of their introduction, there was a view that objectives and principles
could act as ‘a valuable framework and discipline . . . and open the way to
judicial review proceedings’.44 However, this view was not universally
shared: an alternative opinion was that because performance against the
objectives was not measurable, ‘these objectives, for all practical purposes,
are non-operational.’45
The reality has been different from both predictions. Experience
quickly demonstrated that because the objectives and principles operated
at a general level rather than in relation to specific actions46 and also were
Activities) Order 201* <http://www.hm-treasury.gov.uk/d/fin_fs_bill_draft_si_pra_

regulated_activities_order_jan2012.pdf> accessed 19 July 2012. As well as banks and
insurance companies, some large investment firms that deal in investments as principal
will be subject to PRA prudential regulation.
43
Financial Services Act 1986, ss 114–118 and schs 7–9; B Rider, C Abrams and M
Ashe, Guide to Financial Services Regulation (3rd edn, CCH 1997) 27–33.
44
Joint Committee on Financial Services and Markets, First Report (HC328 I-II, HL50
I-II, 1999) para 23, quoting the Delegated Powers Committee.
45
CAE Goodhart, ‘Regulating the Regulator - An Economist’s Perspective on
Accountability and Control’ in E Ferran and CAE Goodhart (eds), Regulating Financial
Services and Markets in the 21st Century (Hart Publishing 2001) 153.
46
Under FSMA as originally enacted (s 2), the objectives related to the FSA’s ‘general
functions’, which were defined (s 2(4)) as (a) the function of making rules (considered as a
whole), (b) the function of preparing and issuing codes (considered as a whole), (c)
424 Eilı́s Ferran
expressed in an open-textured way, they were not well-suited to the role
of being a mechanism of formal accountability through the judicial
system.47 However, this did not mean that their practical value was
negligible. Formal reporting requirements obliged the FSA to explain
its actions by reference to its statutory objectives but the operational
significance of the objectives went much deeper and wider than this.
‘Risk-based’ regulation, with risks assessed by reference to the statutory
objectives, became one of the defining characteristics of the FSA’s super-
visory style.48 Risk to the statutory objectives was thus pivotal to the
FSA’s operational approach.49 In evidence before the Joint Committee
that conducted pre-legislative scrutiny of the draft Financial Services Bill,
Christine Farnish, one time director of consumer relations at the FSA,
explained their significance in these terms: ‘I have worked for the FSA
and I know how important the objectives are in terms of driving
culture . . . Everything comes back to them, so they are extremely power-
ful and critically important.’50
One indication of the embedded importance of the regulatory object-
ives in the UK regulatory system is how prominently they figured among
the issues that came under early review as a result of the financial crisis.
The Financial Services Act 2010 made a number of piecemeal, targeted
interventions. These included a revision of the FSA’s objectives to add a
financial stability objective and to omit its public awareness objective.51
(When the FSA was first established, the view that had prevailed was that
functions in relation to the giving of general guidance (considered as a whole), and (d) the
function of determining the general policy and principles by reference to which particular
functions are performed.
47
E Lomnicka, The Financial Services and Market Act: An Annotated Guide (Sweet &
Maxwell 2002) 39.
48
J Black, ‘The Emergence of Risk-based Regulation and the New Public Risk
Management in the United Kingdom’ [2005] Public Law 512; J Gray, ‘What Next for
Risk-based Financial Regulation?’ in I MacNeill and J O’Brien (eds), The Future of
Financial Regulation (Hart Publishing 2010); I MacNeill, ‘Risk Control Strategies: An
Assessment in the Context of the Credit Crisis’, in MacNeill and O’Brien, ibid.
49
FSA, A Guide to Market Failure Analysis (n 18). See also S Heffernan, ‘UK Financial
Reform Post Crisis; Is More Regulation the Answer’ in CJ Green, EJ Pentecost and T
Weyman-Jones (eds), The Financial Crisis and the Regulation of Finance (Edward Elgar
2011).
50
Joint Committee on the Draft Financial Services Bill, Draft Financial Services Bill:
Evidence <http://www.parliament.uk/documents/joint-committees/Draft-Financial-
Services-Bill/WEBWRITTENEVIDENCE.pdf> accessed 19 July 2012, 446. The
Report of the Committee emphasized the importance of providing the right objectives
for the successor authorities: Joint Committee, Draft Financial Services Bill (HL Paper 236,
HC 1447) 11 (explaining that one of the ways in which legislation could influence the
culture of a regulator was through setting objectives).
51
Financial Services Act 2010, s 2 (amending FSMA (as originally enacted) ss 2–6).
overall financial stability concerns were embedded in the market confi-
dence objective.52) The Financial Services Act 2010 reflected the then
Government’s view that most of what the FSA needed to do in order to
reform its approach to regulation could be accomplished within its exist-
ing powers. It made an exception for the objectives on the grounds that a
formal statutory objective on stability was required in order to give the
FSA ‘the unambiguous authority to take into full account wider systemic
risks’.53 In the same tranche of reforms, the FSA acquired the power to
vary the permission of an authorized firm to engage in regulated activities
if it considered it desirable to do so in order to meet a regulatory
objective.54
The FCA’s objectives are expected to be just as influential as those they
replace.55 In its review of the proposed FCA set-up, the Treasury Select
Committee (TSC) noted that ‘[t]he statutory objectives of the FCA will
determine both what the regulator sets out to achieve and how it goes
about it. They are, therefore, extremely important. Under the current
legislation the FSA’s decisions do not normally take into account con-
siderations, notwithstanding the strength of the arguments for a particu-
lar course of action, unless these are specifically derived from their
statutory objectives and “have regard” duties. We would expect the
FCA to take a similar approach’.56 The TSC also noted the role that
the statutory objectives would be expected to play in ‘setting the tone and
direction of the FCA’.57 The Financial Secretary to the Treasury has
described the objectives as acting ‘as the day-to-day driver of the FCA’s
work and approach’.58 Hector Sants, the final CEO of the FSA, has also
reiterated the continuing importance of the statutory objectives: ‘the
essence of a judgement-based approach is a willingness to intervene
when the regulator judges that the outcomes will, in future, be at variance
to its mandate, even if the firm does not agree . . . The key to success in the
52
Joint Committee on Financial Services and Markets (n 44) para 43.
53
HM Treasury, Reforming Financial Markets (Cm 7667, July 2009) 11. In a related
reform, the Banking Act 2009 inserted into the Bank of England Act 1998 (as s 2A) a
financial stability objective for the Bank of England. Although it may now look like an
obvious gap, from a historical perspective the UK was not unusual in not spelling out a
formal stability objective in financial regulation: S Oosterloo and J de Haan, ‘Central
Banks and Financial Stability’ (2004) 1 Journal of Financial Stability 257.
54
Financial Services Act 2010, s 3 (amending FSMA (as originally enacted) ss 44–45).
55
As before, these objectives will relate to the FCA’s discharge of ‘general functions’:
FSB, cl 5 inserting FSMA, s 1B.
56
TSC, The Financial Conduct Authority (n 16) 8.
57
ibid 11. See also Joint Committee (n 50) 11 and ch 3 generally.
58
M Hoban MP, in Public Bill Committee: Financial Services Bill, Hansard, 1 March
2012, col 227, referring to the operational objectives.
426 Eilı́s Ferran
new judgement-led approach is: the ability of supervisors to identify and
focus on the big risks to their statutory objectives; [and] the capability of
supervisors to make the right judgement as to the course of action to
reduce the probability of risks to their statutory objectives.’59 Although
the details of the FCA’s risk model will be different from that used by the
FSA, the philosophy of risk-based regulation, with risks being assessed by
reference to the statutory mandate, will remain a central feature of the
supervisory approach.60
Regulatory Objectives and Principles: Mapping

the Changing Content
The FSA’s objectives immediately prior to its abolition were to maintain
confidence in the financial system, to contribute to the protection and
enhancement of the stability of the UK financial system, to secure the
appropriate degree of protection for consumers, and to reduce financial
crime. In discharging its general functions, the FSA was required so far as
was reasonably possible to act in a way which was compatible with its
regulatory objectives and which the FSA considered most appropriate for
the purpose of meeting those objectives. It was required to take account of
specified matters (which came to be known as the regulatory principles) in
discharging these general functions. No one objective had priority over
the others.
The FCA is to have different objectives and not all of the changes are
attributable to the fact that responsibility for micro and macro-prudential
supervision are to be hived off to the Bank of England group. Under
the new legislation, the FCA’s objectives are to ensure that relevant
markets function well, to secure the appropriate degree of protection
for consumers, to protect and enhance the integrity of the UK finan-
cial system, and to promote effective competition in the interests of
consumers in the markets.61 The objective of ensuring that markets
59
H Sants, ‘Update on the Regulatory Reform Programme & European Issues’, Speech,
7 February 2012 <http://www.fsa.gov.uk/portal/site/fsa/menuitem.10673aa85f4624c78
853e132e11c01ca/?vgnextoid=d224eb922a355310VgnVCM2000004fbc10acRCRD
&vgnextchannel=e17f60f62b415310VgnVCM10000044bc10acRCRD&vgnextfmt
=default> accessed 19 July 2012.
60
FSA, Business Plan 2012/3, 15-16; H Sants, ‘Delivering ‘Twin Peaks’ Within the FSA’,
Speech at BBA, 6 February 2012 <http://www.fsa.gov.uk/library/communication/
speeches/2012/0206-hs.shtml> accessed 19 July 2012.
61
FSB, cl 5 inserting FSMA, ss 1B-1E.
function well is the ‘strategic’ objective,62 while the others are the ‘oper-
ational’ objectives.63 This classification is relevant to a new hierarchy
among the objectives, which is that in discharging its general
functions the FCA must, so far as is reasonably possible, act in a way
which is compatible with its strategic objective, and which advances one
or more of its operational objectives.64 As between the operational ob-
jectives, competition is afforded a degree of priority because the FCA
must, so far as is compatible with acting in a way which advances the
consumer protection or the integrity objective, discharge its general func-
tions in a way which promotes effective competition.65 As before,
the FCA must have regard to specified matters (now formally labelled
‘regulatory principles’), but some of the items on the ‘have regard’ list
have changed.66 The general guidance given by the FCA must include
guidance on how it intends to advance its operational objectives.67 The new
statutory power whereby the FCA must investigate and report on possible
regulatory failures is framed by reference to the operational objectives.68
The FCA’s Strategic Objective: Is it Vacuous?

From the preceding outline of how the statutory objectives and regulatory
principles are meant to fit together, it would be plausible to form the
impression that the strategic objective is meant to be the lynchpin of the
system. However, this impression begins to fade on closer examination.
What is meant to be implied by the distinction between acting compatibly
with the strategic objective and advancing an operational objective is
not entirely clear.69 There is also a more general problem of vagueness.
A system that is meant to regulate an industry that has innovation and
dynamism in its DNA must have the flexibility to adapt to changing
circumstances; a degree of indeterminacy in the high-level objectives
62
FSB, cl 5 inserting FSMA, s 1B(2).
63
64
65
FSB, cl 5 inserting FSMA, s 1B(4). The concept of ‘effective competition’ is discussed
further below.
66
FSB, cl 5 inserting FSMA, s 3B, and also objective-specific have regards in s 1C(2)
(consumer protection) and s 1E(2) (competition).
67
FSB, cl 5 inserting FSMA, s 1K.
68
FSB, cl 69.
69
HM Treasury has suggested that its role is ‘supplemental’ and ‘a check and a balance’
but, as the TSC points out, it is hard to see how it can do both since these are largely
contradictory functions: TSC, Financial Conduct Authority: Report on the Government
Response (HC 1857, 2012) 4.
428 Eilı́s Ferran
is thus inevitable. Whatever form of words is chosen, the necessarily
chameleonic character of the concepts employed will inevitably make
such objectives vulnerable to the charge of being of dubious practical
value. Nevertheless, a strategic objective to ensure that markets function
well could move the position some distance beyond a useful degree
of indeterminacy. Not without justification it has been said in
Parliament that the drafting of the strategic objective could be considered
‘a bit wet’, ‘not exactly zip[ping] with ambition’ and ‘just for show’.70
The TSC queried the need for a strategic objective, arguing that the
operational objectives cover the ground, and that the inclusion of a
strategic objective as well could give rise to a complex hierarchy.71
Although the Government has not been convinced by this argument, it
is not without force.
Of course, no-one could quarrel with the notion that a regulator
should seek to ensure that the activities for which it is responsible function
well. Moreover, it can be taken for granted, without the need for this to be
specifically spelt out, that the expectation is that the FCA should oversee a
system in which markets function well in the interests of society as whole.
Even so, the wording is still very open. More could have been said. For
those steeped in the disciplines of financial regulation, the mention of
some combination of ‘fairness’, ‘efficiency’, ‘transparency’, and ‘integrity’
would have been an obvious choice for a more expanded strategic object-
ive. In discussions around the draft Bill, the FSA indicated that it envi-
saged the role of the FCA as being to promote fair, transparent, and
efficient markets.72 Ensuring ‘the integrity, transparency, efficiency and
orderly functioning of financial markets’ is a key part of the mission of the
European Securities and Markets Authority (ESMA), the European
Supervisory Authority that is the closest regional counterpart to
the FCA.73 Efficiency, fairness, and transparency are the matters that
are picked out by the International Organization of Securities
Commissions (IOSCO), along with investor protection and prevention
of systemic risk, as the core objectives of securities regulation.74 The
International Association of Insurance Supervisors (IAIS) highlights
70
Public Bill Committee: Financial Services Bill, Hansard, 1 March 2012, cols 224 and
229 (Chris Leslie MP).
71
TSC, The Financial Conduct Authority (n 16) 12–13. See also TSC, Financial Services
Bill (HC 161, May 2012).
72
Quoted in Joint Committee (n 50) 29.
73
Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24
November 2010 establishing a European Supervisory Authority (European Securities and
Markets Authority), amending Decision No 716/2009/EC and repealing Commission
Decision 2009/77/EC [2010] L331/84, art 1(5)(b).
efficiency and fairness, along with stability and safety as the key objectives
of insurance supervision.75
When considered in isolation, the curiously brief strategic objective
thus does not score well against the criteria of whether it provides the
FCA with an unambiguous mandate for action and sets appropriate
boundaries. However, the impression of extreme nebulousness that is
created by looking at the strategic objective on its own needs imme-
diately to be qualified because that approach is too blinkered. The
obvious inspiration for the wording of the strategic objective is the
world of competition policy, in which it is orthodoxy to describe the
role of competition as being to ensure that markets work well. This
insight provides the crucial connection. An examination of the way in
which policy thinking on the importance of competition in financial
regulation evolved from the first HM Treasury consultation paper on
the new regulatory system through to the actual legislation reveals
that the best way of understanding the strategic objective is to regard
it as a component part of a wider agenda to place competition at the
centre of financial regulation.76
More Competition, Less Regulation?

A strong emphasis on the promotion of competition is set to be a, if not
the, defining feature of the FCA’s role. Since so much faith has been
placed in competition as the key to the delivery of better outcomes, the
FCA’s mandate and powers in that area merit especially close attention.
At the outset of this examination, however, it is relevant to note that in
financial regulation policy discourse, ‘competition’, denoting the disci-
plining effect of market forces, has often tended to feature as a safeguard
74
IOSCO, Objectives and Principles of Securities Regulation (International Organization
of Securities Commissions, Madrid 2003) 5
75
IAIS, Insurance Core Principles and Methodology (International Association of
Insurance Supervisors, Basel 2003) 9.
76
The Independent Commission on Banking (ICB, aka the Vickers Commission),
whose views on objectives exerted considerable influence over government thinking, sug-
gested that functioning well should be in terms of competition, choice, transparency and
integrity: ICB, Final Report (September 2011) 230. The Office of Fair Trading (OFT)
thought that the objective should be expressed in terms of working well for users: quoted in
Joint Committee, Financial Services Bill (n 50) 29. The influence of the ICB’s views on this
point has been acknowledged in Parliament: M Hoban MP, in Public Bill Committee:
Financial Services Bill, Hansard, 1 March 2012, col 227. And see also HMT & BIS,
Banking Reform: Delivering Stability and Supporting a Sustainable Economy (Cm 8356,
June 2012).
430 Eilı́s Ferran
against over-regulation.77 This line of thinking sometimes blurs into
another, more explicitly, de-regulatory argument, namely, that in order
to ensure that the finance industry remains ‘competitive’, regulation
should not be imposed. Historically, financial regulation scholars have
not been as keenly concerned with the market conditions that must exist
for competition to flourish, and have focused their attention more on
situations in which a competitive marketplace is presumed to exist.
Where they have worried about competition, the concerns have tended
to cluster around the threat that unbridled competition could pose to
financial stability.78 The new FCA mandate, therefore, pushes financial
regulation scholarship into relatively unfamiliar territory by requiring it
to engage more fully with the tools to counteract anti-competitive prac-
tices that are the traditional preserve of competition law and regulation,
and the interaction between these tools and the established financial
regulatory toolkit.
The promotion of competition, understood as a mandate to ad-
dress anti-competitive market features, thus does not equate automat-
ically to an instruction to the FCA to de-regulate. Nevertheless,
because of the strong historical associations between competition
and the de-regulatory agenda in financial regulation, it is an inter-
pretation that may become associated with that objective, if not by
the FCA then certainly by future critics who perceive it to be indul-
ging in heavy-handed intervention.
Competition and Financial Regulation: Detailed Features of

the Statutory Operational Objective and Related Provisions
HM Treasury has explained that ‘[s]ecuring effective competition in the
market for financial services is a key mechanism for improving outcomes
for consumers, and the FCA’s new competition mandate will be central to
achieving this’.79 The promotion of competition in effect gets several
bites of the cherry, being an operational objective in its own right, and
also a duty that must be taken into account in advancing the other
77
See eg Competition and Regulation in Financial Services: Striking the Right Balance – An
Interim Report (1999), reproduced as Annex F to Competition in UK Banking: A Report to
the Chancellor of the Exchequer (March 2000) (Cruickshank Report).
78
E Carletti, ‘Competition and Regulation in Banking’ in AV Thakor and AWA Boot
(eds), Handbook of Financial Intermediation and Banking (Elsevier 2008) (and see also
n 151).
79
HMT, A New Approach: Securing Stability (n 1) 28.
objectives;80 this is a deliberate choice, not inadvertent duplication.81 An
operational objective on competition, it is said, will enable the FCA to act
more quickly and more effectively in already notorious areas such as the
switching of current accounts, and in relation to issues that arise in future
as a result of new products, services and structures.82 The competition
operational objective is spelt out in some detail: it is effective competition
in the interests of consumers (very broadly defined83) at which the FCA
must aim.84 This is a mandate to pursue a ‘consumer welfare’ version of
competition policy, rather than one based on ordoliberalism or on the
single-minded pursuit of allocative efficiency, without regard to distribu-
tive consequences.85
The wording of the objective and the related regulatory principles
reflects a shift in underlying ideological preferences away from the
notion that unbridled innovation is invariably socially desirable to a
more questioning and critical approach. Whereas it would have seemed
distinctly idiosyncratic in the pre-crisis era to have questioned the social
utility of increasingly esoteric financial instruments and intense high-
frequency trading, such skepticism is now a mainstream view, associated
in particular with Lord Turner, the final Chairman of the FSA.86
Innovation is relevant to the competition objective but only insofar as
the FCA may have regard to how far competition is encouraging innov-
ation in considering the effectiveness of competition in the market.87 As
well as innovation, the Act provides that the FCA may have regard in
considering the effectiveness of competition to: the needs of different
consumers, the ease with which consumers can switch services, and the
80
FSB, cl 5 inserting FSMA, s 1B(3)(c)-(4) and s 1E.
81
ICB (n 76) 230; HMT, A New Approach: Securing Stability (n 1) 28.
82
ICB (n 76) 227–30.
83
FSB, cl 5 inserting FSMA, s 1G.
84
This is similar to the objective of the Gas and Electricity Markets Authority to protect
the interests of consumers, wherever appropriate, by promoting effective competition:
Utilities Act 2000, ss 9 and 13, amending the Gas Act 1986 and the Electricity Act 1989.
85
Examining and explaining differences between these approaches: J Goyder and
A Albors-Llorens, Goyder’s EC Competition Law (5th edn, OUP 2008) 11; A Jones and
B Sufrin, EU Competition Law: Text, Cases and Materials (4th edn, OUP 2010) 23–30;
A MacCullough, ‘The Consumer and Competition Law’ in G Howells and others (eds),
Handbook of Research on International Consumer Law (Edward Elgar 2010);
JB Kirkwood and RH Lande, ‘The Fundamental Goal of Antitrust: Protecting
Consumers, Not Increasing Efficiency’ (2008) 84 Notre Dame Law Review 191;
K Cseres, ‘The Controversies of the Consumer Welfare Standard’ (2006) 3
Competition Law Review 121.
86
Developed for example in a speech at the CASS Business School on 17 March 2010
<http://www.fsa.gov.uk/pubs/speeches/at_17mar10.pdf> accessed 19 July 2012.
87
FSB cl 5 inserting FSMA, s 1E(2)(d).
432 Eilı́s Ferran
ease with which new entrants can enter the market.88 The ‘have regard’
list can be read as an interpretative guide to the meaning of ‘effective
competition’ but that term is not exhaustively defined. There is potential
for uncertainly concerning its meaning to be a source of future problems,
a point developed further below.
The Government will expect the FCA to pursue its strong and explicit
competition mandate by keeping financial services and markets under
review.89 The FCA will be able to make its own market studies.90 A new
‘super-complaints’ procedure, modelled on the one relating to the Office
of Fair Trading (OFT) in the Enterprise Act 2002, section 11, which was
used to considerable effect in relation to the mis-selling of PPI,91 will
enable designated consumer bodies to alert the FCA to market features
that may be significantly damaging the interests of consumers.92 As is the
case under the Enterprise Act 2002, section 11, a super-complaint to the
FCA could concern practices restricting or distorting competition but the
procedure is not solely concerned with anti-competitive practices and
could relate instead to other conduct, such as high-pressure selling tech-
niques or other dubious sales practices.
Where the FCA does not have particular specialized expertise or
powers, it will be able to engage the competition authorities, by referring
matters to the OFT.93 However, the FCA, unlike some sectoral regula-
tors, has not been given power concurrently with the OFT to make a
market investigation reference to the Competition Commission.94 The
significance of this distribution of competences is that under the
Enterprise Act 2002, it is only after a Competition Commission decision
88
FSB cl 5 inserting FSMA, s 1E(2)(a)-(c).
89
90
ibid 32.
91
A super-complaint by the consumer group Citizens Advice in September 2005 led to
an in-depth OFTmarket study of the PPI sector (October 2006) and then a reference from
the OFT to the Competition Commission for further investigation: <http://www.oft.gov
.uk/OFTwork/markets-work/super-complaints/insurance> accessed 19 July 2012. The
Competition Commission concluded that there were market features that had adverse
effects on competition: Market Investigation into Payment Protection Insurance (January
2009). In fulfilment of its duty under Enterprise Act 2002, s 138 to remedy adverse effects,
the Competition Commission made an Order under Enterprise Act powers to address the
adverse effects: Payment Protection Insurance Market Investigation Order 2011 (which
included a ban on the selling of single premium PPI and a prohibition on the sale of PPI
alongside the sale of credit). See further Ferran, ‘Regulatory Lessons’ (n 24).
92
FSB, cl 40 inserting FSMA, s 234C. The FCA will be required to respond within
90 days: s 234E.
93
FSB, cl 40 inserting FSMA, new s 234H.
94
HMT, A New Approach: Securing Stability (n 1) 32. This point divided opinion in
pre-legislative scrutiny, with the Joint Committee, but not the TSC, favouring
concurrency.
on a market investigation reference that measures can be imposed to
remedy market features that are having an adverse effect on competition
but which do not constitute an actual breach of competition law.95 The
Government has indicated that the FCA’s position with respect to con-
current powers could change over time as it builds competition expertise
and a track record of dealing with competition problems.96 Evidence
drawn from its competition work could, in any case, inform the FCA’s
use of supervisory powers, for instance by demonstrating the necessity of a
product ban or the need to vary a firm’s permission to conduct regulated
business. The interaction between competition and supervisory powers
could be a controversial feature of the new regime, as discussed further
below.
The FCA will also differ from other sector regulators in not having
power to prescribe prices, a difference that HM Treasury has justified by
noting that, ‘in the absence of natural monopolies or similar conditions,
such an approach would not be proportionate or consistent with its com-
petition remit.’97 The FSA has, however, indicated that the FCA will
‘be interested in prices because prices and margins can be key indicators
of whether a market is competitive’ and that it will take pricing into
account in ‘making judgments about whether customers are being
fairly treated’.98 HM Treasury appears to be relaxed about the FCA’s
willingness to take a keener and more informed interest in questions of
value for money than the FSA did.99 Nevertheless, there could be con-
troversies ahead as the FCA tests the boundaries of what it is permissible
for it to do in order to pursue its interest in pricing.100
Having now outlined how the FCA’s competition mandate is expected
to operate and identified some potentially controversial features, atten-
tion can turn to examining more closely issues relating to its role in
competition that could become troublesome when the new system be-
comes operational.
95
S Orton and others, ‘Financial Regulation Reform: The Role of Competition’ (2011)
22(11) Practical Law Companies 27, 33. Generally on market investigations: PJ Slot and A
Johnston, An Introduction to Competition Law (Hart Publishing 2006) 136–38; R Whish
and D Bailey, Competition Law (7th edn, OUP 2011) 466–73. See also Ferran, ‘Regulatory
Lessons’ (n 24) for discussion of the use of these powers in the PPI context.
96
HMT, A New Approach: Securing Stability (n 1) 32. This point was reiterated in
Parliament by the Financial Secretary to the Treasury: M Hoban MP, in Public Bill
Committee: Financial Services Bill, Hansard, 15 March 2012, cols 524–25.
97
ibid 33.
98
FSA, The Financial Conduct Authority: Approach to Regulation (2011) 19.
99
100
TSC, The Financial Conduct Authority (n 16) 52–53 (noting lack of clarity about the
FCA’s role with respect to price intervention).
434 Eilı́s Ferran
Debating the FCA’s Competition Mandate
Competition Policy and Consumer Protection as Two Sides of
the Same Coin
There is nothing fundamentally novel in recognizing that competition
policy and the consumer protection objectives of financial regulation are
interconnected. In a world of perfect competition, dedicated consumer
protection regulation would not be needed because the market would do
that job for society. Leading competition experts have put the point suc-
cinctly in remarking that ‘competition promotes fairness’101 and that
‘robust competition is the best single means for protecting consumer
interests’.102 It has also been recognized in the EU jurisprudence that
consumer protection is an ultimate goal of competition law.103 Applying
basic economic principles, under conditions of perfect competition
market prices would equal marginal costs, no single supplier could dictate
prices, and buyers would be able to compare prices of substitute products
that would always be available.104 Conditions of perfect competition do
not obtain in the real world, and so for competition policy and consumer
protection regulation to work hand-in-hand to correct market imperfec-
tions and failures makes good sense. In a seminal paper, Neil Averitt and
Robert Lande delineate the boundaries between competition policy and
consumer protection by explaining that antitrust (competition) laws are
intended to ensure that the marketplace remains competitive, unim-
paired by practices such as price fixing or anticompetitive mergers,
while consumer protection laws are intended to ensure that consumers
can choose effectively from among available options, with their critical
faculties unimpaired by such violations as deception or the withholding
101
J Vickers, ‘When is Trading Unfair?’, Speech to the David Hume Institute,
Edinburgh, 26 April 2001 <http://www.oft.gov.uk/shared_oft/speeches/spe0401.pdf>
accessed 19 July 2012.
102
T Muris, ‘The Interface of Competition and Consumer Protection’, Fordham
Corporate Law Institute’s 29th Annual Conference on International Antitrust Law and
Policy, New York, 31 October 2002 <http://www.ftc.gov/speeches/muris/021031ford
ham.pdf> accessed 19 July 2012. For a more detailed examination of the symbiotic
nature of this relationship, see WE Kovacic, ‘Competition Policy, Consumer
Protection, and Economic Disadvantage’ (2007) 25 Washington University Journal of
Law and Policy 101.
103
As discussed in S Haukka, ‘Consumer Protection and Competition Law’ in
H Kanninen, N Korjus and A Rosas (eds), EU Competition Law in Context: Essays in
Honour of Virpi Tiili (Hart Publishing 2009).
104
Whish and Bailey (n 95) 4–7.
of material information.105 Another way of describing the position is to
say that the role of competition is to ensure that the consumer has choices,
while consumer protection ensures that the available options are not
harmful.
Implications of Complementarities for the Institutional

Distribution of Responsibilities
Many competition authorities also perform consumer protection func-
tions, among them the UK OFT (at least for now106) and the US Federal
Trade Commission (FTC).107 The OFTwas able to able to capitalize on
its position as an authority with both competition and consumer protec-
tion powers in the crackdown on some of the more egregious practices in
the PPI market.108 Furthermore, as alluded to already, some sectoral
regulatory bodies have certain competition powers.109 Accordingly,
giving the FCA a strong role with respect to competition alongside its
consumer protection responsibilities is not something that can be re-
garded as a dangerously radical departure into the complete unknown.
In this regard, it is also relevant to note that, internationally, the FCA is
not alone among financial supervisory bodies in having competition as
part of its remit: the US Consumer Protection Act of 2010, Title X of
Dodd-Frank, which establishes the Consumer Financial Protection
Bureau, defines the Bureau’s mission in terms of ensuring that consumers
have access to markets and services that are ‘fair, transparent, and com-
petitive’.110 However that Bureau’s remit is considerably narrower than
the FCA’s range of responsibilities.
In principle, various advantages stemming from combining competi-
tion and consumer protections functions in a single institution can be
identified: the gathering together of a valuable collection of policy per-
spectives; the opportunity for consumer protection work to benefit from
105
NW Averitt and RH Lande, ‘Consumer Sovereignty: A Unified Theory of Antitrust
and Consumer Protection Law’ (1997) Antitrust Law Journal 713.
106
See n 114, and surrounding text.
107
See further a table provided by the FTC detailing competition and consumer pro-
tection authorities worldwide: <http://www.ftc.gov/oia/authorities.shtm> accessed 19
July 2012.
108
Ferran, ‘Regulatory Lessons’ (n 24). The OFT has explained in general terms how its
dual mandate for competition and consumer protection operates in relation to financial
services: OFT, Financial Services Strategy (2009).
109
Whish and Bailey (n 95) 962–92; Slot and Johnston (n 95) 48–50; MM Dabbah,
‘The Relationship Between Competition Authorities and Sector Regulators’ [2011]
Cambridge Law Journal 113.
110
Dodd Frank Act, s 1021(a).
436 Eilı́s Ferran
internal capabilities in economic analysis and competition policy; better
economic vetting of consumer protection initiatives in order to help to
ensure that policies are robust and well-grounded, and protect consumers
without having adverse economic consequences; and the potential for
experience in performing consumer protection functions to shape the
execution of competition policy.111 Practical experience, moreover,
offers some support for combining functions in this way. The FSA
worked with the OFT and the Competition Commission in
addressing PPI-related issues but has since cited the division of respon-
sibilities as a source of inefficiencies.112 In the literature, Stijn Claessens
has singled out the need for competition policy to adjust and adapt
to changes in financial markets as being one of the lessons from the
global financial crisis.113 Giving the FCA a stronger role in competition
could boost that process.
However, simply bringing competition and consumer protection
functions together within the FCA does not guarantee better outcomes
and, to be clear, no-one has made such a bold claim. We do not need to
look beyond current government proposals to reorganize the institutional
architecture of competition oversight in the UK by merging the OFTand
the Competition Commission into a new Competition and Markets
Authority (CMA) to see that contemporary public policy choices are
not based on a belief that combining these functions is inevitably and
always superior114 it is expected that under the new regime some con-
sumer enforcement responsibilities currently discharged by the OFTwill
not be assumed by the CMA and that trading standards bodies will play a
larger role in this area. This policy ‘inconsistency’ is defensible. Whether
111
Muris (n 102); WE Kovacic, ‘The Consumer Financial Protection Agency and the
Hazards of Regulatory Restructuring’ Lombard Street <http://www.ftc.gov/speeches/
kovacic/090914hazzrdsrestructuring.pdf> accessed 19 July 2012; JT Rosch, ‘Rewriting
History: Antitrust Not As We Know It . . . Yet’, Remarks before the ABA Antitrust Section
2010 Spring Meeting Washington, D.C., 23 April 2010 <http://www.ftc.gov/speeches/
rosch/100423rewritinghistory.pdf> accessed 19 July 2012.
112
Written evidence submitted to the Treasury Select Committee by the FSA in the
context of its review of the Financial Conduct Authority (n 16): <http://www.publica
tions.parliament.uk/pa/cm201012/cmselect/cmtreasy/1574/1574we08.htm> accessed
19 July 2012.
113
S Claessens, ‘Competition in the Financial Sector: Overview of Competition
Policies’, IMF Working Paper WP/09/45.
114
BIS, A Competition Regime for Growth: A Consultation on Options for Reform (2011)
90; BIS, Empowering and Protecting Consumers: Consultation on Institutional Changes for
Provision of Consumer Information, Advice, Education, Advocacy and Enforcement (2011);
BIS, Growth, Competition and the Competition Regime (2012); BIS, Enhancing Consumer
Confidence Through Effective Enforcement (2012); BIS, Empowering and Protecting
Consumers (2012).
these functions are best put together or kept apart is a choice that must
be determined by reference to context-specific considerations. It is not
realistic to treat the issue as a matter that can be predetermined in an
abstract way by the application of a rigid universal principle.
Since the issues are not black and white, the key question in relation to
the FCA is therefore not whether it is ‘right’ or ‘wrong’ to include com-
petition in its mandate. Attention needs to focus instead the FCA’s
chances of making the most of the opportunities afforded by reason of
the complementary nature of competition policy and consumer protec-
tion regulation to achieve better outcomes and on the downside risks of
its responsibilities to promote competition being a burden that it may
struggle to discharge effectively and which could undermine its ability to
perform other functions well. Only time will tell, but by examining the
issues from a number of different angles it is already possible to identify
some troubling signs.
Developing a Competition Competence within the FCA—

Potential Associated Problems
On the practical side, there is the obvious matter of the costs associated
with building up new capabilities with respect to competition. Levies on
the industry are already rising—the industry, as a whole, has been asked to
pay broadly 11.9 per cent more in 2012–13 than in 2011–12115—and
since this cannot continue unabated, branching out in a new direction
will inevitably require some redeployment of existing resources. What
will lose out? It is already evident that the FCA, although more culturally
inclined to intervene than its predecessor, will be less of a ‘hands on’
regulator that is in direct contact with firms and will rely more on regu-
latory returns, thematic work and generic (sector-focused) profiles
in order to inform its decisions on supervisory policies and practices.116
A senior level, high quality, business and market analysis team will
be crucial to this work.117 More desk-based analysis is a model that
sits quite nicely with the role of an economic regulator but it is not so
obviously apposite for a financial regulator to organize its operations in
this way because of the importance of direct proximity to the markets
in ensuring supervisory effectiveness. As IMF officials have noted,
‘Supervision is premised on an intimate knowledge of the supervized
115
FSA, Regulatory Fees and Levies for 2012/13 (PS12/11).
116
FSA, The Financial Conduct Authority (n 98) 31.
117
ibid 9.
438 Eilı́s Ferran
entity. It cannot be outsourced and it cannot rely solely or mainly on
offsite analysis. Supervisors in the financial sector should not be viewed as
hands-off or distant observers, but rather a presence that is felt continu-
ously, keeping in mind the unique nature of financial supervision.’118
Massimo Motta has made the point that ‘[r]egulators’ involvement with
an industry is long-run and continuous, whereas competition authorities’
interventions tend to be occasional.119 There is a risk, as the TSC has
identified, of the FCA’s work becoming ‘divorced from the reality of the
industry’.120
The trade-off is that thematic and generic work and sectoral studies
should be superior mechanisms for the early identification of risky in-
novative practices and products that have the potential to cause mass
harm. Such risks are less likely to be immediately obvious from the trad-
itional supervisory perspective that is mainly focused on the activities of
individual firms on a one-by-one basis. The conventional supervisory
approach is concerned more with catching ‘bad guys’ than with, as
Clive Maxwell, executive director of the OFT, has said, ‘the broader
consumer detriment that arises from weak competition in the form of
poor service, lack of effective choice and greater efficiency.’121 Since not
keeping pace with innovation was a key part of the regulatory failure in
the financial crisis, the potential benefits to be gained from the combin-
ation of functions are considerable. But the new approach will not be
costless (in any sense of that term).
With respect to deeper matters of supervisory style, philosophical ap-
proach and the potential for clashing ideologies, a supervisor that is cul-
turally disposed, as well as legally required, to regard competition in the
interests of consumers as a central part of its mandate could think about
issues in a way that leads to outcomes that are different from those that
would emanate from an organization that prioritizes pure allocative or
productive efficiency. The promotion of allocative efficiency has for a
long time provided the intellectual framework for thinking about capital
markets regulation. In its role as markets regulator, the FCA will be in-
heriting one of the more successful parts of the legacy from the FSA.122
118
Viñals and Fiechter (n 39) 12–13. The IMF mostly concerns itself with matters
pertaining to prudential regulation, but the authors contend (at 5) that their discussion
is also relevant to market conduct supervision.
119
M Motta, Competition Policy Theory and Practice (CUP 2004) xviii.
120
TSC, Financial Conduct Authority (n 16) 37.
121
C Maxwell, ‘Competition and Financial Regulation’, Lecture, King’s College
London 11 February 2011 <http://www.oft.gov.uk/shared_oft/speeches/2011/
speech0311.pdf> accessed 19 July 2012.
122
There is thus a particularly strong need for careful thought about the
implications of a strong operational objective to promote effective com-
petition in the interests of consumers, to ensure that established strengths
are not unintentionally dissipated.123 One of the leading textbooks on
competition law notes that, over the years, many different policy object-
ives have been pursued in the name of competition law, some not rooted
in notions of consumer welfare in the technical sense at all and some
‘plainly inimical’ to the pursuit of allocative or productive efficiency.124
The authors also draw attention to the risk of competition being invoked
in a populist manner, for instance to respond to public concerns about
being ripped off.125 Another of the leading legal texts also acknowledges
that ‘efficiency and consumer welfare may pull in different directions’.126
In a similar vein, economists have drawn attention to the risk that a
regulatory focus on short-run consumer welfare concerns could provoke
too much suspicion of firms’ profitability and lead ultimately to firms
being deterred from investing and innovating.127
However, the danger of the FCA’s strong role in competition leading
to outcomes that are discouraging from an efficiency perspective should
not be exaggerated—although there may be occasional clashes,128 on the
whole competition and efficiency are natural bedfellows.129 It may be that
the greatest risk with respect to the interface between the competition
objective and the market regulation function could be less to do with
123
Although the option of a specialist markets regulator was considered but not ultim-
ately pursued, the Government did acknowledge that there could be some additional
benefits in this option arising from better targeted regulation of wholesale markets and
efficiency gains from having a more specialized regulator of markets: HMT, A New
Approach: Securing Stability (n 1) Impact Assessment, Annex D, evidence base, para 2(b).
124
Whish and Bailey (n 95) 19–21. See also O Odudu, ‘The Wider Concerns of
Competition Law’ (2010) Oxford Journal of Legal Studies 599.
125
Whish and Bailey (n 95) 19–21.
126
Jones and Sufrin (n 85) 13.
127
S Bishop and M Walker, The Economics of EC Competition Law (3rd edn, Sweet &
Maxwell 2010) 31–32. On striking a balance between short term immediate consumer
interest in having more technical choices and potentially less social welfare in the long run
resulting from reduced incentives to innovate, with particular reference to Case T-201/04
Microsoft v Commission [2007] ECR II-3601, see Haukka (n 103) 140–44.
128
R Ahdar, ‘Consumers, Redistribution of Income and the Purpose of Competition
Law’ [2002] European Competition Law Review 341 (examining ‘those relatively infre-
quent occasions where the goals may clash’ (at 350)).
129
FSA, The Financial Conduct Authority (n 98) 18; OFT, Financial Services Strategy
(2009) 11; generally: Claessens (n 113). Also inclining towards the view that they pull in
the same direction, the European Commission has described the objective (emphasis
added) of what is now TFEU, art 101 as being to protect competition ‘as a means of
enhancing consumer welfare and of ensuring an efficient allocation of resources’: European
Commission, Guidelines [2004] OJ C101/97. On the Commission’s stance, see further
Jones and Sufrin (n 85) 44–46.
440 Eilı́s Ferran
matters of high theory and philosophy than with more pragmatic
knock-on effects of shifting priorities and how they affect the perceptions
of those who work within the FCA. The debate about the FCA’s com-
petition role has focused mostly on retail finance concerns such as the
switching of bank accounts; this may be simply because these are the
topics de jour but if specialized aspects of market supervision, particularly
with respect to listing and to issues relating to the wholesale end of the
capital markets, come to be seen as being far away from where the FCA’s
centre of gravity is located, high flyers among its staff may see little to gain
personally from being part of that function.130 The details of how the
FCA’s internal organization will be configured in order to embed the
competition objective into its operational design remain to be fully
worked out.131
Given the discussion earlier in this article about the way in which
competition policy and consumer protection can work hand-in-hand
to produce better outcomes, it is paradoxical, but nevertheless compel-
ling, to identity this area as the one in which the most serious philosoph-
ical tensions could arise. Notwithstanding the many complementarities
between consumer protection and competition, there are circumstances
in which they could clash, in which case the scheme of the legislation
tends broadly to favour a competition-promoting outcome.132
Competition is basically pro-choice,133 whereas restricting choice in
order to prevent harm is a core element of consumer protection.134
There is nothing new in recognizing the potential for the ideologies of
consumer choice and consumer protection to lead to divergent outcomes:
for instance, this has been highlighted recently in the context of targeted,
retail-consumer oriented statutory intervention to regulate unfair con-
tractual terms, most notably in Lord Walker’s judgement in the bank
charges litigation, in which he drew attention to the ‘consumer choice’
rationale of the Directive on Unfair Contract Terms as an important
130
On the other hand, the inclusion in the new set-up of a Markets Practitioner Panel
with which the FCA will be required to consult may provide some reassurance on priorities:
FSB, cl 5 inserting FSMA, s 1P.
131
FSA, Business Plan 2012/13, 22.
132
The FCA will be required ‘so far as is compatible with acting in a way which advances
the consumer protection objective or the integrity objective, [to] discharge its general
functions in a way which promotes effective competition in the interests of consumers’:
FSB, cl 5 inserting FSMA, s 1B(6). ‘General functions’ will include the making of product
intervention rules.
133
Keirbilck (n 22) 524.
134
TSC, The Financial Conduct Authority (n 16) 45–46 (noting the risks that product
intervention can pose to competition and innovation).
factor in his interpretation of the implementing legislation.135 The
nuanced concept of competition employed in the Financial Services
Bill (only ‘good’ or, to use the statutory language, ‘effective’ competition
is to be favoured) may mean that the clash of ideologies faced by the
FCA will not be as acute as envisaged in some of the discussion around
the unfair contract terms legislation. Nevertheless, the basic point
remains valid: promotion of competition by the FCA may not, in prac-
tice, deliver the enhanced level of consumer protection for which many
hope. That delivering appropriate levels of protection and intervention
on the one hand and enhancing choice on the other will sometimes
involve a difficult balancing act is something that the FCA (to be) has
already acknowledged.136
We should, in time, learn much about the true relationship between
these objectives from how the FCA uses its product intervention powers.
Against the background of widespread hostility to the financial services
industry in the aftermath of the financial crisis, there is a credible risk that
the use of competition powers as a regulatory tool could result in
over-intervention. The point has been made that ‘the FCA (which is
not a specialist competition authority) could take action instantly to
address a perceived competition problem in circumstances where the
same action could be taken by the competition authorities only after a
very lengthy . . . market investigation’.137 Yet it is also very plausible to
envisage that, in the long run, the FCA’s strong focus on the promotion of
competition will be a restraining influence that prevents the pendulum
swinging too far in an interventionist direction. If the trump card of
competition does act as a strong discipline that tempers the FCA’s pro-
fessed desire to save irrational investors from themselves, this outcome
will calm the fears of those who have worried about a post-crisis
over-reaction in the way that public authorities treat the financial services
industry but, at the same time, there is a strong likelihood that this turn of
events will disappoint those who are looking to the FCA to be a bold
‘consumer champion’. All will be well, of course, if the FCA does a im-
peccable job of distinguishing between ‘good’ competition (competition
that serves customers well) and ‘bad’ competition (that exploits customer
135
OFT v Abbey National [2009] UKSC 6, [2010] 1 AC 696 [44], citing H Collins,
‘Good Faith in European Contract Law’ (1994) 14 Oxford Journal of Legal Studies 229.
On the ‘conflict’ between the ideologies, see further M Schillig, ‘Directive 93/13 and the
“Price Term Exemption”: A Comparative Analysis in the Light of the “Market for Lemons”
Rationale’ (2011) 60 International & Comparative Law Quarterly 933, and, more gen-
erally, Keirbilck (n 22) 543–54.
136
137
Orton and others (n 95) 47.
442 Eilı́s Ferran
unawareness or, for example, creates a race to the bottom on lending
standards138); but that is a lot to ask for.
Potential Difficulties Arising from the FCA’s Interactions with

other Competition Authorities
It is important to note that it is not the intention to give the FCA exclusive
and comprehensive responsibility for competition issues in the financial
sector. Thus, while the assumption by the FCA of a strong role in com-
petition could eliminate some inefficiencies resulting from the division of
overlapping responsibilities between different authorities, concerns
about jurisdictional overlaps, duplication of effort and inconsistent
approaches could still arise. Expertise in handling financial sector com-
petition matters could be lost by being dispersed between several autho-
rities.139 Of course, many such issues should be capable of being
surmounted through careful management; in doing so, the FSA’s track
record of working with the OFT should provide a useful foundation on
which to build.140 Nevertheless, the possibility of inter-institutional ten-
sions cannot be completely ruled out. The Financial Secretary to the
Treasury has explained in Parliament with respect to the role of the
FCA in competition and its relationship with the OFT that: ‘I foresee
the FCA being very much in the driving seat in a way that the FSA has not
been.’141 Shifts of this nature in the balance of power between public
authorities could lead strained relations.
Experience gleaned from the operation of the competition powers held
concurrently by the utilities sectoral authorities and the competition
bodies indicates why it is wise to treat this risk seriously.142 There
are suggestions that the sectoral regulatory authorities have been disin-
centivized to refer matters to the competition authorities because of
the length of time of market investigations (especially if regulatory
action can produce a swifter result), the risk of lengthy investigations
138
ICB (n 76) 153
139
Claessens (n 113).
140
The FSA and OFT established a joint action plan in 2006 (FSA & OFT, Delivering
Better Regulatory Outcomes (2006), updated annually). In 2009, they entered into a
Memorandum of Understanding to establish a framework for cooperation. In 2011 the
FSA, the OFT, and the Financial Ombudsman Service (FOS) established a joint commit-
tee to strengthen coordination.
141
M Hoban MP, in Public Bill Committee: Financial Services Bill, Hansard, 8 March
2012, col 451.
142
On arrangements for the management of concurrency between the OFT and the
sectoral regulators see Whish and Bailey (n 95) 437–39.
generating industry uncertainty and deterring private investment, unwill-
ingness to cede control over outcomes to another authority, and concern
that an investigation by the competition authorities could be perceived as
a comment on the performance of the regulator itself.143 An unhealthy
relationship between the FCA and the competition authorities could
contribute to sub-optimal utilization of competition policy to deliver
good outcomes for financial consumers. Should the FCA prove to be
reluctant to refer matters to the competition authorities and instead
evinces a preference for using evidence from its own, more limited, com-
petition inquiries as the basis for regulatory intervention on consumer
protection grounds, the use of regulatory tools may not benefit fully from
robust economic grounding. As alluded to already, there is a risk that
limited competition-oriented inquiries by a relatively inexpert body
could result in precipitate over-intervention. While regulatory frustration
at the slow pace of protracted competition inquiries may be understand-
able, there is nonetheless a disturbing aspect to the prospect of regulatory
tools being used as, in effect, a ‘short cut’ to correct features in the finan-
cial services markets that have troubled the specialist competition autho-
rities and the judiciary for many years.144
The Competition Mandate as a Complicating Factor in the

FCA’s Relationships with Foreign Regulators
Other relationships that have the potential to be affected by the FCA’s
competition focus include its interactions with foreign financial super-
visors. Maintaining strong external relationships, especially with sister
authorities in other EU Member States and with ESMA, must now be
regarded as an integral part of the function of delivering good supervision
in the UK. The FCA (to be) has recognized that it is crucial to prioritize
engagement with the Europe and, has declared itself willing to ‘engage
143
These concerns are summarized in BIS, A Competition Regime for Growth (n 114)
75–76. They are examined further in NAO, Review of the UK’s Competition Landscape
(2010). See also Dabbah (n 109) 124–25.
144
An apt illustration of the lengthy and complicated nature of competition inquiries is
provided by the still-unresolved problems with multilateral interchange fees for
cross-border payment card transactions, which have persisted notwithstanding that the
main providers (MasterCard and Visa) have been in dispute with the European
Commission for many years and also that the issues have also been the subject of various
judicial proceedings at national and regional levels: European Commission, Green Paper:
Towards an Integrated Market for Card, Internet and Mobile Payments (COM(2011) 941)
para 4.1.1. In June 2012, the General Court ruled against Mastercard (Case T-111/08
Mastercard v European Commission) but an appeal to the European Court of Justice is
expected.
444 Eilı́s Ferran
early and effectively in EU and international negotiations to influence the
outcomes in ways that are consistent with its objectives and philoso-
phy’.145 However, it is conceivable that the new orientation of the FCA
could, over time, hamper its ability to do so. It is possible to identify many
areas of common ground between the debate taking place in the UK
about what we want from financial market supervision and the discus-
sions in other Member States and in ESMA, with a particularly noticeable
coalescing of opinion around the need for stronger financial consumer
protection and product intervention powers.146 Yet, while improving
cross-border competition in retail financial services is high on the
agenda of the European Commission,147 and the promotion of compe-
tition has been mentioned in the mandate for the high-level expert group
established by the Commission to consider reforming the structure of the
EU banking sector,148 the faith that we are placing in competition as a
force for the delivery of good financial supervision does not have a strong
obvious parallel in recent developments elsewhere in Europe. For coun-
tries that have had a history of State policy of favouring the creation
of financial giants (effectively as national champions), the reorienting
of financial supervisory policy strongly to promote competition in the
interest of consumers would require a still quite significant cultural
adjustment, notwithstanding intense efforts, in both the EU competition
law and EU financial regulation, to develop open, competitive mar-
kets.149 The FCA may be able to lead the way on key issues by providing
a fresh viewpoint that draws constructively on the synergies that result
from the combination of competition and consumer protection
145
146
ESMA, 2012 Work Programme 6-7. N Moloney, ‘The Legacy Effects of the Financial
Crisis on Regulatory Design in the EU’ in E Ferran, N Moloney, JA Hill and JC Coffee,
The Regulatory Aftermath of the Global Financial Crisis (CUP 2012).
147
Some years ago the Commission found that competition may not function properly
in certain areas of retail banking: European Commission, Sector Inquiry under Article 17 of
Regulation (EC) No 1/2003 on Retail Banking (Final Report) COM(2007) 33. Yet, in spite
of various initiatives, problems remain, prompting the Commission recently to launch a
consultation on the need for action and on the possible measures to be taken in relation to
the issues of transparency and comparability of bank account fees, bank account switching
and access to a basic payment account: European Commission, Consultation on Bank
Accounts (Working Document, 2012). An indication of how little progress has been
made is provided by Eurobarometer, Retail Financial Services (February 2012), reporting,
inter alia, that almost all (94%) of those surveyed had never purchased specified financial
products or services from another Member State and eight in ten would not consider it.
148
<http://ec.europa.eu/internal_market/bank/group_of_experts/index_en.htm>
accessed 19 July 2012.
149
And see Zingales (n 5) x, describing his home country, Italy, as country where
‘competition is considered a sin’.
functions. However, the distinctive institutional combination of func-
tions could alternatively mean that is a lone voice without natural allies
that faces an uphill task in trying to make an impact, especially in areas
where economic considerations relating to the strength of European in-
dustry do not coincide with consumer interests.150 At this juncture, it is
difficult to say which outcome is more likely. The nature and extent of the
interaction that the FCA will need to have the European Commission,
DG Competition, and the FCA’s scope for autonomous action in a field
in which the EU has primacy over national schemes, constitute another
area of uncertainty.
The FCA, the Prudential Regulation Authority and the

Financial Policy Committee
For completeness, it should also to be mentioned that the competition
objective could be a source of difficulties in relations between the FCA
and the Prudential Regulation Authority (PRA) and the Financial Policy
Committee (FPC). The PRA and the FPC are bodies that do not have
specific responsibilities for the promotion of competition, which can
override or direct the FCA on stability grounds.151 The relationship be-
tween competition and stability is still not fully understood and it is too
large a topic to be addressed properly here.152 Suffice to note that the
interface between the FPA and the PRA/FPC could be a rich source of
data on the practical management of this relationship.
Overall Assessment of the FCA’s Competition Mandate

Stepping back from particular matters that could be affected by the FCA’s
competition mandate and looking at the position in the round, the clear
finding that emerges from this study is that putting the promotion of
competition at the centre of financial regulation and supervision opens up
150
Haukka (n 103) 148 (making this point in general terms, not with specific reference to
financial services regulation).
151
FSB, cl 3 inserting Bank of England Act 1998, s 9G (FPC directions); FSB, cl 5
inserting FSMA,s s 3I (PRA veto over FCA). The Treasury Select Committee has suggested
that the PRA should have a competition objective and also that an adequate case for the
PRA veto has not been made: TSC, Financial Services Bill (HC 161, 2012).
152
Claessens (n 113) 7. Reviewing the competition/stability in banking literature:
E Carletti and P Hartmann, ‘Competition and Stability: What’s So Special About
Banking’ ECB WP 146 (2002); Carletti, ‘Competition and Regulation in Banking’
(n 78); X Vives, ‘Competition and Stability in Banking’ (2010) IESE Business School
Working Paper No 852 <http://ssrn.com/abstract=1593613> accessed 19 July 2012.
446 Eilı́s Ferran
many new uncertainties. Only an optimist would rate highly the FCA’s
chances of charting a perfect course between the Scylla of a pro-choice,
competition focus that is insufficiently attuned to the potential for con-
sumer harm and the Charybdis of rash over-intervention based on an
inadequate understanding of the dynamics of competition in particular
market segments.153 It is possible to trace various strands of the unease
about giving the FCA a strong mandate to promote competition back to
one underlying fundamental concern: whether the FCA will be
well-positioned to judge what is, and is not ‘effective competition’.
‘Effective’ competition is a rather nebulous concept that can be inter-
preted in different ways.154 In spite of having the benefit of an accumu-
lated body of precedent-setting case law, legal complexities and
uncertainties remain.155 Behind the legal uncertainties lies the fact that
some of the normative foundations of competition policy remain
unsettled.156 Numerous matters, including the extent to which abuse
depends on evidence of likely consumer harm and the timeframe over
which harmful effects should be assessed remain subjects for debate.157
‘Consumer welfare’ is another somewhat slippery concept,158 and there
are also related unresolved difficulties resulting from the potential for a
diversity of interests among different consumers where this class is
broadly interpreted (as is the case in the FSMA context).159 Set against
this background, the challenges for the FCA in establishing a workable,
sound operational approach with respect to the promotion of competi-
tion in financial services look formidable. Quickly developing a
high-level competence in such a technically complex discipline that
involves the making of decisions that could have profound economic
153
C Ahlborn and D Piccinin, ‘Between Scylla and Charybdis: Market Investigations
and the Consumer Interest’, in B Rodger (ed), Ten Years of UK Competition Law Reform
(Dundee University Press 2010).
154
Bishop and Walker (n 127) 15–50. For an articulation of the Competition
Commission’s understanding of ‘effective competition’: Competition Commission,
Guidelines for Market Investigations: Their Role, Assessment, Remedies and Procedures
(June 2012, consultation draft) 6–9.
155
Haukka (n 103); C Ahlborn and DS Evans, ‘The Microsoft Judgment and its
Implications for Competition Policy towards Dominant Firms in Europe’ (2008–9) 75
Antitrust Law Journal 887; G Monti, ‘Article 82 EC: What Future for the Effects-based
Approach’ (2010) 1 Journal of European Competition Law & Practice 2; B Allan, ‘The
Effects-based Approach Under Article 102 TFEU’ (working paper on file with author).
156
V Vanberg, Consumer Welfare, Total Welfare and Economic Freedom - on the Normative
Foundations of Competition Policy (Walter-Eucken-Inst 2009); Ahdar (n 128).
157
Haukka (n 103) 137–39; Monti (n 155); Allan (n 155).
158
P Akman, ‘ “Consumer Welfare” and Article 82 EC: Practice and Rhetoric’ (2009) 32
World Competition 71; Cseres (n 85).
159
Jones and Sufrin (n 85) 48–49; Haukka (n 103) 136–37.
consequences, and doing so without compromising quality in other areas
will not be easy.
Consumer Protection—More Familiar Territory

Even if the FCA proves to be an impeccable judge of what is, and is not,
effective competition, problems will remain: the practical operation of
effective competition depends on active and informed consumers and, for
many reasons, financial consumers often lack one or both of these char-
acteristics. Thus, there will still be a need for the FCA to perform a
significant consumer protection role.
The FCA’s consumer protection mandate is in some respects strikingly
to similar to that held by the FSA. The FCA, like the FSA, must secure an
appropriate degree of protection for consumers, defined in a universal
way to cover all users of financial services and markets.160 The FCA, like
the FSA, must have regard to the general principle that consumers should
take responsibility for their decisions.161 On the other hand, a new
counterbalancing obligation has been added whereby the FCA must
also have regard to the general principle that those providing regulated
financial services are expected to provide consumers with an appropriate
level of care having regard to the degree of risk involved in the transaction
or investment and the capabilities of the consumers in question.162
However, the enactment of this obligation is not meant to herald the
establishment of a new standard of conduct that is to be expected of
regulated firms.163 Other changes of detail are that the FCA’s obligation
to have regard to consumers’ need for accurate information and the
‘have regards’ with respect to the responsibilities of senior management
have been recast.164
Bearing in mind the clamour for a fairer system and the FCA’s pro-
fessed willingness to adopt a more interventionist and paternalistic ap-
proach, a stronger consumer protection mandate to shield as well as to
empower the FCA might have been expected. However, there are a
number of considerations that support the decision not to tamper
more significantly with the wording of this objective. First, a system of
financial regulation must provide a universal degree of protection in order
160
FSB, cl 5 inserting FSMA, s 1C and s 1G.
161
FSB, cl 5 inserting FSMA, s 1C(2)(d) and s 3B(1)(c).
162
FSB, cl 5 inserting FSMA, s 1C(2)(e).
163
Financial Services Bill Explanatory Notes, para 85.
164
FSB, cl 5 inserting FSMA, s 1C(2)(c) and s 3B(1)(d).
448 Eilı́s Ferran
to foster the overall trust and confidence that are critical to successful
financial markets. Self-evidently, less savvy retail consumers who are only
occasional users of the markets require a greater degree of protection than
the most sophisticated and professional wholesale players whose use of
the markets is constantly at the extreme end of high intensity, but the
statutory mandate is not the right place to work out the details of a
differentiated consumer protection regime. The FSA Handbook and,
behind that, the Markets in Financial Instruments Directive (MiFID),
already give effect to a differentiated approach based on client classifica-
tion, and the FCA will inherit that framework. The FSA Handbook, as
presently configured, already delivers a degree of consumer protection
that is greater than that afforded by dedicated legislation aimed at pro-
tecting consumer economic interests from unfair business-to-consumer
commercial practices.165
Second, it is essential to allow (and require) the FCA to take note of the
principle that consumers should take responsibility for their decisions
because a regulator needs to be able to draw the line somewhere. Not to do
so would risk creating a false sense of security that leads people to take
more risks, thereby rendering the policy ultimately self-defeating with
potentially huge social cost. Third, while there is a hint of the counter-
balancing duty on the FCA to have regard to firms’ level of care being little
more than a conciliatory gesture towards those who called for the impos-
ition of a new overarching duty of care on financial firms, the underlying
thinking here is sound. The FCA’s statutory mandate should not be used
a backdoor route for the imposition of a new overarching duty of care (or
fiduciary duty) on the finance industry. A change of this magnitude could
only be seriously contemplated after very careful examination, probably
by the Law Commission, of the principles and burgeoning case law on
duties of care in contract and tort, fiduciary obligations owed by financial
firms in relation to the selling of financial products and services, the
operation of the action for breach of statutory duty under section 150
of FSMA, and the law on misrepresentation.166 The compatibility of a
165
FSA, Reforming Conduct of Business Regulation (CP 06/19) ch 28 (on the implemen-
tation of the Unfair Commercial Practices Directive (UCPD). The UCPD is, in the main,
a maximum harmonization measure but there is an exception (art 3.9), which the FSA
supported, for Member States to impose more restrictive requirements in the financial
services context. On the UCPD generally, see Keirbilck (n 22).
166
The body of recent case law relating to claims arising from failed investments or other
financial market transactions (global financial crisis-related or pertaining to prior crises)
includes: JP Morgan Chase Bank v Springwell Navigation Corp [2008] EWHC 1186
(Comm), [2010] EWCA Civ 1221; Titan Steel Wheels Ltd v Royal Bank of Scotland plc
[2010] EWHC 211 (Comm), [2010] 2 Lloyd’s Rep 92; Raiffeisen Zentralbank Osterreich
new regulatory duty with EU law, which already imposes a fiduciary-like
standard on MiFID firms,167 and with the Government’s policy of gen-
erally not using such discretion as may be afforded to it under the EU law
to gold plate harmonized requirements would also need to be thoroughly
investigated. So too would the interface with the statutory regimes for the
control of unfair terms in consumer contracts and for consumer credit
regulation in general. As a matter of principle, although much has chan-
ged in the intervening years, the sentiment that informed the Law
Commission’s work in the 1990s on the interrelationship between fidu-
ciary duties and regulatory rules—that vague, privately enforced fiduciary
obligations may be less useful to consumers than clear, properly enforced
regulatory requirements—remains appealing.168
Furthermore, it is not the case that the new legislation has utterly failed
to respond openly to calls for strengthened consumer protection. To gain
a full picture of the new position, it is necessary to look beyond the
mandate and also to take account of the FCA’s new statutory powers
to intervene in respect of products and misleading financial promotions.
It can be argued that there is little that is fundamentally new about the
targeted intervention powers and that similar results could have been
achieved by the FSA though ingenious use of its existing tools,169 but
that argument may slightly miss the point by underestimating the im-
portance of the signaling effect generated by the enactment of explicit
statutory powers. The FCA has declared itself ready to intervene and we,
through Parliament, have, in effect, endorsed that declaration of intent by
equipping it more explicitly with relevant powers.
AG v Royal Bank of Scotland plc [2010] EWHC 1392 (Comm), [2011] 1 Lloyd’s Rep 123;
Bank Leumi (UK) plc v Wachner [2011] EWHC 656 (Comm);Wilson v MF Global UK Ltd
[2011] EWHC 138 (QB); Adrian Rubenstein v HSBC Bank plc [2011] EWHC 2304
(QB), [2012] PNLR 7; Zaki v Credit Suisse (UK) Ltd [2011] EWHC 2422; Camerata
Property Inc v Credit Suisse Securities (Europe) Ltd [2011] EWHC 479 (Comm), [2011] 2
BCLC 54; Standard Chartered Bank v Ceylon Petroleum Corporation [2011] EWHC 1785
(Comm); Winnetka Trading Corporation v Julius Baer International Ltd [2011] EWHC
2030 (Ch), [2012] 1 BCLC 588.
167
MiFID, art 19. See generally, Moloney, How to Protect Investors (n 35) 215–17.
168
Law Commission, Fiduciary Duties and Regulatory Rules (LCCP No 124, 1992); Law
Commission, Fiduciary Duties and Regulatory Rules (Law Com No 236, 1995). The
Financial Secretary to the Treasury made a point broadly along these lines during
Parliamentary scrutiny of the Bill: M Hoban MP, in Public Bill Committee: Financial
Services Bill, Hansard, 1 March 2012, col 272.
169
In particular, through use of the ‘own initiative variation of permission’ (OIVoP)
power. to vary a firm’s permission on its own initiative (FSB, cl 9 inserting FMSA, ss
55J-55L). OIVoP powers are wide-ranging and can include removing a firm’s permission
to offer certain products. The FCA will be able to exercise OIVoP powers in a range of
circumstances, including if it appears desirable to do so in order to advance an operational
objective.
450 Eilı́s Ferran
Yet, the need to look at things in the round also brings the discussion
back to the potential for frictions between competing ideologies. The
point bears repetition. In exercising product intervention powers, the
FCA must seek to promote effective competition in the interests of con-
sumers in so far as is compatible with acting in a way which advances the
consumer protection objective (or the integrity objective).170 Exactly how this
will play out in practice is hard to predict. In a perfect world, the FCA’s
competition focus would act as a discipline that reins in consumer pro-
tection intervention to just the right extent, and competition and con-
sumer protection would be in perfect harmony. However, real world
decisions will not live up to abstract models.
Assessment
When the plans to split the FSA in two were first announced, there was
room for a cynical interpretation to the effect that the proposals affecting
the supervision of financial services conduct were an expensive exercise in
deckchair rearrangement. As the plans have acquired more substance, it
has become less credible to maintain that view. The FCA will not be the
FSA with a letter change and a narrower remit. Society expects something
different from financial supervision. The prevailing general consensus is
that the FCA must deliver ‘good’ financial supervision, characterized by
pro-active judgment, intrusiveness, skepticism, credibility, and a level of
paternalism that is higher than we have been used to in the past. The
FCA’s senior management-elect has embraced this challenge.
However, the FCA cannot expect or be permitted to operate in a
completely autonomous fashion. Near the beginning of this article the
terminology of ‘master’ and ‘servant’ was employed to describe the rela-
tionship between a financial supervisor and society but now, near the end,
it has become apparent that this terminology is apt only for some pur-
poses and that to the extent that it conjures up a notion of one party that is
constantly at the beck and call of another it is positively misleading.
Financial supervisors must have operational independence if they are to
function effectively, including being able to take unpopular action on
occasion. This independence means that the relationship is far removed
from the typical master/servant or principal/agent model.171 However,
the fundamental goals at which a financial supervisor is expected to aim
170
FSB, cl 5 inserting FSMA, s 1B(4) (emphasis added).
171
Quintyn and Taylor (n 34) 12–14.
need to be set by society, acting through Parliament and the Government,
in order to provide authority, motivation, and legitimacy, and to contrib-
ute to an accountability framework. These indispensible features of a
well-functioning supervisory system cannot be achieved through super-
visory self-determination of fundamental goals. Hence the emphasis in
this article on the statutory mandate.
The FSA’s experience demonstrated the crucial importance of statu-
tory objectives. The FCA’s statutory objectives are expected to be just
as important: they will function as the principal driver of its work and
approach. Since they represent the foundation stones of the new regime,
close examination and evaluation of the FSA’s objectives is therefore
called for. With this purpose in mind, this article has analysed the
FCA’s objectives. It has drawn particular attention to the FCA’s compe-
tition objective, which is the most innovative feature of its statutory man-
date. This examination reveals a sharp contrast between current thinking
and that which prevailed when the FSA was established, when the possi-
bility of giving it a competition objective was raised but rejected amid
concerns that such an objective could operate as the ‘antithesis’ to the
other objectives and would give rise to ‘an unclear and confusing man-
date’.172 Strong claims have been made by politicians and others for the
part that the FCA’s strong and explicit competition mandate will play in
delivering better outcomes for consumers. However, it is evident from the
study in this article that such success is far from guaranteed.
Combining competition powers and regulatory tools could be bene-
ficial. Competition expertise could enable the FCA to produce consumer
protection policies and practices that are robust and well-grounded, and
which protect consumers without having adverse economic conse-
quences. However, the challenges involved in developing that expertise
are significant. On the downside, imperfect competition analysis by the
FCA could distort consumer protection policies and practices in unpre-
dictable ways. Misjudgments about what is or is not ‘effective competi-
tion’ in the interests of consumers could feed a tendency towards hasty
over-intervention. Yet, it is equally plausible to envisage that if the FCA
deviates from the path of perfection, it will be in the direction of
pro-choice policies being favoured at the expense of consumer protection,
especially once memories of the financial crisis start to fade and hostility
to the financial services industry subsides.
172
A Whittaker, ‘The Role of Competition in Financial Services Regulation’, speech,
27 April 2001 <http://www.fsa.gov.uk/library/communication/speeches/2001/sp79
.shtml> accessed 19 July 2012.
452 Eilı́s Ferran
Is a tentative prediction about the FCA’s trajectory possible? It would
be wise to expect a recurrence of the phenomenon that John Coffee has
labelled the ‘regulatory sine curve’, that is the waning of regulatory ardour
as the sense of emergency is lost, is a certainty.173 As Coffee notes, it is a
‘cycle that is driven by the differential in resources, organization, and
lobbying capacity that favors those interests determined to resist further
regulation’.174 The cyclical nature of regulation, reflecting the boom and
bust of economic cycles, is a matter that has engaged the attention of
many scholars, with Karl Polanyi’s ‘double movement’ of market expan-
sion met by a countermovement checking the expansion in definite dir-
ections providing a classic analysis.175 Hyman Minsky’s writings on the
destabilizing forces within finance that can produce periods of compla-
cency but which lead eventually to excess and crisis further reiterate the
argument.176
The model of the FCA’s future that fits most easily with these insights
is one in which, over time, the drive for increased consumer protection
will increasingly give way to the promotion of competition, and lighter
forms of regulation will, once again, come into favour.177 While good
supervision is meant to be stable and not driven by short-term prefer-
ences, supervisory organizations are not static, and they are inevitably
influenced by the political, economic, and social conditions around
them. For perfectly legitimate reasons related to ensuring that supervisory
thinking can benefit from exposure to cutting-edge industry expertise and
that supervisors are ‘in touch’ with reality, close contacts between super-
visors and firms are unavoidable. These connections will inevitably foster
strong professional relationships that are bound to shape thinking and
actions.178 It is not necessary to go as far as to subscribe to a view of the
world in which regulatory capture is inevitable to regard a gradual soften-
ing in the FCA’s approach towards industry as the climate changes as a
173
JC Coffee, ‘The Political Economy of Dodd-Frank: Why Financial Reform Tends
to be Frustrated and Systemic Risk Perpetuated’ in Ferran, Moloney, Hill and Coffee,
The Regulatory Aftermath (n 146).
174
ibid.
175
K Polanyi, The Great Transformation: The Political and Economic Origins of Our Time
(Beacon Press 1957).
176
H Minsky, Stabilizing an Unstable Economy (Yale University Press 1986).
177
There are already hints in this direction in that the Coalition Government has indi-
cated that the FCA will be expected to review its conduct standards to take account of
potential new entrants to the banking market in taking a ‘proportionate’ view while still
needing to be satisfied that customers will be adequately protected: HMT & BIS (n 76) 52.
178
R Levine, ‘The Governance of Financial Regulation: Reform Lessons from the Recent
Crisis’ (2012) 12 International Review of Finance 39.
very likely prospect.179 The longer the future good times last, the more
‘disaster myopia’ is likely to occur.180
If this is a highly plausible vision of the future, do we then conclude
with a bleak assessment of the reforms examined in this article? Not quite,
but we are certainly disabused of the notion that any one step merits being
viewed as a silver bullet. Notwithstanding its fundamental importance, a
statutory mandate can only ever be expected to contribute a limited
amount by way of stiffening the background of a financial regulator
and preventing backsliding towards an approach that is more sympathetic
to industry concerns. A set of objectives set out explicitly in legislation can
certainly function to protect and incentivize by conferring legitimacy on
controversial actions taken in pursuit of those objectives, but as a lever
that can be used in order to expose shortcomings in its performance, its
value is undoubtedly much weaker. The FCA objectives are imprecise—
for good reason—but that feature will make it hard to test performance
against them. Although the FCA will not be pulled in as many different
directions as its predecessor, it will still have to engage in difficult balan-
cing exercises, and if it makes faulty decisions about the trade-offs that are
necessary in order to reconcile tensions between objectives, these errors
will probably not be easy to detect in the short run. The measurability
problem that was identified in relation to the FSA’s objectives will
remain. The analysis presented in this study suggests that putting the
promotion of competition at the heart of the FCA’s operations will not
eliminate this problem but will merely change the way in which it mani-
fests itself.
It is important to emphasize the potential for the new system to be
beset by some of the same issues as were faced by its predecessor because
that leaves us, in the end, with a sobering reminder of the unavoidable
limitations of financial regulatory reforms based on the formal reorgan-
ization of the supervisory architecture and the imposition of new man-
dates. Whatever the benefits of the latest ’new approach’, there is no room
for complacency because deep and long-lasting changes to supervisory
institutional culture are exceptionally hard to achieve.
179
On factors inducing financial regulators to have different incentives from the public at
large: S Johnson and J Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial
Meltdown (Random House Inc 2010); JR Barth, G Caprio and R Levine, Guardians of
Finance: Making Them Work for Us (MIT Press 2011).
180
On disaster myopia, defined as the tendency over time to underestimate the prob-
ability of low frequency shocks: J Guttentag and R Herring, Disaster Myopia in
International Banking (Essays in International Finance No 164 1986).

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Current Legal Problems, Vol. 65 (2012), pp.

Another New Approach to Financial Regulation

especially in relation to banks, which are regarded as the source of the

Moderating Society’s Demands

economic case for intervention in financial markets.3 Purchasers of finan-

established firms from unwelcome competition.8 In view of the promin-

developments with respect to distribution of competences may have had

Equipping the Supervisor to Deliver a Rebalanced

Such statements of intent herald a quite different style of supervision from

A pertinent illustration of the limitation of rules is that the existence of

even the most self-confident and sure-footed supervisory authority not to

The Desirable Features of a Statutory Mandate for the FCA

distillation into achievable goals of the myriad post-crisis and, therefore,

The Statutory Mandate: What We Have Learnt from

Activities) Order 201* <http://www.hm-treasury.gov.uk/d/fin_fs_bill_draft_si_pra_

expressed in an open-textured way, they were not well-suited to the role

overall financial stability concerns were embedded in the market confi-

new judgement-led approach is: the ability of supervisors to identify and

Regulatory Objectives and Principles: Mapping

The FCA’s Strategic Objective: Is it Vacuous?

is thus inevitable. Whatever form of words is chosen, the necessarily

More Competition, Less Regulation?

against over-regulation.77 This line of thinking sometimes blurs into

Competition and Financial Regulation: Detailed Features of

objectives;80 this is a deliberate choice, not inadvertent duplication.81 An

on a market investigation reference that measures can be imposed to

Debating the FCA’s Competition Mandate

of material information.105 Another way of describing the position is to

Implications of Complementarities for the Institutional

internal capabilities in economic analysis and competition policy; better

Developing a Competition Competence within the FCA—

entity. It cannot be outsourced and it cannot rely solely or mainly on

matters of high theory and philosophy than with more pragmatic

factor in his interpretation of the implementing legislation.135 The

unawareness or, for example, creates a race to the bottom on lending

Potential Difficulties Arising from the FCA’s Interactions with

generating industry uncertainty and deterring private investment, unwill-

The Competition Mandate as a Complicating Factor in the

early and effectively in EU and international negotiations to influence the

functions. However, the distinctive institutional combination of func-

The FCA, the Prudential Regulation Authority and the

Overall Assessment of the FCA’s Competition Mandate

consequences, and doing so without compromising quality in other areas

Consumer Protection—More Familiar Territory

new regulatory duty with EU law, which already imposes a fiduciary-like

need to be set by society, acting through Parliament and the Government,

Is a tentative prediction about the FCA’s trajectory possible? It would

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