Financial Services and Markets Act - terms of reference

OFT review of the impact of the Financial Services and Markets Act 2000 on competition in the financial services sector: summary of terms of reference for first stage of review.

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Background

The Financial Services and Markets Act 2000 (FSMA) established the FSA as the regulator for the financial services sector. The FSA took up its powers in December 2001, replacing a number of other regulatory organisations. The remit of the FSA will be expanded during the next two years to include insurance sales (14 January 2005) and mortgage selling and advice (31 October 2004).

The Cruickshank report into competition in UK banking recommended that the FSMA should be reviewed within two years of its taking effect. HM Treasury accepted this undertaking and is due to begin its review before the end of 2003. Under Section 5 of the Enterprise Act 2002, the OFT will contribute to this review by considering the impact of the FSMA on competition in the financial services sector.  

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Stage one: top down methodology

The FSMA is a complex piece of legislation which affects many markets across the financial services sector. As a first step in a review of FSMA's impact on competition, the OFT will need to identify those areas, issues and/or markets where that impact may have been greatest. This needs to be done in a logical and comprehensive way. Therefore, the OFT is proposing a top-down review of FSMA in three stages, to provide a systematic approach allowing all the potentially relevant parts of the FSMA to be considered while focusing resources on the most important questions.

The first stage, for which expressions of interest are now invited, is to design a 'sifting' process to identify the key areas where the FSMA is likely to have had a significant impact on competition. If a suitable methodology is developed, expressions of interest will be sought for the second stage, to apply the sifting process to FSMA and to highlight any areas of particular concern. Finally, at the third stage the OFT will consider whether any of the areas identified should be subject to a more in-depth study. 

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Objectives

The objective of the first stage is to design a sifting process which can be applied to the FSMA to identify a small number of areas with the most significant competition effects for possible further study. The sifting process should, when applied, highlight the adverse and beneficial effects the legislation may have on competition at a high level, without engaging in detailed empirical analysis or the details of the rules.

The areas the sift recommends for further study should be those for which further study would be most effective, i.e. where:

• the potential effects on competition are likely to be most significant
• further study would not simply duplicate recent or current work
• empirical data would be available or reasonably obtainable
• changes would be most beneficial to consumers.

The design of the sifting process would need to consider how to:

• identify discrete areas for study
• take into account the relationship between the FSMA high-level rules/principles and the effect of the FSA's rules designed to implement them (and whether, or the extent to which, EU legislation precludes changes in either)
• develop a sift which will flag up the key adverse and beneficial competition effects of rules at a theoretical level
• define sift criteria which effectively filter out areas which are not of interest, catching neither too many areas nor too few
• identify and weight the relevant factors in the decision to reject or accept areas for further study, and
• produce results which would inform the direction of further study in each area. 

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