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Financial Services and Markets Act does not distort competition

197/04      2 December 2004

Research by Oxera for the OFT has found that the Financial Services and Markets Act 2000 (FSMA) does not appear to have had a negative impact on competition in financial markets.

The research further concludes that FSMA has had a positive impact on competition by addressing market failures where these exist – for example by regulating financial advisers. This improves how markets in the financial services sector work.

Download Competition Review of the Financial Services and Markets Act 2000 (pdf file 550 kb). 

The OFT commissioned Oxera to identify the key areas where FSMA may have had an impact on competition, and to highlight any areas of particular concern, as part of the Government's two year review of FSMA.

The report also concludes that:

• FSMA allows the Financial Services Authority (FSA) a considerable amount of discretion as to how it pursues its objectives
• the FSA's actions are unlikely to have had any overall negative impact on the structure of markets, but may affect the way in which firms compete with each other
• FSMA provides an important ongoing scrutiny of FSA rules by the OFT
• the Financial Ombudsman Scheme and the Financial Services Compensation Scheme are also beneficial to competition as they build consumer confidence.

During their research, Oxera looked at the main markets covered by FSMA and highlighted those where there may be relatively greater competition issues, although these do not appear to be caused by FSMA. The markets are:

• provision of current accounts to small and medium sized enterprises and individual consumers
• trading exchanges – allowing trades of securities or commodities
• clearing and settlement infrastructure – clearing trades through a central counterparty, and settling trading transactions
• credit rating agencies
• pension fund consultants
• investment banking, specifically initial public offerings and mergers and acquisitions
• custody services – safekeeping and servicing financial assets

The OFT expects to be in a position to announce what further work, if any, it will carry out on these markets in early 2005. It would welcome views on the analysis of these markets in Oxera's report.

NOTES

1. FSMA created a new regulatory regime for the UK financial services industry, and provided the FSA with regulatory powers as the single regulator of the financial services sector. The FSA took up its powers in December 2001, replacing a number of other regulators.

2. The Cruickshank report into competition in UK banking recommended that FSMA should be reviewed within two years of its taking effect. HM Treasury accepted this recommendation.

3. Today's report 'Competition Review of the Financial Services and Markets Act 2000' is produced under Sections 5 and 7 of the Enterprise Act 2002. It contributes to the Government's two year review of FSMA, the outcome of which was announced today by Stephen Timms MP, Financial Secretary to the Treasury.

4. The OFT launched the review of the impact of FSMA on competition in November 2003 (OFT press release 142/03).

5. The research published today builds on the first stage of work by Oxera, published April 2004 (download first stage report), in which it developed a methodology for identifying the key areas where FSMA is likely to have a significant impact on competition.

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