The External Auditor's Role in Bank Regulation and Supervision: Helping the Regulator Avoid Regulatory Capture

Abstract

The incoming Labour administration in 1997 caused a stir when it gave the Bank of England additional monetary policy powers but removed the Bank’s powers to regulate banking. Up till 1997, banking regulation had been the function of the Bank of England while other areas of financial services had been regulated by bodies such as: The Securities and Investment Board (for investment business) and the Department of Trade and Industry (for insurance). Section 21 of the Bank of England Act 1998 effectively transferred banking supervision to the Financial Services Authority (then known as the Securities and Investments Board). This paper amongst other objectives, aims to explore how the Financial Services Authority ( the FSA) as a regulator, could benefit from the expertise of the external auditor as a middleman, to avoid regulatory capture. As an efficient system of accountability would also help prevent regulatory capture, the issue of accountability will also be discussed. A consideration of developments leading to the adoption of a single regulator in the UK, will illustrate how the type of regulator can contribute to knowledge of how the external auditor can assist the regulator. Furthermore, not only does this paper consider how the introduction of the FSA has improved transparency and accountability within the banking regulatory and supervisory system, but also the claim that the external auditor could further employ his expertise to help the regulator avoid regulatory capture.