Written evidence submitted by the Office
of the Complaints Commissioner
1. CURRENT POSITION
1.1 Under the Paragraph 7(1) of Schedule
1 of the Financial Services and Markets Act (2000) (FSMA), the
FSA must make arrangements for the investigation of complaints
arising in connection with the exercise of, or failure to exercise,
any of (the FSA's) functions (other than its legislative functions)
made by eligible complainants. The rules of the complaints scheme
are set out in the document entitled Complaints against the Financial
Services Authority (also known as COAF). Specifically, paragraph
1.4.1 of COAF provides:
COAF 1.4 Coverage and scope of the scheme
1. allegations of misconduct by the FSA
arising from the way in which it has carried out or failed to
carry out its functions. The complaints scheme covers complaints
about the way in which the FSA has acted or omitted to act, including
(a) mistakes and lack of care;
(c) unprofessional behaviour;
3. To be eligible to make a complaint under
the complaints scheme, a person (see COAF 1.2.1 G) must be seeking
a remedy (which for this purpose may include an apology, see COAF
1.5.5 G) in respect of some inconvenience, distress or loss which
the person has suffered as a result of being directly affected
by the FSA's actions or inaction.
1.2 The FSA must appoint a Complaints Commissioner,
subject to the approval of HM Treasury, in order to carry out
the functions conferred upon it by the Complaints Scheme.
1.3 The FSA is by the scheme implemented
under Paragraph 7 of Schedule 1 of FSMA subject to independent
accountability and oversight by a Complaints Commissioner.
1.4 What are the possible outcomes for any
1.4.1 If the FSA concludes that a complaint
is well founded, it will tell the complainant what it proposes
to do to remedy the matters complained of.
1.4.2 Remedying a well founded complaint
may include offering the complainant an apology, taking steps
to rectify an error or, if appropriate, the offer of a compensatory
payment on an ex gratia basis. If the FSA decides not to uphold
a complaint, it will give its reasons for doing so to the complainant,
and will inform the complainant of his right to ask the Complaints
Commissioner to review the FSA's decision.
1.4.3 Complainants who are dissatisfied
with the outcome of an investigation, or who are dissatisfied
with the FSA's progress in investigating a complaint, may refer
the matter to the Complaints Commissioner, who will consider whether
or not to carry out his own investigation.
1.5 When the FSA writes to a complainant
with its final report of its investigation, or explaining that
it will not investigate a complaint under the complaints scheme,
the FSA will inform the complainant that, if he is dissatisfied,
he must refer the FSA's decision to the Complaints Commissioner
within three months of the date of that letter.
1.6 The current complaints scheme is widely
considered to have worked well. It was set up in order to give
the Industry a feeling that its interests would not be ignored
by an over-zealous FSA bearing in mind that any Regulator must
always have due regard to its statutory responsibilities.
1.7 It is recognised that the Industry has
expressed concerns about the modus operandi of the Financial Ombudsman
Scheme (FOS) and to a lesser extent the Financial Services Compensation
Scheme (FSCS) but these concerns and these bodies do not come
within the jurisdiction of the Complaints Commissioner.
1.8 Consumers also have access to the Commissioner's
jurisdiction but are less successful in that access when compared
to the Industry. This is because any dispute will generally revolve
around a particular advisor or product as opposed to the FSA exercising
its statutory responsibilities.
1.9 The most common complaint currently
relates to the issue of plea discussions in the context of the
Enforcement Department of the FSA. The Enforcement Department
of the FSA is the department responsible for investigations of
misconduct and prosecuting the result of the investigation if
that is merited. Sanctions are determined by a quasi judicial
process carried out by the Regulatory Decisions Committee (RDC)
with a right of appeal to the Financial Services and Markets Tribunal.
On many occasions an alleged offender will enter into a discussion
to see if he can "strike a deal" as to his sanction
without going through the RDC process. Misunderstandings can,
and do, then arise. To prevent this the Commissioner continues
to recommend that any such discussions should not be conducted
under a hectoring or threatening note but remain cognisant of
the importance of the principle of equality of arms to ensure
that the lack of representation of the alleged offender is not
ignored to his detriment. The best way of achieving certainty
in that area and to avoid challenges thereafter is to make a detailed
note of all discussions and that that note is agreed by both parties.
1.10 Other areas that arise relate to fees
and their calculation and to authorisations but do not merit individual
comment in this response.
2. WHAT ARE
2.1 Paragraph 3.38 of the Consultation Paper
Given the quasi-legislative rule-making function
of the Prudential Regulatory Authority (PRA), including the power
to raise levies from firms, the Government will give particular
consideration to which, if any, of the accountability mechanisms
currently established with respect to the FSA should be put in
place for the PRA. These mechanisms are described in more detail
in paragraph 4.36.
2.2 Paragraph 4.36 of the Consultation Paper
The Consumer Protection and Markets Authority
(CPMA) will be subject to the following accountability mechanisms
set out in statute and provides (inter alia):
a duty to maintain a complaints mechanism
similar to that required of the FSA by schedule 1 of FSMA.
3. THE PROPOSALS
3.1 The Prudential Regulatory Authority
3.1.1 The PRA has been given the role of
promoting stable and prudent conduct of the financial service
industry. It will also be given operational responsibility for
the regulation and supervision of firms and will take over responsibility
for regulatory decision making including the authorisation, supervision
and the enforcement of its rules upon firms and take the lead
in imposing sanctions (taking action) against firms. From this
it appears that the PRA will inherit the FSA's regulation and
3.1.2 It is noted that the PRA will move
from "a tick box approach" to regulation to a "judgement
led" approach. Adopting this type of approach, whilst to
be encouraged, requires different skills and improved documentation
of the rationale for decisions. The Complaints Commissioner on
occasions has commented that the FSA does not maintain adequate
records and should improve its record keeping. This is referred
to in his annual reports. The question therefore arises whether
the staff, which will no doubt transfer from the FSA to PRA to
undertake these roles, will have sufficient skills to adapt to
this new, quite different, style of regulation. Failing to maintain
adequate records, explaining the rationale behind decisions will
leave the PRA open to claims of bias, lack of integrity and negligence.
It is therefore important that the decisions made by the PRA staff
are subject to review and oversight by an independent body and
where complaints are made, particularly by the Industry, an independent
review can be conducted.
3.1.3 Presumably the new regulators will
have a statutory immunity from claims for negligence, albeit that
complaints of this nature can be considered under the rules of
any complaints scheme.
3.1.4 Much criticism has been made of the
FSA by both the Industry and consumers, but not always justified,
that the FSA is an entity which operates as its sees fit and is
not accountable to anyone. Whilst much of the criticism relates
to the failures of the Tripartite arrangement which led to the
events of 2008/09, it is important that the PRA, as the lead regulator
is seen to be open and to have accountability both to Parliament
and to an independent body which is easily accessible both to
the public and the Industry as the FSA is currently.
3.2 Consumer Protection and Markets Authority
3.2.1 The CPMA has been given the role of
promoting confidence in the financial services industry and financial
markets. It is envisaged that it will achieve this by undertaking
arms length oversight of the operation of firms and markets conducting
3.2.2 The Consultation Paper indicates that
the PRA will be the lead regulator and will have overall responsibility
for the supervision of the industry. However, it goes on to say
that the CPMA will have responsibility for ensuring that authorised
firms comply with its Conduct of Business (COB) rules. Currently
the COB rules form part of the FSA's handbook and are monitored,
amongst other things, by a firm's Supervision Team. It is unclear
how the PRA will be able to fulfil its role and supervise the
Industry without considering the COB rules and/or the firms conduct.
Having the PRA and the CMPA effectively both supervising a firm
is introducing an "overlap" situation which could cause
confusion as well as imposing further regulatory burden on the
Industry which is something which the proposals intended to avoid.
3.2.3 Having two regulators effectively
conducting, to some extent, the same functions albeit overlapping
in some areas, introduces the possibility of inconsistent interpretation
of the rules and/or requirements, particularly where judgement
based regulation is being implemented. It also again raises the
question of accountability and inappropriate comments or instructions
on requirements during supervisory visits. This in turn leads
to the necessity of the requirement of accountability (through
a complaints process) on both bodies.
3.2.4 It is clear that the Government intends
to have a degree of independent oversight of both the PRA and
the CPMA. However, whilst the Government is consulting on this
it is unclear whether it intends to adopt the same procedures
for both bodies. This point is raised as, from the above, it does
appear that there will be a considerable `overlap' between the
roles of both the PRA and the CPMA even though the PRA will be
regarded as the lead regulator.
3.2.5 There needs to be a clear demarcation
of the boundaries between the roles and operational process adopted
by the CPMA and PRA. From the Consultation Paper, it does not
appear, or is at least unclear, whether there is to be a clear
demarcation between these regulators. This is particularly relevant
if mistakes are made by one or both of the regulators when considering
the actions of the firm.
3.2.6 The Complaints Commissioner does not
have the jurisdiction currently to entertain complaints about
a particular product provider and a consumer of that product.
That jurisdiction is fulfilled by the existence of the FOS and
should be replicated at the end of the current process of change.
3.2.7 The issue of clarity in this area
is important however and it is essential that there continues
to exist a clear dividing line between the jurisdiction of any
Complaints Commissioner and any new or enlarged FOS. The Complaints
Commissioner must not become a second port of call for a consumer
who fails at the hands of the FOS.
4. THE ISSUE
4.1 The last time this matter arose was
during the passage through Parliament of the Financial Services
and Markets Act 2000. The report in Hansard (27 January 2000 Column
617) is worthy of consideration at this juncture as the difficulties
that were canvassed then remain live today.
4.2 The Industry funds what is put in place
in terms of the overall regulation of the Industry but would no
doubt be seriously concerned if that funding could be open ended
in terms of compensatory payments and the consequential legal
costs if recourse was had to the Courts.
4.3 The current wording within the current
scheme has not led to large awards by the Complaints Commissioner
for a number of reasons:
4.3.1 the issue of direct causation of loss caused
by the FSA is not necessarily easy to establish;
4.3.2 the complainants often were primarily to
blame because of the actions that they themselves took;
4.3.3 it is clear that it is the case that other
third parties bear some degree of responsibility;
4.3.4 the loss suffered could not have been in
the contemplation of the FSAit is simply too remote;
4.3.5 sufficient degree of culpability cannot
be laid at the door of the FSA;
4.3.6 what is called a novus actus interveniens
(an intervening act) breaks the chain of causation.
4.4 This list is not exhaustive but gives
some indications of the hurdles that have to be surmounted. That
is in addition to the fact that the scheme in question does not
involve hearings or representation at hearings and a consequential
forensic examination of the relevant evidence. Quite apart from
the fact the scheme refers specifically to "compensatory
payments" and not damages and whatever the figure awarded
is to be ex gratia. That is, it is a discretionary award.
4.5 The FSA is well aware of the problems
posed by this whole issue and the position that it arrived at
after extensive consultation (see CP73 (November 2000) and CP93
(May 2001) seemed to result in a compromise acceptable to all.
4.6 However The Law Commission has also
looked at the problem of Administrative Redress between Public
Bodies and the Citizen and has issued a Consultation Paper No
187 to which the FSA responded on 30 October 2008.
4.7 The view could be taken, viewed objectively,
that the current position despite some uncertainties represents
a reasonable compromise having regard to the existence of the
FOS and the FSCS as well as this office that ensures accountability
of the Regulator as set out in 1.1 hereof.
4.8 Whilst the current complaints scheme
does not give a right to financial awards called damages to successful
complainants, and is only under the obligation to offer compensatory
payments, where a complainant can demonstrate a financial loss
(which they would not have incurred had it not been for the FSA
making a decision which upon review of the information available
to it at the time was incorrect) the FSA can then make an award
on an ex gratia basis. Any complaints scheme which the Government
puts in place as a result of the Consultation Papers may feel
obliged to address the issue of Compensatory Payments possibly
on the same basis and taking account of both the requirements
of EU law and the Human Rights Act (which FSMA does).
5. ANSWERS TO
5.1 Do the Government's proposals appropriately
assign roles and responsibilities between the different regulatory
5.1.1 This report shows that the "overlap"
of functions does not clearly and appropriately assign roles and
responsibilities between the PRA and the CPMA in the context of
accountability. If the approach is to be adopted exceedingly clear
boundaries will be needed and a demarcation of responsibilities
set out. There also needs to be clear guidelines and timescales
for referrals and co-operation between regulators. If this is
not the case there will be constant litigation in the Courts.
5.2 Is it appropriate for the PRA and the
CPMA to adopt judgements-based approach to financial regulation
5.2.1 It is questionable whether the staff
transferring to the PRA and CPMA from the FSA currently have sufficient
skills to undertake this type of regulation. Whilst judgement
led regulation will reduce the size of any rulebook firms must
operate within, it opens regulation to interpretation (and therefore
challenge). Whilst adopting this approach could make regulation
simpler, it equally could (and is likely to) introduce inconsistencies
between regulators (and even employees of a regulator) over what
is acceptable and what is expected. The regulators (and in particular
individual supervisors) need to adopt a common or standard approach,
with clear and full documented rationale for any judgements they
make and advice/instructions which are given to firms.
5.2.2 There are also considerable issues
to the manner in which the FSA retains records of the rationale
giving rise to the decisions made. Considerable improvement to
the new regulators' record keeping (including the rationale behind/supporting
its decision making) needs to be made to ensure that the reasons
for their decisions can be justified so that any claims that the
relevant regulator made mistakes, acted inappropriately or acted
with bias can be defended. Failure to do so, particularly if Enforcement
action is taken could leave the regulators open to a successful
challenge at the equivalent of the RDC and/or the Tribunal with
ultimate recourse to Strasbourg.
5.3 To what extent will the regulatory and
administrative burden increase for those firms who now have to
deal with two regulators?
5.3.1 From the Consultation Paper it is
clear that there is a considerable overlap in the roles that the
PRA and CPMA will undertake, particularly in relation to rule
making, supervision and reporting. Those firms having to deal
with two regulators will have to comply with two sets of rules
(which will overlap and may be inconsistent), be subject to two
supervisory regimes (and presumably visits) and also submit reports
to two bodies. From this (and the above) it is clear that the
regulatory and administrative burden will increase considerably
for the affected firms.
15 September 2010