Financial Regulation: a preliminary consideration of the Government's proposals - Treasury Contents

Written evidence submitted by the Office of the Complaints Commissioner


  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 complaints alleging:

    (a) mistakes and lack of care;

    (b) unreasonable delay;

    (c) unprofessional behaviour;

    (d) bias; and

    (e) lack of integrity.

  2.  [deleted]

  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 complainant?

  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.


  2.1  Paragraph 3.38 of the Consultation Paper states:

    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 states:

    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.


3.1    The Prudential Regulatory Authority (PRA).

  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 supervision roles.

  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 (CPMA).

  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 financial services.

  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.


  4.1  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 FSA—it 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).


5.1  Do the Government's proposals appropriately assign roles and responsibilities between the different regulatory institutions?

  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 and supervision?

  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

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