Financial Services Bill

Memorandum submitted by the Association for Financial Markets in Europe (AFME) (FS 09)

1. Introduction

1.1. The Association for Financial Markets in Europe (AFME) welcomes the opportunity to give evidence to the Financial Services Bill Committee (the Bill Committee) on the Financial Services Bill (the Bill).

1.2. AFME represents a broad array of European and global participants in the wholesale financial markets: our members comprise pan‐EU and global banks as well as key regional banks, brokers, law firms, investors and other financial market participants. In giving evidence to the Bill Committee, AFME will, therefore, focus on wholesale financial services issues as well as dealing with more general issues of concern to our members, the majority of which will be regulated by both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) (i.e. "dual regulated firms").

2. Key points

2.1. The Bill is a highly detailed legislative proposal that seeks to create a new, and more appropriately robust, framework for financial regulation by building upon extant financial services legislation, principally the Financial Services and Markets Act 2000 (FSMA). AFME has played an active role in responding to the consultation documents and calls for evidence relating to the development of the new framework and supports, in principle, the main changes the Bill will introduce: in particular:

· the creation of a body – the Financial Policy Committee (FPC) - with responsibility for macro-prudential oversight;

· the separation of prudential regulation from conduct regulation; and

· although judgment-led regulation is predicated on the new regulators having appropriately skilled and experienced supervisors and high quality data, the move away from a, so called, "box-ticking" regulatory culture to a style of supervision that is appropriately interactive and judgmental (provided judgments are, where possible, based on empirical and unequivocal data).

2.2. As noted in our submission to the Joint Committee, the Bill endeavours to strike the right balances between, amongst other things:

· empowering regulators and at the same time providing appropriate checks and balances (including rights of appeal for regulated firms and accountability to Parliament); and

· enshrining sufficient detail with respect to the operation of the new framework whilst giving the new regulators freedom to determine the specific operational arrangements.

However, as discussed below, in a number of areas we believe that the appropriate balances have not yet been achieved.

2.3. In particular, we believe that:

· a high-level mechanism to facilitate domestic coordination – particularly once the PRA and the FCA develop as separate regulators, with distinct and different regulatory cultures – and provide for dispute resolution, should be enshrined in the Bill; and

· whilst the need for new and enhanced regulatory powers is recognised, the Bill should prescribe, to a greater degree of granularity, the powers to be given to the new regulators, including, where appropriate, tests/thresholds for their usage; due process to ensure procedural fairness; and accountability to Parliament.

2.4. We also believe that the Bill should recognise explicitly where the extent and use of powers is modified or limited by EU regulation and articulate how the domestic and EU regulatory regimes interrelate (e.g. in relation to product intervention rules).

3. Detailed comments on amendments to FSMA

We set out our detailed comments below. Given the shortage of time available to consider the Bill and the need to provide written evidence at an early stage, we have focused on amendments to FSMA. Given the complexity and volume of amendments likely to be debated by the Bill Committee, we believe that a number of the key substantive issues will need to be revisited, in more detail, in the House of Lords Committee stage – we hope this will be confirmed in the Bill Committee’s discussions.

3.1. Clause 5, new section 1C: The consumer protection objective

3.1.1. We support the inclusion , in subsection (2), of a general principle that "those providing financial services should be expected to provide customers with a level of care that is appropriate having regard to the degree of risk involved…and the capabilities of the consumers in question."

3.1.2. Common Law also imposes a fiduciary duty on firms in appropriate cases e.g. where an advisor receives payment from a retail client for the provision of advice upon which the client relies. Importantly, whether or not a fiduciary relationship is imposed is judged on the facts (e.g. in the case of JP Morgan Chase v Springwell [1] , the Court held that a bank’s non-advisory relationship with a " sophisticated investor " did not give rise to a fiduciary duty ). Hence we do not believe that a statutory fiduciary duty is necessary or, in certain relationships, appropriate.

3.1.3. It is also important that the "have regard to" factors require the FCA to differentiate appropriately between different types of consumers focusing, in particular, on the protection of retail consumers - when developing policy, particularly with respect to the use of its powers.

3.2. Clause 5, new section 2K: The PRA’s general duty to consult

3.2.1. The Bill enables the PRA to determine its own arrangements for consultation with stakeholders which "may" include the establishment of Panels.

3.2.2. Whilst we recognise that the Bank has a long track record of consultation with stakeholders, we believe the Bill should extend the remit of the FCA’s Practitioner Panel to both the FCA and PRA, thus enabling the Panel to provide input on matters relating to coordination and continue to provide input on the prudential-regulation of dual-regulated firms (rather than just the prudential regulation of FCA-authorised firms).

3.3. Clause 5 and Schedule 3, new Schedule 1ZA, paragraph 10 and new Schedule 1ZB, paragraph 18: Annual report

3.3.1. We believe that, to enhance accountability, the regulators’ annual reports should includ e pertinent information on the use of new regulatory powers (including statistics on usage and results, such as the number of Warning Notices published, withdrawn, and upheld) and that measures of regulatory success should also be evidenced through non-enforcement statistics. We believe that such additional information would assist Parliament in judging the effectiveness of the new regulators.

3.4. Clause 5, new section 3E: Memorandum of understanding

3.4.1. The (draft) Memorandum of Understanding (MoU) between the PRA and the FCA is framed at a fairly high-level of generality. Whilst the MoU is clearly important, effective coordination will be predicated on the regulators having clearly defined responsibilities and appropriately designed operating procedures and staff , at all levels , developing and maintaining good working relationships. Once the PRA and the FCA have developed distinct corporate cultures, a collaborative, non-adversarial environment that enables and encourages staffers to continue to work together - long after corporate memories of the F inancial S ervices A uthority (FSA) have faded – will be vital.

3.4.2. Given the above, dual-regulated firms are still concerned as to whether, and, if so, how, coordination will work in practice. Hence, we strongly believe that the Bill should establish a mechanism through which day-to-day domestic operational coordination can be facilitated ; as discussed in detail in our responses to HM Treasury, we consider that a domestic coordination committee should be enshrined within legislation.

3.4.3. The Treasury’s power, in new section 3G FSMA, to establish a boundary between FCA and PRA responsibilities is helpful, but we are concerned that it may not be appropriate to resolve disputes that arise where the boundary is difficult to determine (e.g. systems and controls rules) or relate to operations. Although the Treasury can require the regulators to consult each other , given that an agreement might not be reached, we believe that the Bill and/or the MoU should provi de for formal dispute resolution arrangements.

3.5. Clause 14: FCA to exercise functions under Part 6 of FSMA 2000

3.5.1. We do not believe that the FCA’s operational objectives are sufficiently tailored for a listing authority. Hence, when the FCA is operating as the UKLA, it should continue to be subject to the general dut y and "have regard to" factors set out in section 73 of FSMA . Although it is proposed that this section be deleted by clause 14(13), we believe that it remain s appropriate for the specialised regulatory function s performed by the UKLA.

3.6. Clause 16: Listing rules: disciplinary powers in relation to sponsors

3.6.1. Under new section 88E, the FCA may take action against a sponsor "if it considers that it is desirable to do so in order to advance one or more of its operational objectives".

3.6.2. We believe that the FCA should be   required to have reasonable grounds for using this power against sponsors – such as breaches of regulatory requirements – and should otherwise use general rule making powers to advance its objectives.

3.7. Clause 21: Proceedings before Tribunal

3.7.1. New section 133(6) limits the Tribunal’s powers in respect of a non-disciplinary reference, providing that the Tribunal must remit such a case back to the regulator rather than determine the action to be taken. We have reservations regarding the two-tier review process that the Bill thereby creates – at a minimum we believe the Tribunal should remit cases back with recommendations – and we are concerned too that the list of disciplinary references in new section 133(7A) is not complete.

3.7.2. In particular, we note that references relating to a prohibition order against an approved person under section 56 of FSMA (notwithstanding that it suspends or ends an individual’s career in financial services) or an own-initiative variation or cancellation of a firm’s permission under section 45 of FSMA, are not categorised as disciplinary. In our view, such cases require high standards of procedural fairness: hence the Tribunal’s powers to determine the action to be taken should not be fettered.

3.8. Clause 22, new sections 137C: FCA general rules: product intervention

3.8.1. We believe the Bill should set a higher threshold for use of the FCA’s power to make product intervention rules, in order to ensure that the power is not used routinely – for reasons of expediency – but only in exceptional circumstances where there is a likelihood of significant consumer detriment.

3.8.2. In particular, the "necessary or expedient" test in new section 137C(1) of FSMA is too wide and should be redrafted to ensure consistency with (draft) a rticle 32 of Markets in Financial Instruments Regulation (MiFIR), Product intervention by competent authorities, which will, when made, have binding effect in the UK. For example, under (draft) a rticle 32(2) of MiFIR, a competent authority would only be permitted to make product intervention rules when, amongst other things, there is a serious threat to the orderly functioning and integrity of financial markets or stability and existing regulatory requirements do not sufficiently address the risks .

3.8.3. New sections 137C(2) and 137(3), will enable the FCA to prohibit agreements to be specified in its rules. We believe that the Bill should require there to be a nexus between a "specified agreement " and the carrying on of a regulated activity.

3.8.4. New section 137C(3) permits the FCA to make "general rules" describing a type of product that is prohibited and new section 137(C)(7) permits the FCA to provide that an agreement is unenforceable and/or require firms to unwind prohibited agreements and pay compensation.  A key issue is the extent to which these powers enable the FCA to apply hindsight and ban products and agreements retrospectively.   Hence, to provide certainty for parties contracting in good faith, we believe that a limitation , similar to section 139A(11) of the Financial Services Act 2010, should be included in the Bill [1] .

3.9. Clause 22, new sections 138M: Consultation: exemptions for temporary product intervention rules

3.9.1. New section 138M provides an exemption from the consultation requirements for temporary product intervention rules if the FCA "considers that it is necessary or expedient…for the purpose of advancing" the consumer protection or competition objective [1] . Again, we believe that this provision should be consistent with MiFIR i.e. reserved for emergency situations.

3.10.  Clause 22, new section 137Q: Financial promotion rules: directions given by FCA

3.10.1. We believe that publication of directions given by the FCA should be subject to a public interest test and , similar to the Advertising Standards Authority, the FCA should be required to publish a summary of representations made . In the interests of procedural fairness, we do not believe that directions which are revoked by the FCA should be published under section 137Q(11).

3.11. Clause 34 and Schedule 9: Discipline and enforcement, paragraph 20(4)(b) - amended section 387(2) - and paragraph 26(3)(a)) - amended section 393(3)

3.11.1. We are concerned that the standard period to make representations has been reduced from 28 days to 14 days - particularly since we understand that lawyers acting on behalf of firms frequently need to request extensions beyond the current 28 days - and believe that this amendment could be perceived as putting pressure on defendants, possibly with a view to encouraging early settlement. Whilst we recognise the argument that there is a need to speed up enforcement cases, given the time taken in respect of other parts of the process, it is unfair to limit a firm’s or individual’s opportunity to review the case against them, as set out in the Warning Notice, and make written representations.

3.12. Clause 34 and Schedule 9: Discipline and enforcement, paragraph 24(2), amended section 391

3.12.1. We recognise that transparency with respect to the commencement of enforcement proceedings may, in egregious cases with probable consumer detriment, enhance consumer protection. However, given the differences between the exercise by a regulator of an administrative jurisdiction and criminal law, as discussed in our submission to the Joint Committee, we believe that the Bill should include additional checks and balances, over and above the important Maxwellisation obligation to consult those named, if ongoing enforcement action is to be made public before the formal representations stage.

3.12.2. The procedures for the issue of a Warning Notice [1] require a far lower standard of proof than the evidential test in the Code for Crown Prosecutors (the Code). A charge is also subject to review/approval by the Crown Prosecution Service (CPS), whereas a Warning Notice, despite being reviewed by the FSA’s Regulatory Decisions Committee , is more akin, in procedural terms, to a caution, as it is issued at the sole discretion of the FSA without a wholly independent review.

3.12.3. In addition, the Bill, unlike the Code, does not require the FCA to satisfy a ‘public interest’ test , to distinguish between cases where urgent publication is necessary in the interests of consumer protection (e.g. cases involving systemic miss-selling) and other enforcement cases.

3.12.4. Hence, we believe the Bill should require that the FCA to satisfy both a higher standard of proof and a public interest test before publishing a Warning Notice . The FCA should also be required to publish a Code of Practice and, if a case is closed or not proven, issue an equally prominent statement.

3.13. Clause 34 and Schedule 9: Discipline and enforcement, paragraph 28(3)(b)

3.13.1. Under amended section 395, the decision-makers for Supervisory Notices may now include a person who is directly involved in establishing the evidence upon which the decision to issue a Supervisory Notice is based.

3.13.2. Given that Supervisory Notices are likely to be come increasingly important in judgment-led regulation, we are concerned that the involvement of 'conflicted' FCA/PRA executives in the decision to issue a Supervisory Notice could give rise to a perception of bias, which could result in more cases being referred to the Tribunal. 

3.14. Clause 38 and Schedule 12: Information, investigations, disclosure etc., paragraph 5, amended section 166, Reports by skilled persons

3.14.1. As discussed in our response to the Joint Committee, over the last five years there has been a significant increase in both the FSA’s use , and the costs of , section 166 reports [1] . Given the significance of the costs involved, it is important to ensure that the s.166 power is used proportionately.

3.14.2. Under new section 166A, regulators will have the power to appoint a skilled person to bring a firm's records up to date.  It is important that this power is not used routinely and that consideration is given first to the desirability of the firm updating its own records under appropriate scrutiny.

3.14.3. Under amended section 166(3)(b), the PRA and the FCA will themselves now have the power themselves to appoint a skilled person to provide them with a report on a firm. A skilled person directly appointed by a regulator will not , however, have any contractual obligations to the firm upon which they are reporting. We are concerned that, as a result, firms will have no safeguards with respect to the quality of skilled persons’ work (regulators having statutory immunity).

3.14.4. Hence, we are of the view that the regulators powers to appoint skilled persons directly should be subject to appropriate limitations - e.g., to circumstances in which there is legitimate public interest in the outcome of the report or where regulators have significant concerns re the fitness and propriety of a firm.

3.15. Clause 54: Duty of Bank to notify Treasury of possible need for public funds

3.15.1. We believe that, given the potential risks to clients, the Treasury should also be notified when the PRA trigger s the Special Resolution Regime or a firm enters the Special Administration Regime [1] .

3.16. Clauses 61: Memorandum of understanding: crisis management

3.16.1. We are concerned that there is no formal role for the FCA in the crisis management MoU, despite its responsibilities for the regulation of client assets.

3.16.2. We believe that the FCA’s role should be enshrined in the Bill and that the MoU should detail how the regulators will coordinate in relation to client asset protection.

3.17. Clause 62: Memorandum of understanding: international organisations

3.17.1. We strongly support the new high-level international coordination committee provided for in clause 62(5)(b): we believe that this committee will be essential for maintaining the UK’s effectiveness, particularly as regards coordination with the European Supervisory Authorities.

3.18. Clauses 79 to 83: Arrangements for the investigation of complaints

3.18.1. We strongly support the single complaints scheme provided for in the Bill, which should ensure that complaints relating to regulatory coordination are dealt with consistently.

February 2012


[1] JP Morgan Chase Group v Springwell Navigation Corporation [2008] EWHC 1186.

[1] The Joint Committee on Human Rights considered the ex post facto effect of section 139A (General rules about remuneration) powers in the previous Financial Services Bill. In their report of 21st December 2009, the Committee noted that it: “appears that the general worded power in the Bill, which, on its face, appears to give the FSA the power to interfere with existing contractual terms, is not intended to do so. We recommend that the Government make this limitation explicit on the face of the Bill, which should meet the concerns about the provision ’ s compatibility with Article 1 Protocol 1.” This limitation now appears as section 139A(11) of the Financial Services Act 2010.

[1] o r, by order of the Treasury, the integrity objective

[1] Set out currently in FSA’s Decision Procedure and Penalties manual (DEPP).

[1] The FSA, in DP10/3 (March 2011) , “estimates that 140 [reports] will be initiated in 2010/11 compared with 88 in 2009/10 and only 18 in 2006/07 .” A Freedom of Information disclosure by the FSA gives the average cost to firms of a section 166 report as £128,000 in 2009/10 (£80,000 in 2007/08) with the most expensive in that year being £4.4 million (£1.1 million in 2007/08).

[1] It is our expectation that the FCA, as the client assets regulator, will have a defined – but not necessarily exclusive – role in relation to the Special Administration Regime.

Prepared 2nd March 2012