Joint Committee on Financial Services and Markets First Report


The Joint Committee on Financial Services and Markets has agreed to the following Report:—



Statutory objectives and principles

We support the principle that the Bill should set statutory objectives and principles for the FSA, to inform its behaviour as it seeks to ensure markets of integrity, and to provide a yardstick for accountability. We agree that these should be set at a high level of generality, so as to be adaptable to changing circumstances. We agree that they should apply at the level of general policy and principles, rather than applying directly to every single act and decision of the FSA. We agree that they should not be ranked (paragraph 24).

For the purposes of the consumer protection objective, we recommend that the Bill should require the FSA to recognise the different regulatory needs of the wholesale and retail industries (paragraph 29).

We recommend that the principle of caveat emptor should feature in the Bill; but that it should be redrafted in such a way that it could not be used to negate the consumer protection objective and excuse exploitation of sections of the general public (paragraph 37).

We recommend that the Bill should require the FSA, in considering under Clause 5 what degree of consumer protection may be appropriate, to have regard to the responsibility of authorised persons (i.e. financial service businesses) to make full and prominent disclosure of the main characteristics of a financial service which might affect consumer choice (paragraph 40).

We recommend that the market confidence objective should refer to "maintaining confidence in the soundness of the financial system", and should be expanded to include a reference to the management of systemic risk, in collaboration with the Treasury and the Bank of England (paragraph 45).

The Committee is content that competition and competitiveness should remain among the principles to which the FSA is required to have regard, rather than being turned into objectives (paragraph 51).

We recommend that the FSA's annual report should address the regulatory burdens and compliance costs of UK markets compared with overseas jurisdictions (paragraph 54).

We welcome the public awareness objective. It is important to be ambitious about bringing a wider understanding of financial services to the public. We recommend that initiatives taken to achieve this objective, and the criteria used to assess progress, should feature in the FSA's annual report (paragraph 58).

We recommend that the FSA should not be given additional objectives (paragraph 62).


We support the Government's intention to ensure that authorisation of solicitors and other professionals is not required unnecessarily; we urge the Treasury to ensure that its intentions are carried out (paragraph 70).

We recommend that a decision in principle be taken now to bring mortgage advice within the scope of the FSA. We recognise that the timetable for implementation will have to take into account the need to manage the appropriate transfer from a voluntary code to statutory regulation and the availability of regulatory resources (paragraph 84).

We agree that long-term care insurance should be included in the remit of the FSA. For the most part this would involve extending the product coverage within the regulated sector. We agree that a decision in principle should be taken and that it should be implemented without delay (paragraph 87).

We welcome the work done towards creating a General Insurance Standards Council (GISC) and the proposals of the insurance industry for this standards body to make membership of the Financial Services Ombudsman Scheme a precondition of GISC membership (paragraph 88).

We expect the FSA to put in place a system of signposting to ensure that consumers concerned about any financial service are directed to the appropriate body if an activity about which they are concerned does not come within its remit (paragraph 89).

We recommend that the Treasury give active consideration, before introducing the Bill, to the proposal to give them power to amend the Lloyd's Acts by secondary legislation (paragraph 92).

We invite the Government to indicate how it intends to ensure that Scottish solicitors, in common with members of the other professions, are not faced with unnecessary regulatory overlap (paragraph 94).

We consider the FSA's approach to the handling of cases which might also interest other agencies to be sensible and workable (paragraph 95).

The changing nature and growth of communications pose challenges to the regulatory authorities which seem likely only to increase in the future. We recommend that the Government should carry out a review of these likely challenges and ways of dealing with them (paragraph 98).


We support the proposal for a single regulator for all UK financial markets (paragraph 102).

We are satisfied that the FSA's structure as a private company limited by guarantee provides a greater degree of managerial flexibility and independence while leaving scope for an appropriate system of accountability (paragraph 105).

We welcome the steps which have been taken so far by the Government to increase the FSA's accountability (paragraph 107).

We do not support giving the National Audit Office the right to access to the FSA but note that under the proposed arrangements it is open to the Treasury to appoint the NAO to undertake an independent report into the efficiency and economy of the FSA's operations. In addition it is important that the report of the FSA's auditors should be included in the FSA's annual report to Parliament (paragraph 111).

In the longer term we recommend that the posts of FSA Chief Executive and Chairman should be separated and that a non-executive Chairman should be appointed (paragraph 113).

We are content for members of the FSA Board to be appointed by the Treasury (paragraph 115).

We are content with the special role of the non-executive members of the FSA Board in relation to efficiency, internal controls and remuneration but we would prefer them to be organised in the form of an audit committee and a remuneration committee. We would not want to extend their role to other aspects of performance as it would be anomalous for the non-executive membership of the Board to monitor the performance of a Board of which they are the larger part (paragraph 117).

We welcome the fact that the members of the FSA Board have been, and will continue to be, appointed in accordance with the Nolan principles. We agree that such appointments should be made on the basis of relevant experience and personal qualities and that seats should not therefore be reserved for representatives of particular interest groups. We would, however, stress, the importance of ensuring that the Board maintains an appropriate balance of membership between consumer and practitioner experience (paragraph 118).

Proper Parliamentary accountability is essential. We believe that this can best be achieved by asking a Parliamentary Committee to review the FSA's annual report and to take regular evidence from a broad section of consumers and practitioners (paragraph 121).

Given the use of the Nolan procedures for the appointment of non-executive members of the FSA Board we do not consider it would be appropriate for them to be the subject of confirmation hearings. We recommend, however, that the Chairman and executive appointees to the Board should be subject to confirmation hearings by a Parliamentary Committee (paragraph 122).

We recommend that a requirement that the Chairman of the Consumer Panel be appointed by the Treasury after consultation with the FSA be included in the Bill (paragraph 127).

We recommend that the Government consider including in the Bill a requirement that before proposing new, or revisions to existing, policies and/or associated principles or rules, which could have a material impact on regulated firms, the FSA will consult the Practitioner Panel. Where it decides not to follow any formal guidance offered by the Practitioner Panel, the FSA will report its reasons for so deciding to the Practitioner Panel and in the FSA's Annual Report. We also recommend that a requirement that the Chairman of the Practitioner Panel be appointed by the Treasury after consultation with the FSA be included in the Bill (paragraph 133).

We believe it is essential that both the Consumer and the Practitioner Panels should have sufficient funds to allow them properly to carry out their functions. We recommend that the Panels should be required to report annually on the adequacy of their budgets. We hope that the Parliamentary Committee which takes evidence on the FSA's report will, as part of its examination, consider whether the Panels are properly funded (paragraph 134).

We consider that the proposals for immunity for the FSA are appropriate, provided that the complaints procedure is strengthened as we recommend (paragraph 139).

We recommend that the immunity of exchanges should extend to actions by non-members as well as members, provided again that there is an adequate complaints procedure in place (paragraph 140).

It has been suggested that the FSA's proposed immunity may prove incompatible with the ECHR. It would be highly undesirable for the FSA to set to work on an assumption of immunity which later turned out to be mistaken. We therefore recommend that the Government should address this issue with the utmost urgency, and should publish a response on this point as soon as possible (paragraph 141).

The appointment of the FSA complaints investigator should require the approval of the Lord Chancellor (with appropriate protection for the Scottish interest) (paragraph 146).

The investigator should have a continuing existence, with adequate resources, and should be able to launch investigations into complaints received directly as well as those referred by the FSA itself (paragraph 146).

The Government should give serious consideration to whether the investigator should be able to award compensation to businesses or their employees damaged by FSA maladministration, and if so, who should pay. If the investigator is not to have this power, the FSA should consider whether it should be its policy to give such compensation ex gratia if the investigator so recommends (paragraph 146).

Discipline and enforcement

We accept that there is a good reason for a power to define "private person"; but we are persuaded by the constitutional argument for not giving this discretion to the FSA. We therefore invite the Government to justify this provision or to amend it (paragraph 161).

We recommend that the Government should publish, as soon as possible, its reasoned view as to what ECHR standards will apply to FSA disciplinary proceedings, and its reasons for believing that the Bill will meet those standards (paragraph 174).

The disciplinary process is an area of the Treasury's original proposals which has given rise to great concern, and we commend both them and the FSA for responding to this concern and clarifying their thinking in this area. The Treasury's proposals in the Progress Report regarding the Tribunal are crucial, and are now broadly satisfactory. Likewise we are broadly satisfied with the latest proposals for the pre-Tribunal stage (paragraph 199).

We recommend that the Bill should be amended to require the following:

(a)  The FSA should set up an Enforcement Committee, or some equivalent mechanism to separate the functions of investigation and enforcement.

(b)  The Chairman of the Enforcement Committee should have appropriate legal qualifications.

(c)  The appointment of the Chairman of the Enforcement Committee by the FSA should be subject to approval by the Lord Chancellor (with appropriate protection for the Scottish interest).

(d)  The Enforcement Committee should give the defendant the opportunity of making oral representations before issuing a decision notice.

(e)  The Enforcement Committee should reach decisions by majority of all the members involved, rather than by the Chairman's decision alone.

(f)  In the interests of public confidence, all final decisions (i.e. decisions which are subject to no further appeal) should be made public, save in exceptional circumstances which would require to be justified (paragraph 201).

The question how far the FSA Enforcement Committee or the Tribunal may be shown evidence obtained by compulsion is better resolved by Ministers and Parliament before enactment, rather than afterwards by the courts; we therefore look forward to seeing what the Government say about it in their reasoned response (paragraph 205).

We recommend that:

(a)  At the FSA Enforcement Committee stage, each side should bear its own costs, save that the Committee should be able to award costs against the defendant or the FSA if they have behaved frivolously, vexatiously or unreasonably.

(b)  The FSA should be expressly prohibited from including its own costs in the amount of any fine.

(c)  The Treasury should consider whether the Tribunal's power to award costs either way should be restricted to cases of frivolous, vexatious or unreasonable behaviour.

(d)  Legal aid should be available at the Tribunal stage, so far as necessary to satisfy the ECHR (paragraph 218).

With regard to the position of individuals implicated in proceedings between the FSA and their employer, we make no recommendation for amendment to the draft Bill, beyond our recommendation above for legal aid at the Tribunal. But we draw attention to the issue, which might become relevant in the future (paragraph 220).

We are content that fine income should go to the FSA. However we recommend that it should be returned gross to the regulated community as a discount on fees, with no offset for enforcement costs, in order to give the FSA the least possible interest in maximising fine income (paragraph 226). To avoid excessive fluctuations in fees, the discount could be spread over a period, perhaps 3 years (paragraph 227).

We have considered the case for setting an upper limit on the fines which the FSA can impose; we consider it better that there should be no such limit (paragraph 229).

We recommend that the following should be given enhanced evidential status:

(a)  FSA non-actionable rules, in respect of statutory requirements and FSA actionable rules, including rules expressed as "principles";

(b)  Codes of practice, in respect of principles of conduct for approved persons (paragraph 247).

The enhanced status which we have in mind is as follows. When the FSA or any other authority or person pursues an alleged breach of a statutory requirement, actionable rule or principle of conduct, the defendant may assert that he has complied with an underpinning non-actionable rule or code of practice. Where the regulator cannot disprove this, it should be required to prove either intent to breach the requirement, actionable rule or principle, or recklessness or possibly negligence as to whether it was breached (paragraph 248).

It will be important for the FSA to attract appropriately qualified staff; this means that salaries need to be competitive. There is also merit in practitioners with up-to-date experience of trading in the regulated industries being seconded to the FSA, so as to bring that experience to bear directly on the regulatory process (paragraph 253).

Market abuse

We accept in principle the need for a market abuse regime that complements the existing criminal offences (paragraph 256).

We are persuaded that a clearer statutory definition of market abuse than the one in Clause 56 as drafted is required (paragraph 263).

We recommend that the draft Bill should provide a safe harbour for behaviour that complies with the FSA Code of Market Conduct except where the FSA proves that the person responsible for it intended to engage in market abuse or exhibited recklessness or possibly negligence about the abusive effect of the behaviour (paragraph 270).

We recommend that the Treasury should consider the case for giving FSA guidance on the market abuse regime the same evidential status as the FSA Code of Market Conduct (paragraph 275).

We consider that there is a compelling case for the Government to respond to the concern that the market abuse regime is criminal in substance in ECHR terms and that the necessary safeguards do not appear in the Bill as drafted (paragraph 280).


We welcome the assurance that the FSA does not intend to apply cost benefit analysis as to whether the Financial Services Ombudsman Scheme should apply to an activity in a narrow (purely accounting) way, but, as with cost benefit analysis elsewhere, will take account of the objectives of the Ombudsman Scheme (paragraph 289).

We recommend that the Ombudsman Scheme should be required to report annually to Parliament on the adequacy of its budget. We hope that the Parliamentary Committee which takes evidence on the FSA's report will, as part of its examination, consider whether the Financial Services Ombudsman Scheme is adequately funded (paragraph 291).

It is important that the procedures under which the Ombudsman Scheme operates should be fair and transparent but within those parameters we hope it will prove possible to ensure that the Scheme does not become over-legalistic because of ECHR requirements. We have not received sufficient evidence to enable us to reach a judgement on this issue; we look to the Government to resolve it before the Bill is introduced (paragraph 295).

We believe that the Ombudsman Scheme is for individuals, not firms. We therefore recommend that the Bill should be amended to preclude authorised persons from using the Scheme (paragraph 296).

Process of pre-legislative scrutiny

In the light of our experience, we recommend for any situation in the future when pre-legislative scrutiny by an ad hoc committee is proposed, that, at the least, the terms of reference of the Committee should be agreed, a Chairman-elect identified and staff allocated before the Committee is expected to begin work, so that all necessary preliminary steps can be taken and the Committee can begin its scrutiny with the minimum of delay. If possible, membership of the Committee should also be decided in advance (paragraph 11).

We recommend that in responding to our Report the Government should respond also to the points made by the Delegated Powers and Deregulation Committee in their submission printed in Annex B (paragraph 13).

On the basis of our experience, the two Houses should establish a specialist Human Rights Committee as soon as possible (paragraph 16).

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Prepared 29 April 1999