Joint Committee on Financial Services and Markets First Report


The Single Regulator

99. In its overview of financial regulatory reform published in July 1998, the Government set out its reasons for establishing the FSA: "The existing arrangements for financial regulation involve a large number of regulators, each responsible for different parts of the industry. In recent years there has been a blurring of the distinctions between different kinds of financial services business: banks, building societies, investment firms, insurance companies and others. This has added further to the complexity of financial regulation. The Government believes the current system is costly, inefficient and confusing for both regulated firms and their consumers. It is not delivering the standard of supervision and investor protection that the public has a right to expect. We are therefore establishing a single, statutory regulator for the UK financial services industry, with clearly defined regulatory objectives and a single set of coherent functions and powers."[116]

100. The new FSA will take over the responsibilities of, and have powers at least equivalent to, those of nine regulators. These are:

  • the existing FSA (formerly the Securities and Investments Board);

  • the Self Regulating Organisations (SROs): Personal Investment Authority (PIA), Investment Management Regulatory Organisation (IMRO), and Securities and Futures Authority (SFA);

  • the former Supervision and Surveillance Division of the Bank of England (already transferred to the FSA under the Bank of England Act 1998);

  • the Building Societies Commission;

  • the Insurance Directorate of Department of Trade and Industry;

  • the Friendly Societies Commission;

  • the Registrar of Friendly Societies.

101. The FSA is currently responsible for supervising banks and for overseeing the regulation of investment business. Further powers for the regulation of the other financial sectors listed above are to be transferred to the FSA by this Bill. In the meantime, the existing regulators continue to have responsibility under the various statutes for regulating individual sectors. The FSA agreed with the other constituent bodies to integrate relevant staff as quickly as possible in order to reduce uncertainty for them and so minimise any risk to regulatory effectiveness. This managerial integration was completed in January 1999. In the FSA's view it "is already leading to a more efficient and focused approach to areas of common interest."[117]

102. As the Treasury made clear in its Progress Report, there has been almost unanimous support for the proposal to have a single statutory regulator.[118] The Treasury Select Committee too, in its report on Financial Services Regulation, concluded that the "balance of advantage lies in having a single regulator, able to combine consumer protection, prudential assurance and policing, rather than separate regulators for these aspects."[119] Further, the International Monetary Fund has commented favourably on the proposed shift to a single regulator.[120] We too support the proposal for a single regulator for all UK financial markets. We hope and expect that the establishment of a single regulator will help to avoid overlaps, prevent gaps in regulation and bring a greater degree of consistency to regulation.

103. On the passing of the Financial Services and Markets Act, the FSA will become one of the most powerful financial regulators in the world in terms of scope, powers and discretion. Given the power and discretion that the FSA will have, accountability needs to be wider than merely being held accountable for the particular decisions it makes. In a broader context, the FSA needs to be judged and monitored for its effectiveness (whether it achieves its mandated objectives), its efficiency (the manner in which it deploys its own internal resources), and the economy of its regulation and supervision. The last mentioned relates to the wider economic impact that regulation has on, for instance, competition, and fostering a climate of innovation in the financial sector; and to the proportionality of regulation as indicated, for example, by rigorous cost benefit analysis. It also covers the question whether the same degree of regulatory effectiveness could be achieved at less cost at both consumers and regulated firms. Different mechanisms will be needed for these different dimensions of accountability.

The FSA's structure

104. The FSA is a private company limited by guarantee. This means that it has members, not shareholders. The members of the company are the same as the members of the Board and as such are all appointed by the Treasury. The Treasury Select Committee raised with Mr Davies the reasons for this structure. Mr Davies said the answer was somewhat historical in that that was the conclusion reached in 1986 in relation to the Securities and Investment Board. The FSA had inherited that structure and adapted it to take on other responsibilities. His understanding was that "Parliament concluded that because it wanted a regulatory system which was as far as possible rooted in the markets that it regulated and funded by those markets, it should be constructed as a private company operating within those markets with private company-type corporate governance procedures and funding direct from institutions with public powers given to it. That would allow it to relate more effectively to the market place, and would allow it to employ people on broadly speaking private sector terms". The protections which people needed in relation to their ability to challenge the FSA and judicially review its decisions still applied.[121]

105. Mr Christopher Bates, a partner at Clifford Chance, thought the question of whether the FSA was a company or not was not of particular importance. "What is important is the role that it has, the powers it has, and the accountability controls that the Bill provides for which the Government has gone a long way in its recent statements to strengthen and enhance in line with and in response to comments made by the industry."[122] Mr Bates has indeed identified the important factors. We are satisfied that the structure provides a greater degree of managerial flexibility and independence while leaving scope for an appropriate system of accountability.

106. In January 1999, following consultation on the draft Bill, the Economic Secretary announced new measures intended to ensure that the new regulatory regime is open and accountable[123]:-

  • The Treasury will have the power to commission an independent report, at periodic intervals, into the efficiency and economy of the FSA's operations;

  • the Bill will require a majority of the FSA Board members to be non­executives;

  • the FSA will be required to maintain consumer and practitioner panels. The panels will have a role in assessing the performance of the FSA against its statutory objectives;

  • the FSA will be required to hold an annual public meeting to discuss its annual report;

  • the FSA will be required to consult upon its arrangements for independent investigation of complaints made against it. As well as being able to report publicly on his investigations, the investigator will also have the power to publish the FSA's responses to his recommendations.

Announcing the measures, Ms Hewitt said, "These measures will build on the accountability framework in the draft Bill. The framework will ensure that the FSA is properly accountable to Ministers and Parliament, and to practitioners and consumers."

107. The Treasury's subsequent Progress Report acknowledged that a strong consensus had emerged from the consultation process on the need to improve the accountability framework.[124] In the light of that the Government had considered various aspects of accountability. First the consultation responses generally acknowledged the importance of effective accountability arrangements to Ministers and Parliament. Second, most of those responses which expressed views on the accountability framework focused on suggestions about how to ensure that the regulator takes proper account of the views of practitioners and consumers. In addition to the changes announced in January, the Government said that it would also be discussing with the FSA an agreed list of the contents of the annual report and that it would be including new safeguards in the Bill covering the FSA's rule­making process. We welcome the steps taken so far to increase the FSA's accountability. Some of these changes are discussed in the following paragraphs; the remainder we accept without comment.

Evaluation of the FSA's performance

108. As a Companies Act company the FSA will, in the normal way, appoint its own external auditors. But, although the Government has announced its intention to give the Treasury power to commission and publish independent value for money audits of the FSA, the Bill does not make provision for independent examination and evaluation of the Authority's performance. The Comptroller and Auditor General (C&AG), in a written submission to our Committee, described the provisions announced by the Government as "a significant response to the concerns that have been expressed about the need for independent scrutiny of the FSA" but questioned whether they go far enough in that the timing of such examinations and their terms of reference would not be fixed independently of the Executive. The C&AG argued that though the FSA was constituted as a private company, it exists to carry out public policy. The C&AG could be given rights of access to the FSA to undertake value for money scrutinies: he "would bring the necessary authority and independence to the role of independent assessor and would be well placed to report on the Authority's performance against statutory objectives."[125]

109. The NatWest Group, in their comments on the Consultation Document, also stressed the need for an independent review and assessment of the FSA's operations. "Such an arrangement could be undertaken by the National Audit Office (NAO) with its direct responsibility to publish its findings and report to the Public Accounts Committee. This is transparent, attracts publicity and demonstrates a clear line of accountability." A similar view was expressed by the Securities Institute, which recommended that the FSA should be subject to review by the National Audit Office and "that this requirement should be included in the Bill. This audit should not be simply an audit of the accounts but should include the FSA's effectiveness and whether it provides value for money in regulatory terms." In making its proposal the Securities Institute noted that various component organisations, including the Friendly Societies Commission and the Building Societies Commission are themselves subject to audit by the NAO.[126]

110. The NAO suggested several ways in which the arrangements for independent scrutiny of the Authority could be strengthened. "The legislation could provide the C&AG with full access rights to the FSA on the basis of which he could periodically report to Parliament on the Authority's performance. Alternatively the Comptroller and Auditor General could be given the same powers as the Treasury to carry out or otherwise commission and publish periodic performance audits of the Financial Services Authority."[127]

111. We agree that it is important that the activities of the FSA should be subject to independent audit. The NAO rightly seeks to follow public money wherever it goes, but the FSA will be paid for by the industry, not the taxpayer. We do not support giving the NAO 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.

The Chairman/Chief Executive

112. Mr Davies is both the Chairman and Chief Executive of the FSA. The Minister thought that "In the interests of accountability. ..there is a good case for having one person who fulfils the functions of both chairman of the board and chief executive."[128] Mr Roe subsequently explained that the Bill currently leaves open, as does the current legislation, whether the Chairman should also be the Chief Executive. "Whilst there is no intention to change the current arrangements whereby Howard Davies is the Chairman and Chief Executive and there is a non-executive Deputy Chairman, Ministers recognise that in the longer term there may be other arrangements which could work. They are however mindful of the fact that parallels with other models of corporate governance are not exact....There is also a good case for a strong line of direct accountability to Treasury Ministers from the senior executive of the regulator."[129] Dr Oonagh McDonald CBE, a former board member of the SIB and the FSA, thought that in this interim period it has probably been an effective way of establishing a new regime. "As you are moving on to become a fully established board, a fully established regulatory authority, so the specific tasks that had to be completed in this two year period will fall away and the main focus will be the conduct of regulations."[130] Mr Philip Telford of the Consumers' Association agreed that at the moment there was a big job to do bringing the different SROs together and establishing a consistent theme to the FSA. It "may be appropriate to have the joint function at the moment." "If there is the flexibility to change that structure and to have a division between those two roles I think that is right."[131]

113. We understand the reasons for combining the roles of Chairman and Chief Executive at this stage of the FSA's existence, particularly when accompanied by the appointment of a senior non-executive director as Deputy Chairman. The parallels with the corporate model are not necessarily appropriate. However, in the longer term we recommend that the posts of Chief Executive and Chairman should be separated and that a non-executive Chairman should be appointed. We see advantages in this of limiting the power of and focus on a single individual; enhancing the power of non-executive directors; and ensuring that control of the agenda does not lie exclusively with the executive.

The FSA Board

114. The FSA is governed by a Board whose Chairman and members are appointed, and may be removed, by the Treasury. The Board has a majority of non-executive members. In addition to the Chairman there are currently three executive Managing Directors and ten non-executive members, of whom one, the Deputy Governor (Financial Stability) of the Bank of England, is an ex officio director. One of the non-executive members is the Deputy Chairman.

115. The Association of Unit Trusts and Investment Funds (AUTIF) and the IFAA expressed reservations about the Treasury's role in appointing the Board. They argued that it was inappropriate for the Treasury, as the FSA's sponsoring department, to appoint the members of the FSA's Board. The IFAA recommended that the Minister for the Cabinet Office should assume this role.[132] We do not consider that this extra safeguard is necessary and we are content for the appointment to be made by the Treasury, which will in turn be accountable to Parliament for the success of the regime as a whole.

116. The Bill gives a new statutory role to the non­executive members of the Board, similar to the arrangements introduced for the Bank of England under the Bank of England Act 1998. There will be a committee of the non­executive members of the Board, whose Chairman will be designated by the Treasury. The role of that committee will be to monitor the FSA's performance against the requirement that it should be efficient and economic and the adequacy of the FSA's internal financial controls. The committee will also determine the remuneration of the FSA Chairman and executive members of the Board. The non­executives will report on the performance of these functions within the FSA's annual report.

117. The Institute of Chartered Accountants welcomed the number, appointment procedures and reporting responsibilities of the non-executive directors but argued that, if the Board was to operate effectively, the non-executive directors must take a full part in the decision making process. "They will thus be, quite rightly, committed to the decisions made. While this has many advantages in improving the quality of decision making and the breadth of experience employed, it also has the effect of reducing the independence of the non-executive committee. It is not realistic to expect non-executive directors to take a neutral stance in preparing a report on the effect of decisions that they have themselves been involved in making."[133] We are content with the special role of the non-executives 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.

118. The non-executive members of the Board are appointed in accordance with the principles of public appointment set out in the Nolan Report. Appointments are made on the basis of people's experience and qualities as individuals, not as representatives of particular interest groups. The Consumers' Association argued that there should be a commitment to reserve a number of seats on the Board for dedicated consumer experts.[134] The National Consumer Council, by contrast, while it would have liked greater consumer representation on the Board, acknowledged that "the position is helped by the fact that all directors must act in the public interest. Nevertheless we consider that Directors who have an industry background should be in a minority on the Board."[135] We welcome the fact that the members of the 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.

Parliamentary Accountability

119. The draft Bill confers on the FSA "legislative functions". This fact, as the Delegated Powers Committee pointed out, is illustrated with the utmost clarity in paragraph 1 of Schedule1 where those functions are defined as "the Authority's functions of making rules and codes of practice and publishing statements of principle and statements of policy." The Committee noted that "the FSA's 'legislation' will not be set out in statutory instruments and so is not intended to be subject to direct parliamentary control, yet is of far greater practical importance than the statutory instruments which Ministers are empowered to make under the draft Bill and which are rightly subject to Parliamentary control. If powers of this kind were to be vested in Ministers, we would undoubtedly advise that there should be a measure of Parliamentary control."[136]

120. The Economic Secretary said that accountability to Ministers and Parliament was absolutely crucial given the public purposes of the FSA. "We are achieving that because the Treasury has the power to appoint but also to remove the board. The Treasury will have the power to commission statutory inquiries in the public interest. There will be an annual report to Ministers on the FSA's performance measured against its statutory objectives and any other matters the Treasury specifies. These reports, of course, will be laid by the Minister to Parliament and will thus be available for parliamentary scrutiny." The Minister hoped that the Commons Treasury Committee would wish to play a full role in holding the FSA accountable to Parliament.[137]

121. The Association of Unit Trusts and Investment Funds (AUTIF) argued that there was a pressing need to improve the FSA's accountability to Parliament and suggested that the best way of achieving Parliamentary accountability would be to ask a Committee—probably the Treasury Select Committee—to review the FSA's annual report. The Commons should then have the opportunity to debate the Committee's findings.[138] The IFAA, however, thought that ad hoc reporting by the FSA to the Treasury Committee was unsatisfactory. "Select Committees have a wide range of issues to address and cannot exercise adequate supervision of even a single financial services regulator." Proper accountability is essential. We believe that this scrutiny 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.

Confirmation hearings

122. The Treasury Select Committee, in its examination of the Bill, sought views on whether it should hold confirmation hearings for those appointed to the FSA Board. The Minister expressed concern that such hearings might conflict with Nolan principles, though she acknowledged that a process whereby the Committee could only encourage second thoughts rather than veto a candidate would not conflict with the principle of Ministerial accountability. The Treasury Select Committee concluded that there were advantages in confirmation hearings for FSA Board members.[139] In evidence to us Dr Oonagh McDonald agreed that the Nolan procedures provide important checks and argued that it was important that the process of selection should be open and fair but also efficient.[140] We believe that it is essential that the Nolan principles are adhered to and that Committees should not take actions which would conflict with them. However, we agree that giving a Committee the right to suggest an appointment is reconsidered would not conflict with those principles and we believe that it would introduce a welcome degree of transparency to the process. Given the use of the Nolan procedures for the appointment of non-executive members of the 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 FSA Board should be subject to confirmation hearings by a Parliamentary Committee.

Accountability to Consumers and Practitioners

123. In November 1999, the FSA established a Consumer Panel and a Practitioners Forum. As we noted above, the Government has now announced that it intends to make the maintenance of Consumer and Practitioner Panels a statutory requirement.

124. The FSA established the eleven member Consumer Panel to advise the Authority on the interests and concerns of consumers and to report on the FSA's effectiveness in meeting its consumer protection and public awareness statutory objectives. The Panel can raise its own concerns, initiate research and publish its own reports.

125. The Consumer Panel welcomed the Government's decision to include in the Bill a statutory requirement for the FSA to establish a Consumer Panel. It urged that the provisions should be drafted so as to secure the independence of the Panel and suggested various ways by which that independence could be safeguarded. The Panel proposed that its members should be appointed by open competition; and that the Bill should give the Panel powers to provide advice, to evaluate the effectiveness of the FSA in meeting its statutory public awareness and consumer protection objectives, to make recommendations, to conduct research and publish its work, and to spend its budget on investigating any aspects of financial services which impact on consumers. The FSA should be required to provide resources adequate to the Panel's needs; and to include in its annual report the Panel's assessment of the FSA's effectiveness in meeting its statutory objectives.[141]

126. We agree that it is essential that the Consumer Panel should be independent and be seen to be independent although we understand the FSA's arguments in favour of not completely separating the Panel from the FSA: "the point of having a Consumer Panel which is inside the FSA is of course that it therefore has a legitimacy within the organisation."[142]

127. The members of the Consumer Panel were appointed by the FSA board after open advertising using Nolan principles. Ms Barbara Saunders, as Chairman of the PIA consumer panel, was involved throughout the selection process. She thought that it might be helpful to have a separate procedure for the appointment of the chairman from that of the panel members and "it may well be that it would be another of the checks and balances so that the FSA was not seen to appoint all of them."[143] We agree. We recommend that a requirement that the Chairman of the Panel be appointed by the Treasury after consultation with the FSA be included in the Bill.

128. The Consumer Panel's current budget is around £420,000, about half of which will be spent on consumer research and about half on its staffing costs.[144] The budget had been agreed by the FSA board on the advice of its consumer relations division at about the time the Panel was established but, as Ms Saunders explained, did "not take account of the [FSA] staff support that we get which is very significant and I would not want to see the degree of involvement between staff from across the FSA compromised by arguments over how much we should pay for that."[145]

129. Mr Davies suspected that in the long run the budget would not be sufficient but added that "until we have our full statutory responsibilities and in particular our new statutory objective of promoting consumer understanding of the financial market place, we do not think that we can justify to ourselves, and therefore to our fee payers, spending a large amount on the Consumer Panel." He did, however, commit the FSA to an early review of the budget.[146] Ms Saunders thought that, "as a point of principle in the future the panel would wish to identify its own budget and negotiate that with the FSA."[147] She would be seeking a review of the budget in the third quarter of this year.[148]

130. The Practitioner Forum was also established in November 1998. Its membership comprises senior representatives from the businesses which are regulated by the FSA. The Forum regards it as its role to make representations to the FSA on any matter it believes is causing concern among practitioners about the way in which the FSA's operations are conducted in practice. Mr David Challen, the Chairman, said that from his experience so far he thought the current management was making good progress in establishing an open and responsive relationship.[149]

131. Mr Derek Wanless, Group Chief Executive at NatWest and a member of the Practitioner Forum, saw the establishment of the Forum as "a very important step in terms of how consultation should happen...the important issue is that there is openness in the process and the panel has the opportunity to report publicly each year."[150] The practitioners would be expected to do research among the regulated firms and use that research as a basis of an annual report. "The issue about resources for that sort of research is obviously an important issue. Again the attitudes of the FSA so far are rather positive in that respect because they themselves see the benefits they get from it."[151]

132. Mrs Angela Knight, the Chief Executive of the Association of Private Client Investment Managers and Stockbrokers (APCIMS), supported the idea of the FSA being required to consult the Panels when making rules or broad policy statements. APCIMS also believed that the Panels should appoint their own chairmen, possibly for a three year period only. In addition it would expect regular reports on what FSA money was being spent as it would be the regulated firms which would be providing the money.[152]

133. We sought Mr Challen's view on how the FSA's relationship with the Practitioners' Panel, as the Forum seems likely to be renamed, might be described in the Bill. Mr Challen suggested "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."[153] This is a very helpful suggestion, combining as it does both consultation and transparency. We recommend that the Government consider including a requirement on these lines in the Bill. We also recommend that a requirement that the Chairman of the Panel be appointed by the Treasury after consultation with the FSA be included in the Bill.

134. 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.

Statutory immunity

135. Under Schedule 1, paragraph 17, the FSA is immune from suit for damages for acts in good faith in discharge of its functions. The FSA is not immune from judicial review,[154] from challenge under the Human Rights Act 1998,[155] or from criminal prosecution.

136. The Minister defended the proposed immunity.[156] It replicated the immunity given to the SIB by the Financial Services Act 1986; and it was necessary for the efficiency and effectiveness of regulation. Mr Whittaker told us that immunity for banking supervisors is found in many comparable regimes overseas.[157]

137. Some people regard this immunity as excessive. Mr Tim Herrington, a partner at Clifford Chance, speaking for the Law Society Company Law Committee, said, "Accountability under the law is vitally important for any public authority and we do not believe that the case for the continuation of the immunity has been clearly made in the light of the increased powers of the FSA. We are particularly concerned that negligent action taken by the Authority in the execution of its powers could have serious financial effects on a firm's business".[158] He conceded that the Bank of England has immunity, but pointed out that the police and many other public authorities do not.[159]

138. LIBA suggested that immunity should be set aside in case of recklessness, as well as bad faith.[160] APCIMS suggested setting immunity aside in case of negligence.[161] The Securities Institute suggested that immunity was an inheritance from the regime of self-regulation, and not necessarily appropriate at all for a statutory regulator.[162] Herbert Smith see immunity as unnecessary.[163]

139. On the other hand, the BBA and AUTIF are content with the proposed immunity,[164] provided that there is a proper procedure for complaints (see below). Mr Herrington likewise indicated that a stronger complaints procedure would help. We consider that the proposals for immunity for the FSA are appropriate, provided that the complaints procedure is strengthened as we recommend below. An essential aspect of regulation is that supervision should not take place to the extent necessary to prevent all possible business failures. If the FSA are vulnerable to suit in the event of business failure, they will go as far as possible to avoid all failures; this will be a recipe for over-regulation.

140. Under Clause 167, exchanges are immune from suit for damages for regulatory acts in good faith, but only in respect of actions by their own members. The London Metal Exchange want this extended to actions by members' clients or employees or approved warehouses, who are much more likely to sue than members.[165] Mr Kit Farrow, Director General of LIBA and an unpaid director of the LME, expressed unhappiness at being personally liable in damages for carrying out his regulatory duties; he wants the immunity extended, and would be content if it did not extend to acts of recklessness or negligence.[166] Mr Alan Whiting is an executive director of the same exchange; he pointed out that, like the FSA, exchanges are liable to judicial review. 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. The LME has made a convincing case, to which we have heard no answer.

141. It has been suggested that the proposed immunity may prove incompatible with the ECHR.[167] In the light of judgements of the European Court of Human Rights in the cases of Tinnelly and Osman, it is possible that a blanket immunity against civil actions, e.g. for negligence, would be held in the courts, in the circumstances of a particular case, to breach the right of access to the courts guaranteed by Article 6. 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 its response on this point as soon as possible.

Complaints Procedure

142. Under Schedule 1, paragraph 7 of the draft Bill, the FSA will be required to set up and publish a procedure for complaints against itself, involving an independent investigator with power to publish his report, and a requirement on the FSA to respond to it. According to the Progress Report, the investigator will also have power to publish the FSA's response.[168] The FSA is currently consulting on this procedure.[169]

143. The Treasury Select Committee wanted the FSA's complaints procedure "enshrined in law".[170] It is not clear what this would involve over and above the current provisions of the draft Bill. LIBA see the complaints procedure as a counterbalance to the FSA's immunity from suit; but they consider that it should be "substantially more robust and independent".[171] The BBA take the same line.[172] They consider that the independent investigator should be a standing body;[173] Mr Whittaker indicated that the FSA would set up a standing body if the volume of complaints required it.[174]

144. Clifford Chance also call for independence for the investigator.[175] They suggested that the investigator should be able to award compensation.[176] They raised but did not answer the question who should pay: "The FSA is funded entirely by the industry, and if it is the FSA that has to pay, then essentially the industry is being required to fund the costs of maladministration by a body which it did not appoint and whose members it does not control". In LIBA's view, compensation for maladministration by the FSA should come from public funds.[177]

145. The FSA was concerned that if the compensation suggestion were adopted, it could lead to the same kinds of difficulties as liability in damages before the courts. "In any case where a major institution needed to be closed, for example, there would be complaints from consumers who lost out as a result, as well as from commercial counterparties and others affected....We are concerned that this would be likely to reduce our readiness to take difficult decisions." The FSA believed that "the statutory compensation scheme provides the proper safety net for consumers in such circumstances and that commercial counterparties should be encouraged to make their own judgements about those with whom they deal rather than relying on the regulator."[178]

146. Mr Roe indicated that this was an area where the Treasury might be open to suggestions for improvement to the draft Bill.[179] We agree with those who see a robust complaints procedure as an essential counterbalance to the FSA's statutory immunity. We therefore recommend that:

  (i)  The appointment of the investigator should require the approval of the Lord Chancellor (with appropriate protection for the Scottish interest).

  (ii)  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.

  (iii)  The Government gives 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.

116  Financial Services and Markets Bill: A Consultation Document, Part One, para 1.1 Back

117  Appendix 4 Back

118  Op cit, chapter 2 Back

119  Op cit, para 54 Back

120  1998 Article IV Consultation-Concluding Statement of the Mission (HM Treasury News Release 216/98) Back

121  Op cit, QQ 232 and 233 Back

122  Q 259 Back

123  Commons Hansard, 19 January 1999, col 395-6Back

124  Paragraph 3.3 Back

125  Appendix 26 Back

126  Appendix 55 Back

127  Appendix 26 Back

128  Q 90 Back

129  Q 343 Back

130  Q 344 Back

131  Q 347 Back

132  Appendix 37 Back

133  Appendix 38 Back

134  Response to the July Consultation Document Back

135  Response to the July Consultation Document Back

136  Annex B Back

137  Q 83 Back

138  Appendix 19 Back

139  Op cit, para 59 Back

140  Q 351 Back

141  Appendix 10 Back

142  Q 12 Back

143  Q 361 Back

144  Q 12 Back

145  Q 362 Back

146  QQ17, 18 Back

147  Q 362 Back

148  Q 363 Back

149  Q 377 Back

150  Q 381 Back

151  Q 389 Back

152  Q 389 Back

153  Appendix 24 Back

154  McDonald Q 340 Back

155  Hewitt Q 94 Back

156  Q 100 Back

157  Q 335 Back

158  Q 377 Back

159  QQ 398-9 Back

160  Q 234 Back

161  QQ 380, 411 Back

162  Q 330, cp Herrington Q 397 Back

163  Q 332 Back

164  QQ 330-1 Back

165  Appendix 50, QQ 202, 234, 236 Back

166  Q 401 Back

167  QQ 332, 402, 434, 443 Back

168  para 3.7 Back

169  Q 19 Back

170  Op cit para 83 Back

171  QQ 234, 379 Back

172  Q 330 Back

173  Q 334 Back

174  Q 336 Back

175  Q 403 Back

176  QQ 235, 377 Back

177  Q 406 Back

178  Appendix 61 Back

179  Q 338 Back

previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries

© Parliamentary copyright 1999
Prepared 29 April 1999