Financial Services and Markets Appendices to the Minutes of Evidence


Note by the Financial Services Authority on the revised proposals on the disciplinary decision-making process


  1. The FSA's proposed decision-making process constituted an important part of Consultation Paper 17 and many of the responses and much of the concurrent public debate have focused on this subject. This memorandum updates the Committee on the FSA's current thinking. A diagram is attached by way of summary.

  2. The revised proposals which follow are derived from our consultation responses and recent discussions with a range of interested parties. (They are limited for the time being to discipline. Work continues on an appropriate process for intervention and admissions purposes.)

  3. The proposals take account of the Government's clarification of aspects of the statutory framework for discipline set out in its March 1999 Treasury Progress Report, including clarification of the respective roles of the FSA's administrative procedures and the independent Tribunal's judicial ones.

  4. However, we do not know whether Government policy will develop in a way which will impact on what is said in this paper. The overall framework within which FSA procedures will operate is, of course, a matter for the Government. We should also stress that our Board has not yet considered these revised proposals. They are necessarily tentative, therefore, and subject to further refinement. Having said that, we believe they meet the objectives we set ourselves, and are capable of commanding general support.


  5. Our aims in devising the FSA's decision-making process are to ensure that the arrangements, together with the statutory right to go to the independent Tribunal administered by the Lord Chancellor's Department, provide a process that is:

    (a)  fair and seen to be fair; and

    (b)  efficient and effective.

  6. In our view this involves:

    —  providing those subject to FSA disciplinary action with sufficient information as to the reasons for that action, and the evidence on which the action is based, so as to enable them to understand the FSA's grounds and, if they wish, to challenge them;

    —  providing those subject to FSA action with a reasonable opportunity effectively to challenge the grounds for the proposed action and present any evidence and arguments that are relevant to the decision in question;

    —  ensuring that decisions to exercise the FSA's enforcement powers are subject to consideration by a person or persons who are able to take a dispassionate and impartial view of the case for FSA action;

    —  ensuring that decisions are informed by the views of persons with adequate experience and expertise in the subject matter;

    —  avoiding unnecessary expense (whether to the FSA, those subject to FSA action or the public purse);

    —  avoiding unnecessary delay to the FSA's ability to take effective action or to bring disputes over FSA action to a conclusion;

    —  providing a mechanism for determining at an early stage what issues are in dispute and ensuring that the process remains focused on those issues;

    —  providing an opportunity for the FSA and the firm or individual concerned to reach agreement as to the matters of concern to the FSA and the action to be taken;

    —  avoiding unnecessary duplication of work (whether by the FSA or the Tribunal) in the consideration of issues which are in dispute;

    —  providing sufficient flexibility to enable procedures to be tailored to the requirements of each case.

  7. Those who responded to CP17 generally supported these objectives.

  8. In CP17, we proposed to establish an Enforcement Committee capable of operating on a quasi-judicial basis. In the light of the responses to CP17, and the Government's clarifications about the statutory framework, we no longer believe that to be the most appropriate way of delivering our objectives. In particular, it would not serve our objectives if the Enforcement Committee were required to duplicate the function of the first instance, independent statutory Tribunal.


  9. We propose to establish a process in which an Enforcement Committee would take formal enforcement decisions. The Enforcement Committee would consist of a Chairman and other members appointed by the Board specifically to take decisions on the exercise of the FSA's enforcement powers on the Board's behalf. As such, the Chairman and other members of the Committee would be required to apply the general policies and procedures set by the Board in considering individual cases. As suggested in CP17, we propose that the Committee Chairman would be required to report to the Board on a regular basis on the performance of the Committee's duties.

  10. In CP17, we asked for views on whether the Committee should include practitioner and other public interest representatives who would be able to vote on disciplinary decisions. The clear majority of those who responded believed that it was important that these representatives should be able to vote.


  11. Under our revised proposals, the operational staff would make a recommendation to the Enforcement Committee that disciplinary proceedings should be initiated by the Committee on behalf of the Board. At this stage, the Committee would consider the case presented by the staff.

  12. If the Committee considered that there were insufficient grounds or that it was otherwise inappropriate to initiate the case, it would be dismissed at this stage.

  13. If the Committee considered that there were sufficient grounds and that it was appropriate to initiate proceedings, it would decide to issue the first notice (referred to in the draft Bill as a "Warning Notice") setting out:

    —  the alleged breaches/lack of fitness or properness;

    —  the grounds for those allegations;

    —  the action that the FSA considered appropriate (including any proposed penalty).


  14. The respondent firm or individual would then have the opportunity:

    —  to obtain from the FSA, upon request, details of the evidence upon which the FSA would propose to rely;

    —  to enter into settlement discussions with FSA staff about the allegations and/or proposed action on a "without prejudice" basis;

    —  if the settlement discussions reached a deadlock, to enter into mediation. (We are currently considering what particular mediation arrangements might be most useful in this context.) The independent mediator's role would be to seek to facilitate an agreement between the FSA staff and the respondent rather than to arbitrate between them or impose a decision;

    —  to make written and/or oral representations to the Enforcement Committee in relation to the merits of the case and any proposed penalty;

    —  not to engage in any of the process described above, in which event the case would proceed directly to the second notice stage below. (At that stage, the respondent would be able to exercise the right to have the case heard by the Tribunal).


  15. In the majority of cases, we anticipate that, as now, settlement discussions would result in agreement between the staff and the firm or individual. In that event, the Enforcement Committee would meet again to consider whether it thought the terms of the agreement were appropriate. If it were duly satisfied, it would issue a second notice (referred to in the draft Bill as a "decision notice") reflecting the terms of the agreement. It should be noted that this second notice could and, generally, would be published: see paragraphs 17-19 below.


  16. We anticipate that it will be only in the minority of cases that no agreement can be reached between the firm or individual and the FSA staff. In that event, the Enforcement Committee would meet to consider the case in the light of any written or oral representations received. It would then either dismiss the case, or decide that it was still minded to proceed. If the Committee were still minded to proceed (whether on the same basis as before or, in the light of representations made, on a revised basis) the Committee would issue a second notice stating:

    —  the alleged breaches/lack of fitness or properness;

    —  the grounds for those allegations;

    —  the action that the FSA considers appropriate (including any proposed penalty);

    —  the right of the defendant to have the case heard by the independent Tribunal.


  17. The respondent would have a period of 28 days after the issue of the second notice in which to decide whether to exercise the right to have the case heard by the Tribunal.

  18. If that right was not exercised, the notice could be published and the proposed action would take effect. For example, any proposed fine would then become payable.

  19. If the case were referred to the Tribunal, a full judicial hearing would take place and the FSA would not, meanwhile, be able to publish the second notice. Any statements made by the respondent in earlier "without prejudice" settlement discussions would not be revealed to the Tribunal by the FSA.

  20. The process proposed above has the following advantages:

    —  it is flexible enough to cater for a wide range of cases from the most straightforward to the most complex. For example, it can provide a speedy, fair and effective process for individuals who may wish to address the Enforcement Committee directly but who are prepared to accept the Committee's subsequent decisions without exercising their Tribunal rights. It also provides a fast track for those who do not wish to engage with the various internal options, e.g., to enter into settlement negotiations, but decide from the outset that they will seek a Tribunal hearing.

    —  the Enforcement Committee would be empowered to conclude, after hearing any representations, that there remained a case to answer, but it would be for the statutory Tribunal, rather than the Committee, to reach a judicial determination. Therefore an expensive and protracted hearing before the Committee involving witness evidence (which could subsequently be duplicated at the statutory Tribunal stage) would be avoided;

    —  the opportunity for early settlement with the option for mediation is in line with the current trend in civil litigation following Lord Woolf's report. Published settlements are, of course, a common feature of current SRO disciplinary processes. On the other hand, the opportunity to make oral and/or written representations directly to the Enforcement Committee is generally new in the financial services disciplinary process. We believe this will lead to greater confidence in the fairness of the process, as well as potentially a larger proportion of settlements than is presently the case.

12 April 1999

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