Note by the Association of Private Client
Investment Managers and Stockbrokers (APCIMS) on accountability
and the FSA
Accountability of the FSA has been improved
following the Treasury's announcement at the turn of the year,
however further changes need to be made as follows:
1. ONGOING CONSULTATION
Whilst having a duty to consult on rules, codes
and guidance, there is no requirement for the FSA to place in
the public domain the responses it receives, nor explain why,
for example, it has not taken up suggestions made to it by the
industry. Of the 21 consultation papers so far issued by the FSA,
and of which APCIMS has responded to all except those relating
to the regulation of Lloyds and the pensions review, a feedback
statement was published on CP10 on market abuse only. For the
remainder, the only responses we have received so far merely say
"Thank you for your response". We consider that more
feedback on the responses should be published as a matter of urgency.
There is already a requirement for a committee
of non-executive board members to keep under review whether the
FSA is undertaking its functions in an economic and efficient
way in addition to considering the adequacy of the FSA's internal
financial controls. However, financial regulation can have the
result of affecting significantly the ability of UK quartered
firms to compete in an international market. Yet there is no requirement
for the FSA to address this issue. We propose that a second committee
of non-executive members should be set up to address the international
competitiveness of UK's firms with the changing financial regulation
framework and the ongoing regulatory requirements and report on
an annual basis.
3. STATUTORY IMMUNITY
The FSA has statutory immunity from negligent
actions, whilst retaining the ability to remove the means of livelihood
of those whom it regulates. The reason given for granting this
immunity is that without it the Government considers that regulators
would be hampered by concerns of legal action from discharging
their duties properly. In view of the fact that other professionals
ranging from the police to the medical profession are not immune,
we consider that the FSA should not be immune either. However,
we also recognise the need to ensure that they are not impeded
by continuous unnecessary legal actions and so propose that an
action against the FSA can only take place under specific circumstances
such as negligence.
4. FSA PRINCIPLES
As with the SIB before it, the FSA is proposing
a set of high level principles to govern the regulated community.
APCIMS believes that these principles should be a two way street.
So, just as financial firms have to respond quickly to the regulator
and be staffed with professional people, so should the FSA be
required to do likewise. Current practice, for example, is for
a regulatory team to visit a firm but then take three months to
send them a follow up letter listing the points found that they
wish to see addressedand then only give them seven days
to respond. CP20 proposes that the FSA has up to a year in which
to decide whether an applicant firm is to be authorised, but awards
an applicant firm only 28 days in which to make representations
following a failed application.
There is no requirement for the regulatory teams
to be staffed with people who have experience of the business
that they are visiting. With the haemorrhaging of staff, particularly
from the SFA and from IMRO, firms are already finding that there
can be inadequate experience among the staff of visiting teams.
Disciplinary action should be linked to rule
breaches only and not breaches of a principle as they are designed
to be general statements and are not specific.
5. RULE INTERPRETATION
There needs to be a public record of how rules
are interpreted under differing circumstances. It is well documented
that at present differing teams will interpret rules differently.
For example, SFA Rule 4.112 on reconciliations, required SFA firms
to carry out monthly reconciliations on investments which they
do not hold against statements issued by the custodians of the
investments. IMRO firms had no equivalent requirement. This rule
resulted in considerable expense for our firms and for many demands
that IMRO and SFA rules be synchronised. The whole investment
club fiasco developed from advice issued by enforcement teams
without consulting the SFA Policy unit and then subsequently policy
had to support them. As a result, APCIMS had to develop the tedious
and administratively burdensome route for firms to follow, otherwise
the investment club movement would have been severely depleted.
We understand that banking supervision keeps such a record and
although the existing SROs do not and it would be unreasonable
to expect them to start to do so now, with the new FSA rulebook
this should be done so there is a Record of Interpretation available
to the regulators and regulated alike and accessible on the Internet.
6. THE REASONABLE
The Government has responded that the FSA, like
other public authorities, must exercise its powers reasonably
and so does not believe it is necessary to include in the legislation
a requirement for the FSA to act reasonably.
However, the existing regulatory bodiespublic
authoritiesrequire an appellant firm or individual to pay
their regulators costs if that firm, or person loses their appeal,
but if they win the appeal they cannot claim their legal costs
back from the regulator.
It is proposed that the FSA can issue guidance
which a firm abides by, but it can subsequently prosecute that
firm if it believes the firm has not acted in the "right
Neither action appears to be "reasonable".
The "Wednesbury" decision on this
matter says that as long as a public authority has taken into
account all relevant matters even if it reached an unreasonable
decision, it would not be considered to have acted unreasonably.
It could only be considered as acting unreasonably if it reached
a decision that no reasonable regulator could have reached. So
as a reasonable regulator can reach an unreasonable decision,
there is not much comfort here for a regulated firm. Especially
as a court would not have the authority to substitute its own
view as to what was a reasonable decision for that of the FSA.
For there to be a good relationship between
regulator and the regulated, a requirement for the FSA to exercise
its powers reasonably should be explicitly included in the Bill.
The alternative proposed by Government of Judicial Review is costly
and for practical purposes only available to large institutions,
those on legal aid or the legal profession acting for itself.
7. THE DISCIPLINARY
We consider that a much fairer procedure to
that currently proposed would be as follows:
The FSA notifies a firm that it considered
to have acted in breach of the rules and, accordingly, that the
FSA is considering taking disciplinary action.
If it disputes this, the firm has
the opportunity to present its case along with the regulators
to the FSA Enforcement Committee composed of a majority of external
practitioners and with a Chairman from one of the external practitioners.
The firm or individual would have
the option to appear in front of the Committee to make their case
should they choose to do so.
Even after the case has been heard
by this Committee, both the FSA and the firm would retain the
right to appeal against the decision to the independent tribunal
Only after the final decision on
disciplinary action would consideration be given to fines or other
penalties by the Enforcement Committee.
No publicity given to the case until
after all procedures have been fulfilled.
8. MARKET ABUSE
Market abuse is the combination of action and
motivation from those who undertake it, but in so doing other
innocent parties can find themselves inadvertently involved. If
intent is not specified within the legislation, firms will be
regulated by hindsight and expected to know in advance the exact
effect that any trade may have on a market. This is a practical
impossibility as all trades on a market affect the price of the
13 April 1999