Financial Services and Markets Appendices to the Minutes of Evidence


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:


  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.


  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.


  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 addressed—and 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.


  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.


  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 bodies—public authorities—require 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 spirit".

  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.


  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 route.

    —  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.


  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 security.

13 April 1999

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