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Financial Services and Markets Appendices to the Minutes of Evidence


Memorandum by the Association of Unit Trusts and Investment Funds (AUTIF)


    —  FSA's accountability to Parliament and public needs to be strengthened.

    —  Treasury Select Committee should review FSA Annual Report and present findings to House of Commons for debate.

    —  FSA should consult on all significant policy initiatives, not just rule changes.

    —  FSA should also hold public hearings on important policy proposals.


    —  FSA needs to promote a culture of mutual trust between regulator and regulated. Discipline should be the exception, not the norm.

    —  Role of proposed Enforcement Committee should be enshrined in Bill.

    —  Bill should require FSA to delay publicising disciplinary action against a firm until any parallel investigations into the firm's employees have been completed.

    —  Enforcement Committee should exercise independent oversight of cost and timescale of disciplinary proceedings.

    —  There is also a need for independent scrutiny of the FSA's use of fines.

    —  Both Enforcement Committee and Tribunal should be able to award costs against FSA.

    —  Statutory immunity of FSA staff from civil suit should be removed.


    —  Early publication of missing provisions relating to collective investment schemes is essential.

  1. The Association of Unit Trusts and Investment Funds welcomes the opportunity to comment on the issues identified by the Joint Committee. Our main concerns are set out below.


  2. The FSA will be independent of both Government and industry. Although accountable to the Treasury, the link is, by design, very weak. There is thus an accountability deficit which is best mitigated by increased, and statutory, openness and consultation requirements.

  3. The draft Bill gives the FSA extremely wide ranging powers, especially in the area of enforcement and discipline. Whilst these powers are designed to make the FSA an effective regulator, it is essential that they are balanced by a robust framework of accountability. We therefore welcome the recent announcement by the Economic Secretary, Patricia Hewitt, of further measures to strengthen the FSA's accountability.

  4. However, the provisions of the draft Bill largely focus on accountability to Treasury ministers. We believe there is a pressing need to improve the FSA's accountability to Parliament and the public. The best way to achieve Parliamentary accountability would be to ask a Committee of the House—probably the Treasury Select Committee—to review the FSA's Annual Report, in order to assess how well the FSA is performing in meeting its statutory objectives. The House of Commons should then have an opportunity to debate the Committee's findings. We believe that this would be a far more effective discipline on the FSA's activities than the procedure currently envisaged by the Treasury, whereby the FSA's Annual Report will simply be laid before Parliament without debate. We are aware that the FSA will be required to hold an annual public meeting, but we doubt whether this will be as effective in maintaining accountability as a debate in the House of Commons.

  5. The draft Bill requires the FSA to carry out public consultation whenever it proposes to change its rules. We think that the Authority should also be required to consult on all policy initiatives affecting one or more sections of the regulated community, even where they do not involve rule changes. This would be in line with the Inland Revenue's formal practice of consulting "wherever it is practicable to do so".

  6. It would also be desirable for the FSA to publish a summary of responses to consultation, with individual responses available for scrutiny, except where respondents specifically request anonymity.

  7. Finally, we believe that the FSA should be willing to learn from the practices of overseas regulators in this area. It would improve the openness and transparency of the policy making process if the FSA were to adopt the practice of the US Federal Reserve and Securities and Exchanges Commission of holding public hearings on important policy proposals. This would have the incidental benefit of helping the FSA to raise its public profile, and thus to meet its consumer education objective.


  8. The draft Bill gives the FSA far reaching powers of enforcement and discipline. It is clearly desirable for the FSA to be able to deal swiftly and effectively with those who breach regulatory obligations wilfully or recklessly. At the same time, there is a perception that some of the FSA's constituent organisations—notably IMRO—have sometimes exercised their (more limited) powers in an oppressive manner. Enforcement in the FSA is in the hands of the ex-IMRO team. This has naturally given rise to a concern amongst industry and legal practitioners that the FSA's enforcement regime should contain appropriate checks and balances and adequately protect the rights of firms and individuals. We believe it is important for these safeguards to be incorporated in the Bill itself. In our view, the safeguards announced so far do not go far enough.

  9. We recognise that the Treasury and FSA have a difficult balance to strike in this area. The FSA will clearly need to exercise its enforcement powers in a way that is fair and just to those accused. But equally, it is essential that the FSA's procedures do not become inflexible or legalistic. Against this background, we believe there are a number of relatively simple measures that could be taken to improve the fairness and transparency of the proposed enforcement regime whilst leaving the FSA with the required degree of flexibility:

    (i)  Most importantly, the FSA needs to promote an atmosphere of mutual trust and dialogue between a firm and its regulators. It is counter-productive to impose a fine and/or issue a public reprimand for minor or inadvertent rule breaches, since this will inhibit the flow of information between the firm and its regulators. In a recent case, one of the SROs publicly disciplined a firm for a rule breach which the firm itself had brought to its regulators' attention. Public censure should, in our view, be reserved for those who deliberately breach regulatory requirements or act negligently. For occasional, minor rule breaches, the FSA should use private reprimands instead. The need to discipline should be seen as a failure of regulation, not a success.

    (ii)  AUTIF welcomes the proposal to establish an Enforcement Committee, with practitioner and public interest members, to hear disciplinary cases. It would help reinforce the separation of powers between the FSA enforcement staff and the Committee if the latter's role were enshrined in the Bill itself (as per the Practitioner and Consumer Panels).

    (iii)  In some recent disciplinary cases, there has been a protracted delay between the conclusion of disciplinary proceedings against a firm and the completion of follow up enquiries into the firm's employees. It is very difficult to maintain the presumption of innocence of the individual in these circumstances. We believe that the Bill should require the FSA to delay publicising the outcome of a disciplinary case against a firm until any related proceedings against the firm's employees—including any appeal to the Tribunal—have been completed.

    (iv)  In recent cases, the unnecessarily protracted nature of SRO proceedings has meant that the accused have run out of defence funds. This has introduced an element of injustice for the individuals concerned. We believe, therefore, that the Enforcement Committee should have a formal role in monitoring the cost and timescale of disciplinary proceedings, in order to ensure that the FSA enforcement staff conduct their investigations as quickly and efficiently as possible. The Committee should review the progress of active enforcement cases on a regular basis to check whether target service standards are being met.

    (v)  The proposal that the FSA should use the proceeds of fines to meet its general costs gives the Authority an artificial incentive to use fines as a disciplinary tool. Consequently, we believe there is a need for independent oversight of the FSA's use of fines, to ensure that any fine imposed on a firm or individual is proportionate to the nature of the offence. Within the FSA, the Enforcement Committee could provide this oversight, but we would also encourage the Treasury Committee to monitor the FSA's use of fines.

    (vi)  Legal costs arising from a disciplinary action can be so prohibitive as to deter individuals and firms from taking their case to appeal. It is therefore vital that both the Enforcement Committee and the Tribunal should be able to award costs against the FSA if they find in favour of the firm or individual. It is not clear that the Bill makes adequate provision for this.

    (vii)  We believe that a key check is missing from the Bill in that the FSA staff will enjoy a statutory immunity from civil suit. Given the oppressive manner in which some SROs have acted in the past within powers not dissimilar to those in the Bill, we believe that this statutory immunity should be removed.


  10. We are studying the Treasury's Consultation Document on Regulated Activities and will respond separately on this. In our earlier submission to the Joint Committee, dated 2 March, we emphasised the need for the Committee to have an opportunity, and sufficient time, to examine the new draft legislation in its entirety before completing its report. We remain very concerned that most of the main Bill clauses relating to collective investment schemes (unit trusts and open ended investment companies) have still not been published for comment. It will be impossible for the Committee to meet its terms of reference if it has no sight of these important parts of the Bill. We would encourage the Committee to press for immediate publication of these missing provisions, which are central to the Government's intentions on savings and pensions.

17 March 1999

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