Financial Services and Markets Appendices to the Minutes of Evidence


Memorandum by the Compliance Register Limited


  Further to our conversation on Thursday 8 April, I have pleasure in enclosing the following comments and observations for the Committee's consideration. I have tried to contact all members of our Advisory Board ("the Board") but given the short time scale, it has not been possible to get all their views nor to formulate a formal response that would be representative of the Board as a whole.

  However, the Board will be very pleased to lend any assistance it can towards the re-drafting of the revised Bill particularly with regard to any areas of difficulty. Please do not hesitate to contact me if such assistance is required.


  The Treasury's recent Progress Report indicates that although the Government has made many concessions, which go far to redress the lack of balance in the draft Bill, there is nonetheless a feeling among City firms that a number of the concessions are token gestures and that others are about the minimum that they could have done given the strength and loudness of the objections in relation to FSA's power and accountability.

  The opportunity now exists to focus on some particular outstanding issues such as those set out below:


  Whilst it is still not yet clear the extent to which FSA will gear itself up to providing ad-hoc guidance (and we comment further on this below), they seem to have missed the main point on no action letters. Of course, FSA can issue guidance and interpret its own rules and grant waivers from them. What is clear however, is:

    (a)  they cannot waive a provision of primary legislation or a related statutory instrument, unless an expressed power is included in the Bill (which is inconceivable);

    (b)  their guidance about provisions of the Bill and statutory instruments under it is likely to be less helpful, particularly if they continue their traditional approach of responding that it is for the courts to decide.

  We all recognise that the courts will decide the meaning of the law, but there is nevertheless a role for the FSA to state its position regarding enforcement. Here the "no action" letter comes into its own, and is quite distinct from waivers and guidance.

  A "no action" procedure would involve the FSA issuing a letter which states that, in the particular circumstances described, the FSA would not take enforcement action under a particular statutory provision. Of course, one can argue that the Bill does not need to empower the FSA in order for it to do this. However, we would argue strongly that the Bill should make provision for two reasons.

    (i)  So that it is formally recognised that such letters will be available

      —  FSA seems to deny or dissemble when asked whether such letters have been issued in the past (we know of at least one occasion which is, of course, confidential);

    (ii)  Because the Bill could provide a framework to ensure that, in general, such no action letters are published.

  In relation to such a procedure, and in relation to its own ad-hoc guidance (and possible waivers) there seems to be a concern that the FSA will find its resources diverted. What seems not to have been adequately considered, (although mentioned briefly to FSA's chairman before the Joint Committee) at least publicly, is FSA's potential to charge for no action letters, guidance and waivers. This should be seriously considered, and if necessary provision should be made in the Bill.


    (a)  Amidst all the arguments about investigation powers, enforcement sanctions, appeals, etc., one important argument seems to have been lost. We are being encouraged to take heart from FSA's public statement of its enforcement policy (at least what will presumably become a public statement once it has taken into account responses to Consultation Paper 17). We cannot take heart from this because FSA has the right to change it (even though it is, of course, obliged to publish information about certain aspects of its approach).

    (b)  The important point, therefore, is that the critical elements of enforcement policy should be specified in the Bill. It could perhaps be a provision which is amendable by statutory instrument subject to positive resolution of both Houses. Alternatively, the policy itself could be specified by statutory instrument, subject to positive resolution of both Houses and subject to prior consultation.

    (c)  The reference by Antony Hilton in the Evening Standard last month to "bullying, intimidation and seething vindictiveness in the old system" a reference which was raised by the Joint Committee with Howard Davies on 16 March, is a description which many in the industry can relate to. Most do not believe it is all-pervading, but have encountered evidence of it.

    (d)  Success and career advancement within the FSA should not be dependent upon obtaining guilty pleas and imposition of penalties.

    (e)  Most compliance professionals have some (if not considerable) sympathy with their erstwhile brethren in Morgan Grenfell. There is considerable concern at the impossibly high standards (retrospectively assessed) being set for senior management and compliance staff.


(a) Exchanges

    —  This is a matter which has been of considerable concern to many in the industry over many years, ever since they began to get full details of LIFFE's rules, which before publication of their four-volumed glossy rule book, were extremely opaque.

    —  Although, now, all the exchanges make their rule books publicly available, there is nevertheless much that affects the rights and obligations of members which is not made publicly available immediately on issue or upon taking effect. We refer to board notices of exchanges, such as the London Metal Exchange's board notices on give ups. In the context of security exchanges, we mention the London Stock Exchange's trade compensation scheme, details of which were circulated to members in October 1997 in connection with the launch of SETS and are considered by the Stock Exchange to be guidance, but do not appear in its official list of guidance.

(b) FSA et al

    —  Unfortunately, the exchanges are not the only regulator guilty in this area. Again, in the area of give ups, one can point to the circular letter issued by FSA/SFA to LME members in August 1998. This is not a one-off omission—the problem goes back at least as far as FSA/SFA's letter to all members years ago concerning the compliance responsibility of senior management, which was subsequently incorporated in SFA Board Notice 87 (in 1992) and now covered by Appendix 38.

    —  Even in the current consultation agenda of FSA we find that those papers which are not formally designated as consultation papers are given no reference and therefore may not be easily identified at a later date. For example, "Meeting our responsibilities", "The Open Approach to Regulation", and "the Discussion paper on inter-professional business". Other material, such as feed back on consultation seems to have been released selectively.

    —  Other examples concerning FSA/SIB include standard form, circular letters to:

      (i)  Internet Service Providers and others in connection with Internet regulation and their potential need to obtain authorisation; and

      (ii)  traders and others in the new UK gas markets several years ago, again concerning the possible need to obtain regulatory status (e.g., authorisation under the 1986 Act or permission under Schedule 1, paragraph 23).

    —  Transparent regulation should require that any communication whatsoever which goes to all firms (or members, in the case of a SRO or exchange) or a particular category or categories of members (as distinct from a letter sent to a specific firm and tailored and personalised to the circumstances of that firm) be listed in the official publication listings of the regulator. Thus post inspection visit letters could be based on a template or precedent without requiring either to be published, should be published and listed.

    —  All of these matters are important in helping firms and their advisors ascertain regulatory attitudes as well as the rights and obligations of regulated firms. This kind of transparency should be incorporated in:

      (i)  in the Bill itself so far as FSA is concerned; and

      (ii)  the recognition criteria for exchanges and clearing houses (to be set out by Treasury Statutory Instrument, a draft of which has been published for consultation).


    (a)  Although some improvement in the drafting of the Bill has been promised—for example, to consolidate the many different rule making powers and procedures of FSA, much of the legislation proposed is difficult to track or essentially unclear.

    (b)  The proposed Regulated Activities Order is a good example of the form. Its approach of repeating essentially the same exclusion several times, once for each activity makes it more difficult to analyse exclusions.

    (c)  The market abuse provisions in the Bill are examples of uncertainty and lack of clarity.


  More care needs to be taken about transition to the new regime. For example, FSA seems to assume that its new principles for business can be introduced on N2 date. Presumably, they are seen as so basic as not to have systems implications. Yet dramatic changes have been wrought in the effects of regulation under the 1986 Act, based on the existing 10 principles. Principles do indeed have detailed implications for conduct, which implies (in turn) procedural IT, training and other implications.


  The FSA should be required, under provisions in the legislation, to abide by corporate governance best practice by separating the roles of Chairman and Chief Executive. It is widely accepted that an independent chairman with a "detached" view can have a considerable "moderating" influence on the actions of the executive arm of the organisation.


    —  It is right and proper that the FSA should be given considerable powers in order that it may be an effective regulator "with teeth".

    —  However, as the saying goes "power corrupts and absolute power corrupts absolutely", important checks and balances must be provided for in the legislation.

    —  One of the key controls will be to provide for appeals against disciplinary decisions to be heard by an independent commission whose members are not appointed by the FSA. This should include appeals against decisions and awards made by the proposed Ombudsman.

  If you require any further information or assistance, please do not hesitate to contact me.

13 April 1999

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