Financial Services and Markets Appendices to the Minutes of Evidence


Memorandum by the Consumers' Association


  Consumers' Association (CA) welcomes the opportunity to respond to the Financial Services Authority (FSA) consultation on enforcement. The ability and willingness of the financial services regulators to take pro-active and effective disciplinary measures has been an area that we have taken interest in from the perspective of consumer confidence in the market and consumer redress. In our response to the Treasury consultation on the draft Financial Services and Markets Bill we stated our view that:

    "The regulation of authorised persons must make it clear in practice as well as theory that individuals are responsible for the actions of their organisations. Disciplinary measures of public censure and fining should be used when appropriate."

    As a general point CA favours wide ranging disciplinary and enforcement powers for the regulator. In our view it has been the lack of powers, and more specifically the lack of willingness of regulators to use these powers, that has been a detriment to consumer protection.

    Therefore we have set out below the areas in which we wish to comment.


    —  We regard it as essential that a strong regulator with wide ranging disciplinary and enforcement powers protects consumers.

    —  The FSA must adopt a pro-active stance in identifying problems before they become serious or widespread matters.

    —  The powers of the FSA must be practical and usable.

    —  The FSA powers must be simple and streamlined and not overly legalistic or complex.

    —  Investigations should be targeted.

    —  Individual accountability is essential and the FSA must be able to take action against individuals when this is warranted.

    —  Accountability is important but so is the ability for the FSA to use its powers quickly, efficiently and effectively.


Part 2 Intervention

  In considering the FSA powers of intervention in the business and affairs of firms, we would first state that we expect the bedrock of this interaction to be an environment of openness and co-operation. Not only should this be expected from regulated firms, as outlined in the Principles of Business, but it is also the most cost effective method of dealing with issues on a day-to-day basis.

  In terms of regulatory intervention, we naturally regard it as essential that the FSA has wide powers to deal with firms, against the background of its statutory objectives. But more than this we regard it as essential the FSA adopts a pro-active stance in trying to identify potential problems either before they manifest themselves, or before they manifest themselves on a large scale. CA has been critical of the financial regulators in the past for their inability to position themselves ahead of problems, and has often been in the unfortunate position of having to react to market failures.

  So in terms of the FSA's overall approach to intervention we would strongly welcome a high profile pro-active role. In this context we were very encouraged by the recent statement by Howard Davies warning firms about misleading consumers about Individual Savings Accounts (ISAs).

  We are pleased to see a clear statement from the FSA that it must co-operate and collaborate with overseas regulators. This is indeed essential for the effective regulation of the international market in financial services, particularly in view of the many challenges that lie ahead in terms of E-Commerce, distance selling and the Euro. It will be imperative to have robust mechanisms in place to cope with cross border jurisdiction and the enforcement of regulations.

  While we accept that many instances of intervention can and will be conducted on a regulator to firm basis only, we regard it as essential that the FSA are quick to make details of intervention public where this will benefit the market in terms of confidence and warning consumers.

Part 3 Investigations

  Investigations should be conducted with regard to the statutory objectives of the FSA, but they should also be targeted so that the weight of enforcement falls where it is most appropriate. By being pro-active in gathering information, the regulator should have a clear understanding as to which sectors and firms may require the most monitoring.

Part 4 Securing Redress for Consumers

  We strongly support FSA powers to ensure that losses suffered by consumers are made good when they occur as a result of a regulatory breach. In addition to this consumers will still have the right to complain to the firm, and ultimately to take their complaint up with the Financial Services Ombudsman.

  In most cases we expect that the FSA will be able to agree with the firm as to the extent of compensation, the form it will take and the timescale for payment. If this is not possible, we strongly support the ability of the FSA to utilise statutory powers.

Part 5 Discipline of Authorised Firms and Approved Persons

  With regard to disciplinary powers we welcome the ability for the FSA to issue public statements about firms and individuals and to impose fines on firms and individuals.

  We have had concerns in the past about fines levied only against firms, in that they have seldom been large enough to damage the institution, they are ultimately paid for by consumers, and they place accountability on the firm rather than on the individual. Nevertheless the sanction of imposing fines against firms and against individuals is an important one, and we do not subscribe to the view that the ability of the FSA to impose fines pushes the regime onto a criminal basis.

  We have strongly supported moves towards individual accountability in the industry. There must be effective sanctions to make employees, especially company directors and senior management, responsible for the actions of the companies they are managing. For example, throughout the protracted pension mis-selling review not a single senior manager, board member, director or compliance officer has been censured or fined, even when the regulators have identified internal management failures as a cause of, or contributing factor to, the mis-selling.

  As a final sanction, we are fully supportive of powers to withdraw authorisation, and ensure that individuals who are not fit and proper are removed from the industry.

Part 6 Market Misconduct

Part 7 The FSA's Decision-making Process

  The issue of the wide-ranging powers that the FSA will be able to utilise has received much attention and lobbying from certain sections of the industry. As stated earlier CA's general concern has been more about the lack of powers of financial regulators or the lack of use, rather than concerns about over use. However, it is of course correct that the FSA is accountable for its actions.

  The existence of an independent Appeal Tribunal is an important safeguard as is the establishment of an FSA Enforcement Committee.

  We are clear that within a structure that is accountable and contains procedural safeguards, the FSA must be able to operate a process that is as simple as possible, and that avoids an overly complex legislative approach.

  In terms of the actions of the Enforcement Committee, the procedure must be flexible enough to deal with each case before the Committee. However as a general principle we consider it appropriate for the Committee to issue a Warning Notice at outset and then allow the firm or individual to make representations to the FSA. We believe that this mirrors the existing regime for dealing with disciplinary issues.


  In conclusion it is vital that the enforcement regime adopts a pro-active consumer focused approach that delivers against the statutory objectives of protecting consumers, maintaining confidence in the financial system and reducing financial crime. The financial services industry has inflicted many blows to public confidence in recent years, and we regard it as essential that the FSA uses its enforcement powers to ensure a fair and competitive market where consumers can buy with confidence.

February 1999

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