1. "NO ACTION"
Both HM Treasury and FSA seem to have missed
the main point on no action letters. FSA can issue guidance and
interpret its own rules and grant waivers from them. On the other
(a) FSA cannot waive a provision of primary
legislation or a related statutory instrument, unless an expressed
power is included in the Bill (which is inconceivable), and
(b) FSA's 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,
to the effect that it is for the courts to decide.
Of course, the courts will decide the meaning
of the law, but there is nevertheless a role for the FSA to state
its position regarding enforcement. The "no action"
letter has a particular value here, quite distinct from waivers
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. One can argue that the
Bill does not need expressly to empower the FSA for it to do this.
However, we strongly contend that the Bill should make provision
(i) then it will be formally recognised that
such letters will be available;
(ii) the Bill could provide that, in general,
such no action letters must be publishedthis would avoid
suggestions of unjustified differential treatment.
In relation to such a producer, 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, at least publicly
(although mentioned briefly by FSA's chairman before the Joint
Committee), is FSA's potential to charge for no action letters,
guidance and waivers (so its concerns about being unduly distracted
by requests for these are over-stated). This should be seriously
considered, and if necessary provision should be made in the Bill.
2. ENFORCEMENT POLICY
A very important point risks being forgotten
among all the other arguments about investigation powers, enforcement
sanctions, appeals, etc. The point 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 affirmative 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
The financial sector and its advisers are encouraged
to take comfort from the proposed public statement of FSA's enforcement
policy. We cannot do so because FSA has the right to change it.
A critical issue which concerns many in the
sector (and their advisers) is how Mr Davies and his Board will
ensure that success and career advancement in many parts of his
organisation will not depend upon obtaining guilty pleas and imposition
of penalties. People who have done nothing wrong but, with hindsight,
could have performed their job differently are being forced to
choose between a ruined career and reputation, if they accept
the regulator's charges, and bankruptcy if they fight (and both
plights, of course, if they fight and lose).
3. TRANSPARENCY OF
This is a matter which has been of considerable
concern to us over many years. From our discussions with other
lawyers closely involved in advising firms which carry out business
on securities and futures exchanges, we know it is of concern
to many of them.
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
(if at all). Examples include:
the London Metal Exchange's board
notices on give ups (sent to members only), and
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).
The Financial Services Authority itself, and
the self-regulating organisations, have also been guilty in this
On "give up" arrangements again, FSA/SFA
issued a circular letter to LME members last August. This is not
a one-off omissionthe problem goes back at least as far
as FSA/SFA's letter to all members some 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 of SFA's rules.
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".
A good example of FSA's failure, in the context
of the current consultation process, has occurred very recently.
At FSA's recent (and expensive) conference on market abuse it
released to delegates its feedback statement on the consultation
on this subject. No press release was issued nor publication madeindeed
both the FSA's Markets Department and FSA's publications unit
denied existence of the feedback statement. We ultimately tracked
it down on FSA's web-site, where it had been "filed"
in a different manner to other feedback statementsan extraordinary
approach in relation to one of the more controversial aspects
of the new regime.
Other examples concerning FSA/SIB include standard
form, circular letters to:
(a) Internet Service Providers and others
in connection with Internet regulation and their potential need
to obtain authorisation; and
(b) 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 requires that any communication
whatsoever which goes to all firms (or members, in the case of
an exchange), or to a particular category or categories of firms,
should be published and listed in any list of the publications
of the regulator concerned. On the other hand a letter sent to
a specific firm and tailored and personalised to the circumstances
of that firm (even if based on a template or precedent) need not
Publication in a readily identifiable and accessible
form is critical to helping firms and their advisors ascertain
regulatory attitudes as well as the rights and obligations of
This kind of transparency should be incorporated:
(a) in the Bill itself, so far as FSA is
(b) in the recognition criteria, which are
to be set by statutory instrument for exchanges and clearing houses.
4. SCOPE OF
Neither the draft Bill nor the draft Regulated
Activities Order adequately address the position of businesses
such as solicitors, accountants and actuaries, who are, generally,
currently authorised by their Recognised Professional Body to
carry on investment business. Such business is specifically excluded
from the Investment Services Directive. Authorisation is currently
regarded as necessary because of a perception that it is unsafe
to rely on the exclusion currently contained in paragraph 24 of
Schedule 1 to the Financial Services Act 1986 for "advice
given or arrangements made in course of profession or non-investment
The Treasury proposes to clarify definitions
so that authorisation will clearly not be required for such firms
where the activities either "may reasonably be regarded as
necessary" in providing its professional services or where
those activities comprise general advice or certain non-discretionary
services. Further clarification in FSA guidance is proposed.
We are concerned that the proposals do not address
the activities of the medium and large professional firms which
act for businesses rather than private clients, particularly those
with substantial practices supporting the corporate and finance
sectors. Services include legal and accounting analysis, and advice,
valuation, drafting of documents and negotiation of deals. With
no substantial change to the terms of the current paragraph 24,
it is hard to see how businesses which do not fall within that
would fall within the equivalent exclusions proposed in Schedule
3 to the draft Order. The proposals appear to focus on small,
high street practices.
The Treasury has promised to improve the drafting
of the Billfor example, to consolidate the many different
rule making powers and procedures of FSA. But much of the primary
and secondary legislation proposed is difficult to follow or essentially
The proposed Regulated Activities Order is a
good example of the former. Its approach of repeating essentially
the same exclusion several times, once for each activity makes
it more difficult to analyse exclusions. More imaginative forms
of presentation are desirable (for example a matrix indicating
the relationships among investments, activities, and exclusions).
We strongly disagree with the approach described
in paragraph 2 of Part One of the Regulated Activities Consultation
Document. The current need to consider that much in Schedule 1
to the Financial Services Act 1986 is qualified (for some purposes,
at least) by reference to the Investment Services Directive (ISD)
via the statutory instruments which implemented that directive
in the UK is unsatisfactory, and inconsistent with the Government's
stated objectives and concerns in Part One, paragraph 2.3 of last
July's Consultation Document on the Bill.
We recommend a unified approach. The Government
is accustomed to implementing European Community/European Union
Directives in other fields through legislation which in effect
interprets directives within a UK legal and commercial environment.
Whilst we accept that the extreme care is necessary, we see no
reason in principle why it should not adopt the same approach
The market abuse provisions in the Bill are
examples of uncertainty and lack of clarity.
6. TRANSITIONAL ARRANGEMENTS
Greater sensitivity than has so far been evident
is necessary in transition to the new regime. For example, FSA
seems to assume that its new principles for business can be introduced
on N2 (the date upon which the Bill will come into force). Presumably,
these principles are seen as so basic as not to have business
or organisational implications. Yet the existing 10 Statements
of Principle effective from April 1990 have, in their practical
application, affected dramatically the regulatory environment
(despite purporting to express then existing standards). The new
principles are bound to have detailed implications for conduct,
which implies (in turn) procedures, IT, training, etc., and consequently
time and costs to implement.