Financial Services and Markets Appendices to the Minutes of Evidence


Memorandum by the Futures and Options Association (FOA)

  1. The Futures and Options Association (FOA) is the industry association for some 180 institutions which engage in the carrying on of derivatives business (see Annex 1).[7] This brief submission is designed to focus only on matters relevant to the Bill and not on matters of policy and procedure that are within the discretion of FSA (although the extent of that discretion is relevant to the concerns expressed in this submission).

  2. The FOA supports, in principle and in general, the concept of a single regulatory authority for the UK financial service markets and providers.

  3. The concerns of the FOA arising in connection with the evolution of the single regulatory authority are set out in a number of detailed position papers, some of which will have already been seen by the Committee. In the interests of brevity, a few of those concerns are set out below:

    (a)  It is vitally important not to underestimate the potentially serious impact the new regulatory structure could have on the international reputation of the UK financial services sector and on the competitiveness of UK-based financial service providers. In particular, because of the international and wholesale nature of those providers, they are highly sensitive to any matter which may have an adverse effect on their competitiveness; have no particular ties to the UK; and are very well placed for the purpose of relocating business areas to overseas affiliates.

      For this reason, extreme care should be taken in (i) setting the regulatory perimeter so as not to include wholesale, essentially physical, markets/participants within financial services regulation (exacerbated by the removal of Permitted Persons status); and (ii) notwithstanding the understandable urgency to introduce the enabling legislation, ensuring that the innovative role of this Committee—which is addressing primarily matters of principle and policy—is not used as a means of shortening the Committee stage—which is responsible for reviewing the detail of the legislation.

    (b)  The Bill should express more clearly the need for differentiated regulation for wholesale or inter-professional business (cf provisions in the Investment Services Directive and Commission's policy priorities—which include better expression of the need to differentiate wholesale from retail business—for completing the single market in financial services). For example, the definition of "consumer" is given a variety of different meanings in both EU and UK legislation and is clearly normally directed towards individual retail consumers of various products and services. Its use to include wholesale institutions is misleading.

    (c)  While welcoming the pragmatic approach of providing for a Bill that will serve as enabling legislation, the FOA believes that too much discretion has been left to secondary legislation and, notwithstanding the fact that it will be subject to an affirmative parliamentary procedure, the Bill is far too imprecise about defining the regulatory perimeter (see the letter attached at Annex 2)


    (d)  The FOA has had significant concerns over an organisation (i.e., the FSA) having considerable, wide ranging, and in some cases, controversial powers—which can have a serious impact on the livelihood of individuals and the business of authorised firms—having also the benefit of statutory immunity. The recently issued Progress Report on the Bill has introduced a number of new and important checks and balances on the exercise of those powers and this has helped to address those concerns. The suggested statutory amendment in (e) below would help to ensure that a proper balance is struck between individual rights and the need for effective regulation.

    (e)  In view of the industry furore over the significant and unacceptable degree of regulatory and legal uncertainty that has been generated by the imprecise definitions of market abuse, the use of principles for disciplinary process, the significant increase of powers granted to the FSA, the growing interface (not often clear) between criminal and civil process and concerns that the European Convention of Human rights is not being paid sufficient regard in the process of establishing the investigative, disciplinary and criminal powers of the FSA, the FOA believes that the statute should establish parameters for the exercise of their very considerable powers, e.g., as a Clause 2(3) criterion requiring their exercise to be (to use FSA's own words) "transparent, proportionate, consistent and demonstrably fair".

      It is recognised that "fairness" is already required under administrative law, but its inclusion in the Bill will serve as a valued public commitment in the light of the above-mentioned concerns and would not involve any change in policy. It would also help to address the current conflicting views over the continuance of statutory immunity.

    (f)  The FOA believes that the principal role of market supervision should be a matter for the recognised investment exchanges; that, in carrying out this role, they should be on a par with the FSA in the matter of statutory immunity; and that the FSA should exercise its regulatory discretion in such a way as to avoid intervening in commercial matters and to take full account of the potential damage that the exercise of powers of intervention may cause to international reputation and investment values.

    (g)  The legislation should provide specifically for periodic rules' review by the FSA to ensure that they remain appropriate, effective and cost-effective, bearing in mind that FSA, in any of its consultation papers, has yet to give due recognition to the need for such reviews.

30 March 1999

7   Not printed. Back

8   Not printed. Back

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