Memorandum by the Independent Financial
Advisers Association (IFAA)
In our view there are five questions which should
be asked when creating or recreating regulatory architecture.
Who are you trying to protect?
What are you trying to protect them
Can you explain it to the public?
A general question that needs to be asked, "Under
what circumstances could the Chairman of the FSA refuse to take
actions demanded by HM Treasury?"
The Treasury is not only the sponsoring Ministry
for the financial services industry but is also the creator of
its own financial services products, the creator of tax regimes
and the controller of government welfare spending and policy and
the overall controller of the Economy.
This puts the Treasury in control of most of
the major factors that could compromise any financial advice given
by the industry. We fear that unless there is a framework that
clearly delineates the powers of the FSA, the Government might
be tempted to use the FSA to cover up embarrassing failures of
Government policy or taxation.
We wish to suggest a finessing of the current
proposals that might add further clarity and flexibility. Currently
there are two options for the FSA namely, either regulate in-house
as part of the one-stop shop concept or not regulate at all.
We suggest a third option:
Allow voluntary regulators to
regulate under an inspection and systems control regime created
by the FSA.
The Regulation of Mortgages and General Insurance
The current voluntary system will not lead to
efficient or sustainable regulation.
GISC and MCRI are not in the information
"matrix" enjoyed by more formal regulators. Proven
miscreants from other regulated areas will therefore be able to
invade the voluntary sector without those regulators knowing about
FSA has no powers to homologate
systems and standards between the voluntary sector and itself
thus leaving those who need to be both in the statutory and voluntary
forms of regulation to trade with a confusing array of standards.
In practice, this will lead to the same information being requested
by different regulators in different ways. Three regulators also
mean three sets of costs and three sets of overheads.
The voluntary regulators suffer
from a lack of the legal protection afforded to other regulators
against being sued by the regulated. This can lead to a toothless
and lengthy form of regulation and much of the regulatory effort
being subsumed in litigation.
The voluntary structure is endemically
unstable dependent as it is on the continuing good will of
product providers to refuse to deal with those outside the code.
Those tasked with regulating under this regime find some of their
actions compromised by the will of providers. Independent intermediaries
find their independence compromised by such regulation as it gives
providers influence over the way intermediaries can go to the
Our proposal allows a third way which will not
impact too heavily on the structure of FSA but will ensure effective
and structured regulation in areas which are deemed to be of a
lesser risk. It may be in the fullness of time that areas currently
regulated in-house may be better regulated externally by such
bodies. Our approach will allow that to happen without further
Whilst the intellectual argument for the current
Bill is the "one-stop shop", intermediaries who trade
across the borders of Financial Services, Mortgages and General
Insurance will face three regulators and three lots of costs.
More importantly their clients will face a confusing array of
regulators and complaint schemes. We are fully aware of the danger
of overloading the FSA particularly early in its life. Thus our
suggestion allows for both MCRI and GSCI to be brought into the
"one-stop shop" without the disruption that full integration
We believe the FSA should be subject to scrutiny
by external and independent examiners.
In pursuing the concept of compliance cost
assessments, we suggest that the Better Regulation Unit should
appoint an independent task force to make regular inspections
of the Authority's expenditure and also ad hoc cost assessments
of the effect of specific rule changes.
We do not believe it is appropriate for the
Treasury, as the FSA's sponsoring department, to appoint the members
of the Authority's Board. This function should be carried out
by a different department of Government.
We recommend that the Minister for the Cabinet
Office should be appointed to this role.
We take the view that the ad hoc reporting of
the Securities and Investments Board(now FSA) and other
regulators to the Treasury Select Committee is unsatisfactory.
Select Committees have a wide range of issues to address and cannot
exercise adequate supervision even of a single financial services
We suggest that it might be appropriate for
the Treasury Select Committee to appoint a sub-committee (as for
the Civil Service) for the purpose of parliamentary scrutiny.
We believe that there must be a check on the
regulator's actions outside the concept of judicial review. It
is our opinion that regulators have expanded beyond their powers
confident in the knowledge that the judicial review route is cumbersome
and expensive. The previous Act was drawn so widely that any action
from the regulator was unlikely to be deemed ultra-vires and the
test of reasonableness is often in itself unreasonable.
In essence we wish to see a clear framework
of duties and responsibilities enshrined within the Bill so that
the regulator's powers are clearly defined.
There is a balance to be achieved between
flexibility and the creation of an over mighty being which the
current draft singly fails to address.
Polarisation is the current process under which
all those distributing financial services products must disclose
for which party in a transaction they are working. In essence;
are they working for the provider (Tied Agent or Company Salesman)
or the Client (IFA)?
We therefore suggest that consideration be
given to incorporating the disclosure of distribution status in
the Bill. This would put an end to the arguments, create certainty
for the industry and underpin investor protection.
As suggested earlier the draft is remarkable
for what it does not contain as much as what it does. We would
wish to add the following areas for consideration.
Basis of Redress
There are lessons to be learnt from the Pensions
Review. The most important was the wholesale dismantling of the
process of common law by SIB. This opened a Pandora's Box which
far from shortening the process, had the reverse effect and prolonged
We cannot see that any reasonable investor would
expect to receive redress above and beyond his entitlement in
a court of law. That said, we do not wish for those who feel they
have a complaint to need to resort to the courts. It is therefore
necessary for all redress procedures to offer complainants a parallel
system to the courts at less cost.
Any other method of redress is by definition
profoundly unfair on the policyholders and shareholders who would
effectively fund such payments. It is also unfair to professional
advisers who do not have access to policyholders and shareholders
money and depend on professional indemnity to pay redress. Any
deviation from common law creates a hiatus in the PI market with
cover becoming either unavailable or prohibitively expensive.
We believe that all redress procedures must
be based on common law and this concept should be enshrined in
the Act. This would be an invaluable curb on any regulatory excesses
ensuring policyholders and shareholders funds are not raided for
A competitive and healthy market can only
be achieved by the involvement of professional advisers. The involvement
of professional advisers is only possible by the use of professional
indemnity insurance and a regulatory system that in turn is based
on the common law.
Both for reasons of asset protection and
the continued existence of the professional adviser, we believe
that such protection should form part of the Act and be reflected
in all the processes of regulation including Ombudsman and Compensation
The Office of Fair Trading
The current FSA 1986 puts a duty on the OFT
to comment and make recommendations on issues of competition.
We believe this should continue but be tempered by considerations
of investor protection.
Whose side is the FSA on?
This may seem a strange question but an important
one. We understand that one of the FSA's major tasks is to protect
the investor but it is important that the regulator holds the
ring for all stakeholders in the process and is not perceived
as favouring any single party.
As both the FSA and its Ombudsman have a
judiciary function it would be wrong for them to be anything but
independent. This needs to be clarified within the wording of
the Bill. It also needs to be both de jure and de facto independent
Discipline and access to the Industry
The denial of rights to the regulated does
not enhance the rights of the consumer
Both parties should be able to rely on due processes,
checks and balances which will protect even those who might be
an embarrassment either to their employers, the regulators, politicians
or the industry.
The current disciplinary regimes fall short
of the high standards we are entitled to expect. Hearings do not
keep the defendant properly informed and represented. The appeals
process is expensive and inaccessible.
The procedure for making a complaint against
the regulator also requires revision. Pressure can be applied
to dissuade a complainant from pursing a complaint. Furthermore,
the process is unduly lengthy and unwieldy.
It is for the common good that those who are
unable to come up to the standards of the industry are removed
from it but it should be remembered that such processes impact
completely on the lives of those in the industry and must be seen
to be both fair and timely.
It is likely that a firm that finds itself under
regulatory pressure will produce a "sacrificial lamb"
which will find itself cast out of the firm without the means
financially or evidentially to defend itself.
Thought also needs to be given to the role of
compliance officers and whistle blowers and what protection regulation
should be offering.
If the fining of top management were to become
a regular event consideration would need to be given to the long-term
impact on the recruitment of top managers into the sector.