Financial Services and Markets Appendices to the Minutes of Evidence


Memorandum by Justice in Financial Service

  1. The FSA needs power to determine whether individuals are "fit and proper". However, the proposed power to discipline individuals is unnecessary, unfair and potentially incompatible with a free economy.

  2. It is unnecessary because the FSA will have the power to discipline firms that fail to control their employees. If a firm is not controlling its employees, laying down proper procedures and disciplining employees who transgress it can and should be punished or, in serious cases, suspended from carrying out business.

  3. It is virtually impossible to see how the FSA can exercise a power to impose censure or fines fairly at all and it is certain that this involves disproportionate cost. Establishing individual responsibilities and omissions inside a firm is difficult and complex. There are great difficulties in allowing any form of fair trial. IMRO's attempts to discipline chief executives of three Morgan Grenfell companies ended with massive and hostile coverage of the regulator, widespread sympathy with the victims in the City and the UK being hauled into the European Court of Human Rights. The only beneficiaries are lawyers who have received around £3 million in fees.

  4. As pointed out by the Consumers Association, the power to fine individuals or suspend their right to work for a limited period is useful to force executives to do what the regulator says when their firms would otherwise resist pressure in the courts or otherwise. In effect, the FSA is asking for a power to say to the chief executive of the Pru: "We want you to pay money to this group of investors. You have said that the Pru will fight this in the courts as you do not believe we are right and this money will be paid by investors in the Pru's "with profit" funds and shareholders (who are investors in pension funds and unit trusts managed by other firms). If you do not do what we say, we will bring charges against you personally relating to these matters and other failings. You will be unable to work in the industry until they are resolved. You will have to pay lawyers to defend you. You will not be able to get a penny of those costs back from us and you will have to pay our costs if we establish a single charge against you. We have banned the Pru from giving you an indemnity for your costs."

  5. The FSA's rules determining costs are oppressive and one sided. We urge that the ability to recover costs be limited, following proposals by Lord Woolf for the reform of civil litigation. We suggest recovery by any party to disciplinary proceedings should be limited to the higher of £5,000 or 10 per cent of the required capital of the firm.

  6. In the Morgan Grenfell case, Mr Glyn Owen's lawyers had incurred expenditure totalling some £75,000 when IMRO notified them that it had incurred £200,000 legal costs which it expected to recover from Mr Owen. We suggest that this is intolerable and the primary legislation should limit ability to recover costs on both sides. In other cases, IFAs have been forced to pay between £8,000 and £25,000 costs as a condition of settling charges relating to record keeping and similar matters. Whilst we accept that, in some circumstances, heavy fines may be appropriate, regulators should not be permitted to use huge costs as a punishment or indeed deterrent to defending a case at all.

  7. We believe that it is wrong for the people who in effect act as judges to be appointed by the FSA, to be paid by the FSA and to receive bonuses that may be increased by fines. We urge that all persons acting as judges be appointed by the Lord Chancellor and that he should determine their pay and conditions.

  8. We agree with the FSA that no charges should be served without independent review of the case. But we cannot see how anyone appointed by the FSA can be independent. The European Court of Human Rights has given a clear guidance on this point.

  9. We view with concern the proposed powers of the FSA and the Ombudsman to award compensation when no legal liability exists without rights of appeal to the courts. We believe that in all cases legal liability should be established by the courts.

  10. We do not think that if the right of appeal to the courts is granted, it will be used often if at all—certainly the right of appeal against the PIA Ombudsman is seldom if ever invoked—but if it does not exist, then the FSA and Ombudsman will be under constant pressure to do what the consumer lobby urges, the industry may become uninsurable and the results will be both unfair to the industry and ultimately harmful to investors as IFAs find it impossible to give advice and withdraw from the industry.

  11. We also believe that both the SIB and the ICS have on occasion miscalculated compensation when they have stated that the calculated figures are what a court would award. If there is to be no appeal, some steps must be taken to correct this.

  12. We support the Treasury Select Committee's call for effective arrangements for investigating complaints against the FSA to be set out in primary legislation. We believe that the Ombudsman who deals with complaints against Government departments and the NHS should deal with complaints against the FSA and should report to Parliament, not the FSA.

  13. Lastly, we believe that the structure of the FSA and the absence of effective judicial supervision creates scope for corruption. There is prima facie evidence of financial interest intruding in a quasi judicial process in three high profile cases—West Bromwich Building Society, Knight Williams, Morgan Grenfell Asset Management. The exercise of quasi judicial functions of the FSA by persons appointed by the Lord Chancellor would greatly reduce the scope for repetition of unfortunate episodes.

17 March 1999

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