Financial Services and Markets Appendices to the Minutes of Evidence


Memorandum by London Investment Banking Association (LIBA)

Q1. The Government has made several proposals for enhancing the accountability of the FSA. Are you now happy with the FSA's proposed level of accountability?

    —  Do you think making the establishment of the Enforcement Committee a statutory requirement would improve accountability?

  While agreeing that the measures announced by the Treasury are important steps forward we would like to see the following additional steps:

    (i)  Annual Report: We would like to see FSA required to include in its annual report:

      —  an explanation of any occasion on which it has introduced a rule (or other obligation) more onerous than required by the relevant international or European standard;

      —  the level of expenditure on the public awareness objective;

      —  an account of FSA's international work.

    (ii)  Consultation: There should be an obligation to provide a feedback statement on all consultations (see also paragraph 19 below).

      Where rules are introduced without consultation because of urgency FSA should seek views after the event and provide feedback.

      FSA should be required to explain the methodology used in cost/benefit analyses, and also to give some analysis of alternatives to the rule chosen.

  The essential purpose of the Enforcement Committee is to ensure that decisions to take enforcement action are taken by appropriate persons who are independent of the regulator and investigatory authority—in the same way as decisions to prosecute criminal offences are taken by the Crown Prosecution Service. The persons should include someone with appropriate legal experience and someone with commercial experience relevant to the type of business concerned. The importance of their role is such that it is desirable those points should be included in the Bill.

Q2. What type of arrangements for independent investigation of complaints made against the FSA do you think would be most effective?

  The independent investigator should not be appointed by the FSA or the Treasury. If the PCA is not the investigator the process of appointment should be similar to that for appointment of the PCA.

Q3. The draft Bill requires the FSA to carry out public consultation whenever it proposes to change its rules. The Association of Unit Trusts and Investment Funds (AUTIF) has suggested that the FSA should also be required to consult on all policy initiatives affecting one or more sections of the regulated community. Do you think there is a need to require the FSA to consult on matters going beyond proposed rule changes?

  LIBA considers that consultation should cover all requirements which are in practice mandatory and potentially the subject of enforcement action.

  There is little substantive difference between a rule, a principle, a code and guidance if breach of any of them is subject to the same enforcement process. For example, if there is a principle that persons are to maintain proper standards of market conduct, and breach of that principle is a disciplinary offence subject to unlimited fine or removal of authorisaiton, "guidance" which lays down what is and what is not considered proper conduct is in effect a rule under another name.

Q4. The AUTIF has also suggested that the FSA should hold public hearings on important policy proposals. Do you think that would be a useful step towards increasing the FSA's accountability?

  Yes. Public debate is a useful discipline

Q5. Are you satisfied that the rule-making procedures fully accord with the Better Regulation Unit's principles of good regulation?

  No. A few quotations from the Guide indicate areas where the FSA proposals do not seem to match up:

  "A full Regulatory Impact Statement should accompany any external consultation . . . " 2.1.

  "[In consultation documents] include a statement that responses will normally be made public." 2.6.

  "Integrate with previous regulations. If the regulation overlaps with another measure, try to replace it with a combined and streamlined regulation . . . How will those who are being regulated get the full picture of what is required." 3.6

  "Helping business and others comply in the most effective way should . . . be one of your key aims. This cannot be achieved solely by detection and punishment of breaches by enforcement officials. Neither do you want the enforcement and sanctions to be so strict that you are effectively discouraging those who are being regulated from performing legitimate activities or forcing them through fear or uncertainty, to go to unnecessary lengths to comply." 4.4

Q6. Several bodies have suggested that the FSA should be subject to periodic efficiency audit by the NAO. What is your view?

  LIBA considers both that the financial audit of FSA should be conducted by the National Audit Office(NAO) and that NAO should conduct periodic value-for-money scrutiny. FSA has a breadth of power which would more normally be within a government department. NAO has experience both of auditing departments and of conducting value-for-money scrutiny of public policy organisations such as departments and public corporations, and it is wholly appropriate that it should perform both roles in respect of FSA.

14 April 1999

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