some default text...
Financial Services and Markets Appendices to the Minutes of Evidence


Memorandum by Mr C M Williams

  This submission focuses on the proposed accountability of the FSA in the light of its conduct to date and that of its predecessor, the SIB.


  1. Despite all the claims to the contrary the structure of the proposed regulatory organisations, the FSA, and therefore ultimately its actions and its accountability will be little different from those of the past. The appointment of board members and their removal, the making of rules and the annual report are similar to the present, and previous, regimes. Of particular significance is the structure as a private limited company with immunity from claims for damages. This in the past has enabled the regulators to disregard the justifiable criticisms of the private investor and in the view of many the regulators are discredited.

  2. The structure for regulation with many of the staff recruited from the industry which it regulates and who expect their future career to be back in that industry is biased towards that industry.

  3. The structure used by the present system and proposed for the new system makes regulation unaccountable to either the public it is supposed to protect or to government.

  4. Regulation structured as proposed has been shown not to work satisfactorily in the past and there is no reason to think that it will be any different in the future.

  5. This opinion and the evidence to support it comes as a result of seven years of personal experience of the workings of the regulatory bodies, initially as a private individual and latterly as a member of an action group and is therefore based on actual events and experience. This submission is made as a private individual.

  6. The documentary evidence to support this opinion is in my possession but for reason explained in my letter of 17 February 1999 to the Clerk of the Treasury Committee I am unable to quote directly from the documents.

Basis for the opinion expressed above

  7. The minutes of evidence of the Treasury Committee held on Tuesday 8 December 1998 contain Mr Davies' response to a question put by Mr Kidney concerning the rationale for the FSA to be structured as a private limited company. Mr Davies' reply gives credence to the view that the structure of the FSA needs a fundamental change if it is to be accountable, particularly to those it is supposed to protect. His answer at paragraph 232, final sentence was: "That is what our institutions want us to do, they want us to employ people who understand their business and go in and out, and that would be facilitated by the private company model . . . "

  So the rationale for the FSA to be structured as a private limited company with immunity from actions for damages is:

    (a)  that this is what our industry wants;

    (b)  so that staff move more easily from the financial services industry to the FSA and back out again.

  The first priority of the FSA is therefore to satisfy the financial services industry, a rather peculiar first priority for a regulator. It must be the first priority in Mr Davies' mind because it is fundamental to the structure of the FSA from which all else flows.

  8. Mr Davies' comment reveals all too clearly that the regulators are and will continue to be too close to those they are supposed to regulate. The problem in the past was not the FSA86, it was the failure of the regulators to carry out their responsibilities. Once the new broom enthusiasm has died down we shall be back to the same situation as before.

  9. To suggest that the private limited company format allows staff to move more easily from the financial services industry to the FSA and back out again overlooks a very important point. When a regulator has found it necessary to use the full regulatory powers on a number of firms in the financial services industry, what will be the chances of employment back in that industry?

  10. There is another important feature that inevitably follows on from the structure of a private limited company.

  With no outside shareholders the board of directors is only answerable to itself and, as in the past, once appointed is able to act autonomously. Accountability to any other body is difficult to enforce. This was the case in the past and the Treasury was powerless to act. I have letters from officials which prove this point. Once the Delegation Order of the Financial Services Act 1986 came into effect the Treasury was virtually powerless to control the actions of the SIB in any more than a general way. The new legislation contains little to stop this happening again.

  11. The Chairman of the Treasury Committee, Mr Radice, in a recent letter to me states that the proposed legislation now takes accountability into consideration. This is not my view. The Treasury may "expect" its appointees to the FSA board to "take account of the need to pursue the objective of protecting consumers . . ." but with members of the financial services industry prominent on the board we know from experience that they have other far more pressing priorities.

  12. None of the appointments to any of the boards of the regulatory bodies in the financial service industry including the FSA, come under the remit of the Commissioner for Public Appointments, though lip service is paid to the "guidance" issued by the Commissioner.

  13. Consumer Panels, which have an advisory function, are claimed to give the private investor influence in the operations of the regulator. Those of us with experience of organisations know only too well that it is the board that holds and uses the power.

  Bodies which only have advisory powers are very easily "fobbed off" and become nothing more than "talking shops".

  14. My experience of the operation of the regulators reveals a catalogue of regulatory events which some would describe as incompetence, others that it reveals too close a relationship with those who were supposed to be regulated. What is certain is that the regulators showed a reluctance to act and when they eventually did it was too little as well as too late.

  Two agreements negotiated by SIB, contained fatal flaws. There are other examples of a failure to safeguard the interests of the private investors.

  When finally it came to paying compensation the "rules" were invoked to ensure that as little as possible was paid out. The iniquitous formulae used to calculate compensation was only possible with a structure which makes the regulatory body, in this case the ICS, virtually unassailable by private individuals. The FSA which now has the responsibility for the ICS "rules", refused to intervene despite numerous requests. At the meetings at which this problem was discussed, the first with the ICS and the second with both the ICS and the FSA we met with prevarication and claims that the "rules" allowed the particular stance being taken.

  This, I believe, was due to the structure of the regulators as private limited companies and their close relationship with the industry.

  15. It appears that the Government is relying on the FSA annual report and the Treasury Committee to monitor and control the actions of the FSA. Annual reports are notorious for being smokescreens and are often little more than vehicles for self congratulation. They are also historic, but many situations in the financial services industry require immediate action. The Treasury Committee, powerful body that it is, is unlikely to get at the grass roots level of regulation.

19 March 1999

previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries

© Parliamentary copyright 1999
Prepared 14 May 1999