Examination of witnesses (Questions 320
TUESDAY 30 MARCH 1999
and MR GEOFFREY
TURNER, called in and examined.
ROE, and MR
320. So you would prefer the even-handed
approach whereby the costs should be separated out and either
party can claim against the other depending on the outcome of
(Mr Sylvain) Yes.
321. But if that were the case, on the deep
pockets of the FSA, those deep pockets will not be as deep if
you do not let them have the fine income, as was suggested earlier.
So how are you going to gel with that? The implication is that
the costs will fall with the fees of the members subscribing to
the FSA. Presumably it will not be terribly welcome?
(Miss Hutchinson) We feel it is inherently wrong
for the fines to be a source of funding for the FSA because that
is bound to lead to people deciding how much they need to fine
by comparing it to the budget, as it were.
322. But are they not required to publish
their basis for that? To play devil's advocate, Howard Davies
would say that, although nearly 70 per cent. is variable income,
they are going to set a norm of a budget for a year and that will
be the benchmark against which they are fining too much or not.
So to take his view, he is looking at it quite closely as to what
is a fair amount to fine, and I fully admit that on the face of
it I do not like in principle the fines going because it is an
incentive to fine if the fee income has gone down because market
conditions suggest it has gone down whereas people have gone out
(Miss Hutchinson) It means if you are being an
effective FSA in providing all the right guidance and people are
not doing anything wrong, you will not have any money.
323. Could I press this particular case
because as I said last week I was slightly astonished at this
suggestion that the industry should volunteer to give money to
the Treasury. I have not come across this in many years in the
Treasury. It seems to me it should not be beyond the bounds of
possibility to design something which avoids the apparent incentive
to levy fines in order to cover costs, either by returning the
money in its gross form back to the industry in the form of a
discount on their fees or by allowing some modest offset of the
enforcement cost against it. I find it difficult to believe there
is not a way of designing it such that you can return the money
to the people who paid it in the first place as a discount, and
which quite clearly avoids the apparent incentive to impose a
fine rather than another form of discipline where there is a choice.
The extreme conclusion of having the money come to the Treasury
(Mr Sylvain) My Lord Chairman, I think we have
heard that, as you say, in the proposals that have been put forward
by Howard Davies it will be separately accounted for and be discounted.
That actually sounds like something you can control and you can
do, so that sounds sensible from the point of view of a practitioner.
324. But does that not encourage a culture
of one firm ratting on another to keep the fees down?
(Mr Sylvain) I hope not.
(Mr Buxton) My Lord Chairman, we would vote in
favour of the fines going back to the FSA.
325. To the industry?
(Mr Buxton) Then being accountable in the way
that has been suggested.
Lord Montague of Oxford: My
Lord Chairman, they do not necessarily have to go back to the
industry. Perhaps these fines could be considered for consumer
Lord Eatwell: All
the activities of the FSA have to be funded out of its fees anyhow,
so you are having some form of reduction of fees.
326. I thought it was very interesting that
the view over there was as it was.
(Mr Clarke) My Lord Chairman, it would be ideal
if you were right and there was a system for making sure that
fines were not used as an incentive to the FSA, but I think you
would have to add on another independent layer to make sure that
it was not impliedly motivating the FSA. Once upon a time, I understand,
back in the Middle Ages judges got a percentage of fines they
levied but eventually that was thought not a good idea.
327. I understand that. I am very familiar
with the arguments. I wrestled with them a lot in the Treasury,
particularly the question of whether the police authority or whatever
should have any access to the fines that were levied, which is
why I am taking an interest in this. But I would have thought
it would be possible to design something whereby the money went
to the industry in a form which did not touch the FSA's pockets
in any way. If it did not affect the amount they actually spent,
then it would not affect the decision that they took, other than
if they suddenly set themselves an objective to maximise the discount
going back to the industry.
(Ms Hutchinson) The point may be dealt with to
some extent because the body that makes the adjudication, which
imposes the fine, I suppose, is the independent tribunal and not
a part of the FSA.
(Mr Clarke) It does in a way get back to it, that
because of the conflict of interest I think it is actually something
the industry does not want. It does want a quicker and better
procedure at the first stage and that should be seen to be fair.
The other thing one would hope is that the junior members of the
staff of the FSA would always act perfectly reasonably, but if
a prosecutor has to spend a great deal of money developing a case
which could be recovered if there was a decision, it can be, I
suspect, in cases of perhaps the less strong-minded prosecutor
a strong incentive not to admit halfway through, "I have
made a mistake. This person has not acted unreasonably and if
you pursue it you can actually recover your costs."
Mr Beard: But there
is a requirement for guidelines on fines to be set out and consulted
on beforehand. You cannot just decide in the middle of a case
what your new principles of fining are. You would have to stick
to the guidelines which have been published.
328. Furthermore, this is a system which
has been running for rather a long time in various institutions
around the City. Would you like to produce a couple of cases where
you are utterly certain that the amount of the fines and the way
the thing was handled and generally conducted clearly indicated
that the fact that the SRO would keep the fine really influenced
the outcome of how that was conducted?
(Mr Clarke) I cannot, but I still believe in this
principle and, therefore, the procedures
329. All of us who have been on the other
side of this thing, curiously enough, and some practitioners over
there, may say it is possible to envisage this vision but it seems
to me it is fair to ask whether you are not envisaging something
to do with angels on the tops of pins?
(Mr Clarke) I hope not.
330. If I could take the Chairman's privilege,
I would like to move on to the question of statutory immunity,
which I think was raised by one or two people. Can I put the other
side of this, as I see it. I hear a lot about the desire not to
have over-regulation. We do not want people to be very bureaucratic
and heavy-handed about this. If there were not statutory immunity
would that not turn the FSA into a very different sort of body
that had to be really immensely concerned about everything that
it did? Every time a firm went under and somebody lost any moneyand
occasionally that is going to happenwe would find they
were being sued by the investors. In order to avoid that, you
have to pursue a policy of saying no firm can ever go under and
the whole process becomes enormously cautious. Would not that
on its own be a very strong motivating force towards a very heavily
regulated business and, therefore, is not the statutory immunity
in the Bill a safeguard against excessive regulation?
(Mr Turner) Could I say that why we have statutory
immunity in the current system, the self-regulatory system that
is fading away, is because way back in 1985 nobody would agree
to play, if I can call it that. Practitioners would not take part
without the assurance of immunity from discharging their role
on SRO boards and committees. What I simply do not know is in
moving this system to a statutory system whether that force still
applies. Certainly the community believed implicitly a decade
ago that without it regulation would not work.
(Mr Buxton) We believe that the FSA should have
immunity. I think it is necessary. The other side of that is that
we do not believe that the complaints procedures set up in Schedule
1.7 are sufficient. We think they should be more independent and
we think they should be more transparent as a result of the complaints.
331. So you see these two things going together.
You see statutory immunity requiring that you have a strong and
independent complaints system.
(Mr Buxton) Yes, absolutely.
(Mr Sylvain) This is all of a piece, is it not?
If there is strong accountability for the FSA, if there is a complaints
procedure, if there is a tribunal then, as you say, there are
probably enough safeguards that the freedom that immunity might
give an over-zealous regulator can actually be checked. I think
that is what has to be in place.
(Ms Hutchinson) I think our concern started really
because granting statutory immunity may be in breach of the European
Convention in a case that the European Court heard last year.
Obviously that would be a problem.
332. That would be a problem.
(Ms Hutchinson) We cannot have that, can we? If
there is no statutory immunity then is the FSA really going to
be on the receiving end of a large number of claims? For a claim
to succeed a plaintiff or claimant, as we will have to call them
in a few weeks' time, will have to show that the FSA owed it a
duty of care in a particular way. If you look at the case law
of people who have tried to sue the police and other authorities
they probably would not get very far. It may be that if the Convention
is a problem and there can be no immunity then it will not be
too much of a problem for the FSA anyway. There may be examples
of cases where the FSA should be liable, for example if it acts
in breach of confidence or there is some act by a member of staff
when they have intervened in someone's business or exercising
their powers of inspection and have caused some damage there,
there should be a claim then.
333. But what about the suggestion that
this should be seen alongside a strong complaints procedure too?
(Ms Hutchinson) I think that is a very good idea,
334. How would that work in practice? How
would that be accountable? Would it come out as a subsidiary to
the annual report in terms of complaints investigated and successfully
taken up or whatever? It seems slightly against the trend to me
where at the moment there is pressure on the police to be far
more accountable and for disciplinary action against them to be
much more easily taken by members of the public aggrieved by measures
they have taken. Putting it the other way, the point I always
make is that it will become a haven for duff compliance officers
who cannot do their job because they would get prosecuted anywhere
else in the City but they can do the job in the FSA with immunity
from prosecution, just to take it to its extreme. I am not particularly
concerned about the malicious possibilities of somebody acting
with immunity for the FSA, and I think Howard Davies reassured
us that there are a number of procedures in hand to do that, it
is more those of incompetence and various actions taken by the
FSA leading to the whole industry being prejudiced in the eyes
of its competition.
(Ms Hutchinson) Dealing with the malicious point,
that would not be covered by statutory immunity on the current
drafting. On the other one, I have not given a huge amount of
thought to the complaints procedure but having heard what Andrew
Buxton has said I can quite understand that you are going to need
a strong complaints procedure if you are not going to have the
ability to bring civil proceedings.
(Mr Vipond) The key feature we would see is that
it is a continuing and independent body that does produce its
annual report. At the moment, as drafted in Schedule 1 of Part
7, it is very much an underdeveloped and un-thought through complaints
procedure. It is something that will happen on a case by case
basis. Given the power that the FSA has, given the need for accountability,
that is simply not adequate, you need something much more robust,
particularly if it has statutory immunity. The FSA can come into
your offices, it can trash them, it can go around and do a full
investigation and they can walk away and come back two days later
and say "sorry, we got it wrong, we came to the wrong offices".
There has got to be some redress.
335. Thank you very much. I think that more
or less gets us to the end of our agenda. I would like to offer
David Roe and Andrew Whittaker the chance to make any remarks.
If they say something particularly controversial we may come back.
Do you have anything to say by way of concluding remarks?
(Mr Whittaker) Just on the point of statutory
immunity. We have made a number of points about this in the past
and the way that it affects us in practice. One point we have
not made up until now is to report to the Committee on the extent
of statutory immunity available elsewhere in the world. We understand
that the Basle Core Principles on how they relate and operate
include a statement that there should be "a suitable legal
framework for banking supervision... including... legal protection
for supervisors". They expressly refer to "protection
... from personal and institutional liability for supervisory
actions taken in good faith in the course of performing supervisory
duties..." In accordance with that principle legal protection
for the banking supervisors is available in Australia, Canada,
Germany, India, Ireland, Malaysia, New Zealand, Philippines, Singapore,
South Africa, Sweden, Switzerland, the UK and the US. Thank you.
336. Do you have anything to say about the
complaints procedure because that was a very interesting point?
(Mr Whittaker) It is an entirely fair point. Certainly
if the volume of complaints were such as to justify it we would
need to have an ongoing continuing complaints arrangement.
337. Does that satisfy you over there?
(Mr Vipond) I think there will be that volume
of complaints so there ought to be consequences.
338. I think that is something we can return
to. David Roe?
(Mr Roe) I was going to make the same point on
statutory immunity but I did not have quite such an impressive
list as the one that Andrew has provided to you. I do think that
it is very important not to under-estimate the importance of statutory
immunity and the fact that it is rooted in other jurisdictions
and in previous arrangements we have here. On the complaints arrangements,
yes, I think this is a very interesting area which I am sure we
would welcome the Committee's thoughts on.
Chairman: Thank you
very much. David, one of the interesting things is trying to judge
your language, particularly the words you use as to whether these
are possibilities which may be open or whether they are possibilities
which may be closed. Thank you all very much for coming, I have
certainly found it very interesting and illuminating. You have
given us a lot of evidence which we will do our best with. We
have a very tight timetable, as you know, so we are going to have
to get down quite soon to the whole question of taking a view
about these things. Thank you all very much.