Select Committee on Constitution Minutes of Evidence

Memorandum by the Association of Independent Financial Advisers (AIFA)


  AIFA is the trade association representing nearly eighteen thousand independent financial advisers (IFAs). Its members are all regulated by the Financial Services Authority and this paper draws some general lessons about the accountabilty of regulators, based on our experiences with that body. The question of accountability of the regulatory system is absolutely crucial to its successful development and we congratulate the Committee on selecting this topic for investigation.

  We believe that our views offer a different perspective on regulatory relationships because IFAs are, atypically for financial institutions, primarily small businesses and the regulator has particular challenges to develop a relationship with such businesses.


  A regulator will have a direct line of accountability to a Minister or to Parliament. It will be for them to judge whether the regulator is achieving the right overall balance between the various groups affected directly or indirectly by that regulator. In an increasing number of cases, the regulator will also be judged against statutory objectives. But the regulator also needs to feel in some way accountable to those affected by its decisions. These will include consumers as well as the businesses which it regulates. Whilst this memorandum is written from the perspective of the regulated business, we believe that our comments could be applicable to other stakeholders as well.


  This memorandum is intended to look at systemic problems of accountability. It is not a generalised moan about regulation or the regulator. We should acknowledge that there are many instances where the FSA has shown a willingness to engage with the concerns of small businesses; to listen and change its mind in the light of reasoned representations; and to show commitment to its consultation processes. The FSA has also been good at working through trade bodies.


  Parliament was, of course, mindful of the need to demonstrate that statutory regulators are accountable. During passage of the Financial Services and Markets Act which set up the Financial Services Authority, a series of processes were built into statute to ensure checks and balances between a very powerful regulator, those it regulated and other groups.

  These checks and balances include:

    (i)  An Independent Complaints Commissioner.

    (ii)  Requirements upon the Authority to produce cost benefit analysis and to consult before any rules are changed.

    (iii)  A system of appeals against regulatory decisions affecting one firm.

    (iv)  Statutory bodies to reflect the interests of consumers and practitioners to the Authority; and a Small Business Practitioner Panel which is extra-statutory but has an important role to play in reporting the concerns of the smaller businesses to the FSA.

  But all these checks and balances are to do with process. Process of its own does not deliver accountability. Indeed, however well intentioned it might be, it can inadvertently be biased against the smaller business.


  Statutory processes are inevitably formal and complex. For larger institutions, this can justify the development of in-house expertise, specifically dedicated to steering the company through the process. There will be sufficient instances where this expertise is needed to justify the cost. The smaller firm will encounter the processes rarely, and will require "buying in" of expensive external assistance to penetrate them. There will be no in-house legal resources to offer interpretation. So the proportionate costs of keeping pace with the regulator are proportionately higher.

  There is a similar concern over the consultation process. Most IFA firms cannot keep pace with the flow of consultation, never mind play a constructive part in responding to it. They feel detached from the process and at the mercy of whatever the regulatory machine churns out. This has a demoralising effect on business as the firm does not consider itself empowered or in control of its destiny. The accountabilty mechanisms are felt to be of little value in such circumstances.

  But these mechanisms matter. The key is to make sure that they are seen to empower not overwhelm.

  There is no single, snappy solution to this intractable issue. But there may be steps which can be taken to improve the position and give a better sense that accountability is being achieved.


  It should most of all be recognised that these mechanisms work best if they are not put under too much strain. Take the consultation process. Over the last 12 months 45 consultation papers have been issued by the FSA. Various government departments and independent reviewers such as Ron Sandler, answerable to the Chanceller, have added to this flow of paper and recommendations for change. Fewer consultation documents would enable those affected to stay abreast of the process and feel better able to influence it.

  Of course, the FSA has relatively recently been set up and it was inevitable that there would be extensive consultation in its early stages. But the industry needs to feel that this process has run its course and that there is hope of a less demanding schedule in the future. There are three ways in which this can be achieved.

  First, the FSA must relentlessly prioritise its initiatives, in conjunction with other official bodies, so that only essential change is pursued and so that the process is staged. We should not be in the present position of there being eighteen relevant consultation processes going on at once. Agencies could exercise a self-charging ordinance! There needs to be better co-ordination between the various instigators of reviews so that their timings are better planned. This is especially important as lengthy consultation and consideration of the outcomes can introduce planning blight into a sector whose commercial future is put on hold whilst external authorities consider the way forward. The present situation has come about because initiatives arising in different parts of the official machine have come to the point of consultation and subsequent decision simultaneously. The solution is better planning at the stage of inception, not further delay now.

  Second, regulators in general should be more alert to the possibility that collaborative initiatives with industry may discharge regulatory objectives more effectively and cheaply. In other words, they should ask themselves what is the most efficient and cost-effective mechanism for delivering a desirable outcome. Of course, industry is not the only stakeholder in these exercises and any initiative of this nature would have to be transparent and open to influence by other interested parties. But we still believe that collaboration has important advantages to bring, not least speed of action and reduction of planning blight.

  Third, the length and complexity of some consultation documents could be reduced. A recent paper from the FSA took over 250 pages to set out the theme "Less is More". Documents on this scale may indicate that the objectives of the regulator are too ambitious. Regulators may be becoming too involved in the operational detail of the businesses which they regulate and their proposals can impose considerable cost in return for benefits which are far less tangible. There are times when regulators in effect start to map out in considerable detail how a firm will undertake its business. Yet, if their detailed rules fail to deliver the desired outcome or if the costs turn out in fact to be disproportionate to the benefits they deliver, then the regulator is not accountable for the wasted effort or resources on the part of regulated businesses. Better accountability of both regulator and those who are regulated will be achieved if the regulator requires less and keeps its requirements at a higher level. This leaves the business to adapt its own business model (and be held accountable as to whether the desired outcomes are achieved).


  We have some concerns over the accountability mechanisms of other parts of the regulatory structure, in particular the ombudsman. The ombudsman service is rightly independent of the regulator and has a fair degree of discretion in judging particular cases. But this does mean that there are occasions where a firm which complies with the rule book may still be found against by the ombudsman service which only has to take account of, rather than follow, the provisions of that rule book.

  In addition, decisions in individual cases can have very wide ramifications for the entire financial services sector. Accountability for these decisions needs to be a transparent for the ombudsman as for the regulator. The implications—including cost benefits implications—of particular decisions have to be properly analysed. This process is not adequately delivered by the legislation. The advantages of a cheap and relatively informal complaints handling system are apparent but the powers of the FOS need to be exercised with proper accountability.


  Accountability is something that is created by a state of mind as much as formal processes. The culture of a regulator will determine quite how accountable it behaves in practice to any of its stakeholder groups. An external party can do little to engender that culture beyond raising awareness of its importance.


  Issues of accountability are about to become even more complex. Many more regulatory initiatives are originating in Brussels. Their mechanisms for consultation and representation are opaque and random. We believe that the European Commission actively welcomes input from those affected by its decisions but it is often very difficult to ensure that these go to the right person in a timely fashion. We suggest that one of the biggest challenges in the next few years will be attempting to ensure that the European institutions and regulatory colleges deliver better and more consistent accountability to parliamentary institutions and to those affected by their decisions. If this does not happen, the impression of disillusion and dislocation will increase, to the detriment of good regulation.

Association of Independent Financial Advisers

March 2003

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