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FINANCIAL SERVICES AND MARKETS BILL: GOVERNMENT RESPONSE TO THE
REPORTS OF THE JOINT COMMITTEE ON FINANCIAL SERVICES AND MARKETS
PART 1: RESPONSE TO THE FIRST REPORT OF THE JOINT COMMITTEE
Contents Page
1. Introduction 2
2. Statutory objectives and principles 4
3. Scope 7
4. Accountability 10
5. Discipline and Enforcement 15
6. Market Abuse 19
7. The Ombudsman Scheme 21
8. Process of pre-legislative scrutiny 23
PART 2: RESPONSE TO THE SECOND REPORT OF THE JOINT COMMITTEE 24
Appendices
I Summary of conclusions and recommendations of
First Report
II FSA Board Responsibilities - A note by the non-executive directors
of the FSA
(C) Crown copyright reserved
PART 1: RESPONSE TO THE FIRST REPORT OF THE JOINT COMMITTEE
1. Introduction
The Government published in July 1998 for public consultation a
draft Financial Services and Markets Bill setting up a new regime
for financial services regulation under the Financial Services Authority
(FSA). In November 1998 it was announced that a Joint Committee
of both Houses would be set up to scrutinise the Bill. At the outset
of the Committee's inquiry the Treasury submitted on 5 March 1999
a Progress Report setting out responses to the very full and constructive
consultation process which had taken place. The Committee was able
to consider this Report and the earlier material alongside a wealth
of written and oral evidence from a wide variety of expert sources.
The Committee's report was published on 29 April.
The Government believes that the process of pre-legislative scrutiny
has been exceptionally useful. We are extremely grateful to Lord
Burns and the Committee for their hard work and for the thoroughness,
objectivity and rigour with which the inquiry was completed in the
limited time available. There is no doubt that the Bill, as introduced,
is better for the Committee's work. They have made a major contribution
to what is a major piece of legislation.
The financial services industry is vital to this country, not only
to those for whom it provides employment but to all those individuals
whose savings are looked after, and the firms in all sectors of
the economy who obtain vital funding from it. Many of the issues
which arise in relation to the Bill are complex and detailed - inevitably
so - and the Committee has made several quite specific recommendations.
At the same time the Government very much appreciates the way that
the Committee has kept in sight our overall goal - the creation
of a modern, effective financial services regulator, to ensure fair
and proportionate regulation of a vibrant, competitive and world
class industry. Further observations on the innovative pre-legislative
scrutiny process are in section 8 of this document.
The Government finds itself strongly in agreement with the great
majority of the Committee's conclusions, although in some cases
our proposed way forward is not identical to that recommended by
the Committee. A full reasoned response is set out in sections 2
to 7 of Part 1 of this report.
At the end of April it was proposed that the Committee extend the
period of its inquiry to look further into the question of the compatibility
of certain aspects of the Bill with the European Convention on Human
Rights (ECHR). The Government fully supported this proposal, which
led to a second, supplementary report published on 2 June. The Government's
response to that is Part 2 of this document.
The Financial Services and Markets Bill was introduced into the
House of Commons on 17 June. References to Parts and clauses of
the Bill in this document are to the Bill as introduced rather than
to the earlier consultation draft.
2. Statutory objectives and principles
The Government attaches great importance to the regulatory objectives
and principles of the FSA, which are set out in the Bill. These
will help to ensure that regulation is effective and appropriate
and that the FSA can be held accountable for the way in which its
functions are exercised. The Government welcomes the Committee's
support for the present structure and effect of the objectives and
principles (paragraphs 24 and 51 of the Committee's report) and
the recommendation that the FSA should not be given additional objectives
(paragraph 62). These conclusions have been reflected in the Bill
as introduced.
Consumer protection The Committee made three closely
related recommendations on the consumer protection objective. The
Government has responded to concerns about the possible negation
of consumer protection by the principle of caveat emptor (paragraph
37), and about the need for reference to the responsibility of firms
(paragraph 40) by inserting a new paragraph (c) in clause 5(2) of
the Bill. This clause now requires the FSA, in considering what
is the appropriate degree of protection, to take into account the
need that consumers may have for advice and accurate information.
Clause 5 of the Bill should be read as a whole and we believe that
this change both makes clear what it is reasonable for consumers
to expect, and also puts their responsibility for decisions in the
context of this expectation. Similarly, paragraph (c) helps to underline
the need for the FSA to recognise the different degrees of protection
appropriate to consumers in the wholesale and retail sectors, as
recommended by the Committee (paragraph 29). The Government continues
to believe however that there is a spectrum of types of customer
within these broad categories - for example some retail customers
are very vulnerable, others are much more experienced. It would
be unhelpful in terms of the FSA's fine-tuning of regulatory arrangements
to meet the needs of more and less vulnerable consumers if the drafting
of the legislation suggested that all "retail consumers" had the
same needs.
Market confidence Careful consideration has been given
to the Committee's recommendation that the market confidence objective
should be amended to refer to "maintaining confidence in the soundness
of the financial system" and to include a reference to collaboration
with the Treasury and the Bank of England (paragraph 45). Public
and market confidence in the financial system clearly requires confidence
in the soundness of the system as a whole. However, other aspects
are also relevant, notably maintaining confidence in the effective
prudential supervision of individual institutions. Singling out
one aspect could throw doubt on the FSA's role in this area and
narrow its remit. The Government strongly agrees with the Committee
that cooperation with the Bank of England and the Treasury is very
important; this is the subject of a published Memorandum of Understanding.
As pointed out in the Progress Report, the Government recognises
that various facets of the FSA's work will require cooperation with
a number of other bodies, the composition of which may change over
time, but believes that nothing would be gained, and flexibility
would be lost, were statutory provision to be made in the Bill.
The Government therefore believes that the Committee's concerns
in this area have already been met, without the need to amend the
Bill. We will, however, continue to reflect upon this issue.
FSA annual report The Government endorses the Committee's
recommendation that the FSA's annual report should address UK regulatory
burdens and compliance costs compared with other jurisdictions (paragraph
54) and progress in increasing public awareness of financial services
(paragraph 58). Paragraph 10 of Schedule 1 to the Bill stipulates
that the annual report should cover the discharge of its functions
and the extent to which, in the FSA's opinion, its regulatory objectives
have been met. These questions are clearly relevant to the FSA's
objectives and principles. This paragraph also includes a reserve
power for the Treasury to require the inclusion of particular matters.
While we believe that the Committee has identified some very important
elements, we do not regard it as necessary, or desirable as regards
future flexibility, for the legislation to prescribe in detail the
exact composition of the annual report. We regard this framework
as an adequate one to meet the Committee's concerns. It is understood
that the FSA intends to cover both consumer awareness initiatives
and comparative compliance costs amongst the matters covered in
its annual reports and that it will also report on the exercise
of its legislative functions, as recommended in the report of the
House of Lords Delegated Powers and Deregulation Committee. The
Joint Committee drew attention to the importance of including the
report of the FSA's auditors as part of the annual report (paragraph
111). This is the FSA's existing practice and we understand that
they intend to continue it. The Government has had detailed discussions
with the FSA about the proposed contents of its reports and understands
that a list will be published shortly. Against that background,
the Government currently has no plans to exercise the reserve power
in paragraph 10(1)(c) of Schedule 1 to the Bill to specify the coverage
of the annual report. A minor amendment has however been made in
the light of the Committee's concerns to paragraph 10(2)(b) to clarify
that this extends to requirements for the inclusion of other documents
within the report. If the FSA decided not to include in its annual
report the issues referred to by the Committee, the Government would
not hesitate to use its reserve powers accordingly. We believe that
the Committee's concerns have therefore been met.
3. Scope
The Bill allows the scope of regulated activities to be determined
by secondary legislation. This approach provides an important degree
of flexibility and the Government welcomes the fact that the Committee
expressed no specific concerns about it. The Government agrees with
the conclusion of the House of Lords Delegated Powers and Deregulation
Committee that the affirmative resolution procedure is appropriate
when extending the scope of both regulated activities (clause 20)
and the financial promotion prohibition (clause 19) and this is
now reflected in the Bill.
Mortgages Turning to the Joint Committee's specific conclusions,
the Government appreciates the reasons for the recommendation that
a decision be taken in principle to bring mortgage advice within
the remit of the FSA (paragraph 84). We also welcome the Committee's
recognition that the timetable for implementing this would have
to take account of the need to manage change, and of resource constraints.
The Government agrees that this is an important issue and believes
that a full public review is needed before decisions are taken.
The Treasury proposes to consult during the summer with a view to
making a decision in principle by the end of the year, before the
scope order under clause 20 is made. The views of the Committee
will be taken fully into account in arriving at a decision.
Long term care We also appreciate the thinking behind
the recommendation that long term care insurance be brought within
the remit of the FSA (paragraph 87). This is being considered in
the context of the Government's response to the recent report of
the Royal Commission on Long Term Care, which reached a similar
conclusion.
Cooperation The Government supports the Committee's suggestion
that the FSA should have arrangements for "signposting", to ensure
that consumers can be directed to the appropriate body if an activity
about which they are concerned is outside the FSA's remit (paragraph
89). We also welcome the Committee's support for the proposed approach
to handling enforcement cases in which other agencies have an interest
(paragraph 95).
The professions The Government welcomes the Committee's
support for the intention to ensure that future authorisation of
members of the Recognised Professional Bodies under the existing
legislation is not required unnecessarily (paragraph 70). One of
the key objectives in drafting the secondary legislation on the
scope of regulated activities is to minimise unnecessary authorisation,
to the extent that this can be done without jeopardising consumer
protection. The Treasury is currently considering responses to its
recent consultation document on regulated activities. Discussions
with the professions are expected to continue, including with the
Law Society of Scotland who have raised specific technical questions
about the effect on the Solicitors (Scotland) Act 1980 (paragraph
94) which are being considered. In parallel, the Government is aware
that the FSA is taking steps to ensure that those professionals
who do require FSA authorisation are subject to an appropriate and
cost-effective regulatory regime, and the FSA will be issuing a
consultation document shortly.
Lloyd's The Bill provides for a significant element of
oversight of Lloyd's by the FSA. As recommended by the Committee,
the Government has considered carefully whether it might use the
Bill to bring about amendments to the Lloyd's Acts (paragraph 92),
either directly or by taking a power to do so by order. The Government
supports City institutions' determination to develop to maintain
and enhance London's competitive position in increasingly global
financial markets. We welcome the contribution made by Lloyd's in
recent years to that overall objective, and recognise the determination
of the Council of Lloyd's to continue its reforms. However, our
considered view is that the changes which it has been proposed might
be made to the private Acts governing Lloyd's cover matters which
involve the way in which the Society is constituted as well as the
way it is regulated, and would affect the private relationships
between the Society, its members, agents and brokers. The Government
has concluded it would not be appropriate to take a power in this
Bill to change, by secondary legislation, those relationships.
New technology
The Government strongly agrees with the Joint Committee about the
impact of the changing nature and growth of communications on regulation
(paragraph 98). The new legislation, and in particular the regime
for financial promotion, is being designed with the need for flexibility
to cope with technological change in mind. The Treasury is consulting
on the approach to regulating financial promotion under clause 19
of the Bill. In the light of that, and of recent studies by for
example IOSCO(1) and the UK's Financial
Law Panel(2), the Government does
not believe that a further formal review is necessary at this stage.
4. Accountability
The Government welcomes the Joint Committee's support for a single
regulator (paragraph 102), for the structure of the FSA as a private
company limited by guarantee (paragraph 105), and for the measures
taken to strengthen its accountability in the light of public consultation
(paragraph 107). We appreciate also that the Committee does not
support giving the National Audit Office the right of access to
the FSA (paragraph 111) and the reasoning behind this.
Governance The Government does not accept the Committee's
recommendation that in the long term the posts of the FSA Chairman
and Chief Executive should be separated (paragraph 113). Under the
current arrangements, there is a full time Chairman and Chief Executive
and a non-executive Deputy Chairman. The Government is very happy
with these arrangements and does not intend to change them. It understands
the thinking behind the Committee's view that in the longer term
there may be other arrangements which could work. It is however
mindful of the fact that parallels with other models of corporate
governance are not exact. There is also a good case for a strong
line of direct accountability to Treasury Ministers from the senior
executive of the regulator. These views are shared by the non-executive
members of the FSA Board and a copy of a memorandum they have sent
to the Treasury is annexed to this document.
The Government agrees with the Committee's conclusion that it would
be anomalous to extend the role of the non-executive Board Members
to the oversight of the role of the Board as a whole (paragraph
117). We have considered the recommendation that their functions
in relation to efficiency, internal controls and remuneration should
be exercised in the form of an audit committee and a remuneration
committee. It is anticipated that audit and remuneration will be
important elements in the functions set out in paragraph 4(3) of
Schedule 1 to the Bill. There is however already scope within the
terms of the Bill for considerable flexibility in the way the work
of the committee is organised, because specific provision is made
in that paragraph for the formation of sub-committees to deal with
financial controls and with remuneration, and further legislative
provision is not needed to meet the Committee's suggestion.
The Government welcomes the Committee's agreement that the Treasury
should be responsible for the appointment of Board members (paragraph
115), and accepts the recommendation of the Committee that importance
should be attached to ensuring an appropriate balance in the membership
between consumer and practitioner experience (paragraph 118). The
Committee's recommendation does not require any change to the Bill.
The Government also agrees with the Committee (paragraph 122) that
transparency and fairness is important in the appointment of the
Chairman and executive Board members, just as it is in the case
of the non-executives. The Committee recommended that the Chairman
and executive appointees should be subject to confirmation hearings
(paragraph 122). The Government has considered the complex issue
of giving Select Committees a role in confirming appointments to
the FSA, but does not consider that an extended role for Parliament
would sit comfortably with the principle of Ministerial accountability
for appointments endorsed by the Nolan Committee for Standards in
Public Life in its first report. It is however proposed that all
future Board appointments be based on Nolan standards. In addition
the Government considers that, were a Parliamentary Committee to
decide to call newly appointed executive members of the FSA Board
to discuss how they intend to carry out their functions, this could
be a helpful part of the overall process of scrutiny.
Parliamentary accountability The Government welcomes the
Joint Committee's proposal that a Parliamentary Committee should
review the FSA's annual report (paragraph 121). The House of Lords
Committee on Delegated Powers and Deregulation also drew attention
to this in relation to the exercise of the FSA's rule making powers.
The Joint Committee's own inquiry has amply illustrated the value
of Parliamentary Committees taking evidence from a broad section
of consumers and practitioners. The Government would also regard
it as a helpful development if the relevant Committee were to decide
to scrutinise a wider range of relevant material, for example the
reports of the Ombudsman and Compensation Scheme and publications
of the Consumer and Practitioner Panels.
Consumers and practitioners We welcome the careful consideration
which the Committee has given to the role of the Consumer and Practitioner
Panels. The Government's general approach in this area has been
to require the FSA to establish and maintain the Panels, whilst
avoiding detailed specification in the Bill to allow flexibility
in the way arrangements develop over time.
Clauses 7 to 9 of the Bill make clear that the Panels are to be
an important and integral part of the FSA's responsibility to carry
out effective consultation. The Government does not therefore propose
to accept the Joint Committee's specific suggestion that the Bill
be amended to require the FSA to consult the Panels before going
out to wider consultation (paragraph 133), although it seems that
at least in some cases that could be valuable. Similarly, the Government
does not propose that the FSA should be expressly required to report
any difference of view between it and the Panels. Instead, clauses
8(4) and 9(4) of the Bill generally require the FSA to have regard
to any representations from the Panels. The Government expects the
Panels to wish to give appropriate publicity to their work and would
see considerable value in their producing periodic reports of their
activities, so as to provide adequate opportunity to inform the
public about the role of the Panels and to promote debate on a wide
range of issues. These might well include, as suggested by the Committee,
the adequacy of funding and the way that effective use has been
made of resources (paragraph 134).
The Government has carefully considered the Committee's proposals
that the Chairmen of the Panels should be Treasury appointments
(paragraph 127 and 133). We believe the primary responsibility should
continue to lie with the FSA to establish arrangements for consulting
on its policies and procedures. On the other hand we recognise the
validity of the Committee's view that some element of external oversight
in their appointment may help to provide assurance as to the independence
of their voice. We therefore intend to meet the Committee's concern
by providing in the Bill for the appointment and removal of the
Chairmen by the FSA to be subject to Treasury approval. This is
consistent with the arrangements for the Chairmen of the Ombudsman
and Compensation Scheme Boards.
Immunity The Government welcomes the Committee's support
(paragraph 139) for the proposal that the FSA and its staff should
be immune from suit for damages where they have acted in good faith,
subject to there being a strengthened procedure for complaints against
the FSA (see below). The Government has also noted the Committee's
concern about the ECHR (paragraph 141). Our considered view is that
the provisions for immunity in paragraph 19 of Schedule 1 to the
Bill are compatible with the ECHR. Immunity does not extend to actions
in bad faith by the FSA or its staff, and following the enactment
of the Human Rights Act the provisions have been amended to ensure
they do not prevent an award of damages made in respect of action
which was unlawful under section 6(1) of that Act.
The Committee recommends that the immunity of Recognised Investment
Exchanges should be extended to actions by non-members as well as
members. We understand the reasons for this and also appreciate
why the Committee thinks this should be subject to a similar proviso
that the exchanges have adequate complaints procedures (paragraph
140). The Treasury therefore proposes to pursue this with the exchanges
before a final decision is taken.
Investigation of Complaints The Government recognises
the strength of the arguments that arrangements for the investigation
of complaints should be effective and seen to be sufficiently independent
from the FSA. We have therefore decided to make further improvements
to Schedule 1 to the Bill, broadly in line with the Committee's
recommendations (paragraph 146). The FSA will be required to maintain
on a continuing basis an independent investigator, who must have
the means to conduct an investigation of complaints referred to
him by the FSA. In addition, the FSA will be required to inform
the investigator of the conclusions of any internal investigations
and any decisions not to pursue a complaint. He will have the discretion
to pursue these matters where in his judgement there is a case for
doing so. We agree with the Committee that it would be advantageous
for the appointment and removal of the investigator to be subject
to Government approval, although this is more obviously a role for
the Treasury than the Lord Chancellor, given its general Departmental
responsibility for financial services regulation. The arrangements
made by the FSA could include an annual report by the investigator
on investigations carried out. This could include any matters he
wishes to have brought to the public's attention regarding the extent
of cooperation by the FSA, provision of resources and so on.
As requested by the Joint Committee, the Government has given consideration
to whether the investigator should be able to award compensation
(paragraph 146). This is not a feature of the existing legislation,
a fact which does not appear to have caused any specific difficulties.
It is also helpful to see this issue in the broader context of protections
provided by the legislation. Consumers will have access to the Ombudsman
or, in the case of a default on an authorised firms obligations,
the Compensation Scheme. Those regulated by the FSA will be able
to refer any enforcement decisions against them to the independent
Tribunal, which will have the power to examine the case and to award
costs against the FSA. The Government sees the (enhanced) role of
the complaints investigator as being primarily to ensure that any
alleged shortcomings can be investigated in a transparent way, not
as a route to additional recompense for firms and consumers. The
Government does not therefore believe that a convincing case for
his being able to award compensation has yet been made out.
5. Discipline and Enforcement
Enforcement procedures The Government welcomes the Committee's
broad support for the Tribunal and the pre-Tribunal stage of the
enforcement procedures in the Bill (paragraph 199). There was a
useful opportunity during the Committee's oral hearings for the
Treasury to clarify these procedures and amendments have since been
made to the language of the Bill to ensure that it fully reflects
what is intended. In response to the Committee's recommendation
(paragraph 174), the Government confirms its view that these procedures
are fully compatible with the ECHR. This matter is also dealt with
in the Committee's second report and the Government's response is
in Section 2 of Part 2 to this document. The Government's response
to the recommendation on use of compelled evidence (paragraph 205)
was covered in a further memorandum of 14 May and the Economic Secretary
to the Treasury's oral evidence to the Committee on 19 May.
The Government has considered very carefully the terms of the Committee's
recommendation (paragraph 201) that the Bill should be amended to
require the FSA to set up an Enforcement Committee or some equivalent
mechanism to separate the functions of investigation and enforcement.
The Government agrees it is very important to ensure that the FSA's
internal, administrative procedures are fair and transparent. We
recognise that the arrangements proposed by the FSA in December
1998 and elaborated in evidence to the Committee provide in particular
an effective degree of separation between those investigating or
recommending the institution of disciplinary proceedings and those
responsible for decisions about whether to exercise the disciplinary
powers. On the other hand, decisions about how the FSA exercises
its decision making processes and administration procedures are
properly a matter for its Board. As the reference in the Committee's
recommendation to equivalent mechanisms rightly recognises, this
is also an area where future practice could evolve. We therefore
propose to meet the Committee's concern by amending the Bill to
add clause 340(2) which will require the FSA to take account of
the need for appropriate separation, by ensuring that a relevant
decision is taken by a person not directly involved in establishing
the evidence on which that decision is based. This approach also
appears to meet the concerns of the Committee on Delegated Powers
and Deregulation about the need for an element of statutory separation.
The Government has considered the recommendation that the Chairman
of the Enforcement Committee (or equivalent) should have appropriate
legal qualifications and be appointed by the Lord Chancellor. Whilst
we appreciate the thinking behind this, providing for it in the
Bill would parallel and duplicate the existing requirements in relation
to the Tribunal and could blur the distinction between the two stages.
We therefore do not consider that putting such a requirement in
the Bill is necessary or appropriate, given the distinction between
the FSA's administrative and the Tribunal's adjudicative processes,
although it may well be that the FSA would consider it appropriate
in the light of the Committee's recommendation to give a key role
to a person who was a distinguished lawyer and/or a practitioner.
Similar considerations apply to the specific suggestions regarding
voting procedures and the right to make oral representations.
The Government has also considered the recommendation that all final
decisions should be made public, save in exceptional circumstances.
In many cases it will certainly be desirable in the interests of
transparency for decisions to be made public. On the other hand,
there are various circumstances in which it might be inappropriate
or unfair for a decision to be published. One example would be where
announcing a decision not to proceed with disciplinary action against
a person for lack of evidence could nevertheless damage their reputation.
Another would be where there is a broader public interest in the
action - for instance in relation to a measure to prevent the collapse
of a major institution - remaining confidential. The Government
has therefore decided to respond to the Committee's concerns by
requiring in the Bill that decisions should normally be made public.
Costs and Fines The Government accepts the logic of the
Committee's concern (paragraph 218) that those subject to FSA enforcement
action might be deterred by the prospect of excessive costs. The
ability to award costs, whether for vexatious behaviour or more
generally, would also appear not to be consistent with the administrative
nature of the FSA's proceedings. The Government therefore accepts
the Committee's recommendation that the Bill should continue to
require both sides to bear their own costs for FSA disciplinary
processes and that the FSA should not be permitted to include its
own costs in the amount of any fine. On the other hand, it is appropriate
that the Tribunal, as a judicial body responsible for considering
how the interests of justice are best served, should have a broad
discretion to award costs, and not just in frivolous or vexatious
cases.
The Government also welcomes the Committee's concerns that there
should be seen to be no incentives, real or apparent, for the FSA
to maximise fine income for its own financial benefit, and accepts
the recommendation that fine income should be rebated gross to the
regulated community (paragraph 226). The requirements for the FSA
to carry out public consultation on its fining policy now include,
in paragraph 16 of Schedule 1, consulting on appropriate arrangements
for rebating its fine income. These could include arrangements to
even out volatility, as recommended by the Committee (paragraph
227). The Government accepts the Committee's recommendation that
the Bill should not specify an upper limit on the fines which the
FSA can impose (paragraph 229).
Rights of action The Government has considered the Committee's
recommendation (paragraph 161) that it should justify or amend the
FSA power to define private persons for the purpose of determining
rights of action for breaches of rules. This recommendation also
reflects concerns expressed by the House of Lords Committee on Delegated
Powers and Deregulation. We recognise the strength of both Committees'
views and accept the recommendation to amend clauses 68(2) and 120(5)
so that this power is exercisable by the Treasury.
Legal aid Paragraph 3.3 of the Government's response
to the Committee's Second Report and our earlier evidence address
the issues raised by the Committee's views on the availability of
legal aid in proceedings before the Tribunal, so far as necessary
to satisfy the ECHR. The Government understands the Committee's
concern about the position of individuals although no specific recommendation
is made (paragraph 220).
Pre-clearance, guidance and waivers
The Government has considered very carefully the Committee's specific
proposals that enhanced evidential status should be given to FSA
non-actionable rules and to codes of practice for approved persons
performing regulated activities for authorised firms (paragraph
247), and the Committee's suggestions about the form that this status
might take (paragraph 248).
The Government agrees with the Committee that non-actionable rules
or codes can be important in underpinning higher level rules, and
in complementing more detailed actionable rules. Guidance, both
informal and formal, also has an important role in improving certainty.
The Government believes that in considering disciplinary action
the FSA will need fully to consider compliance with any relevant
rules or guidance it has issued. The combination of high level,
detailed and evidential rules and of guidance however gives the
FSA considerable flexibility which could be undermined by expressly
changing the status of any of them, and our current view is that
changes should not be made.
The arguments in relation to the status of the evidential code for
approved persons under clause 61 may be slightly different. Compliance
with this code will be the main way of assessing compliance with
the relevant high level statements of principle. There are therefore
more obvious parallels with the code of market conduct, which is
to be given an enhanced status under the Bill (see paragraph 6.3
of this response). We will give further consideration to the status
of the clause 61 code in the light of the FSA's forthcoming consultation
on a draft of it.
The Committee on Delegated Powers and Deregulation recommended that
those seeking additional certainty should be entitled to seek advance
rulings which enable them to know in advance of taking any particular
action that it does not contravene the rules. On the other hand
the Joint Committee recognised the FSA's intention to make active
use in future of its guidance and waiver powers and did not recommend
that they be required to do so on demand (paragraph 246). The Government
agrees with the Joint Committee's view that this would be an unreasonable
burden, and a restriction on the FSA's freedom of action.
The Government welcomes the Committee's recommendation to the FSA
regarding the need to attract appropriately qualified staff (paragraph
253). We agree that this is a very important objective, and look
to the FSA to respond accordingly.
6. Market Abuse
The Government welcomes the Committee's acceptance in principle
of the need for a market abuse regime that complements the existing
criminal offences (paragraph 256). The Treasury's memorandum of
14 May and the Economic Secretary's oral evidence to the Committee
on 19 May set out further details of the Government's proposals.
The Committee concluded that a clearer statutory definition of market
abuse than the one in clause 95 as drafted is required (paragraph
263). This view is reiterated in the Committee's Second Report.
The Government's response is set out in section 3 of Part 2 to this
document.
The Government agrees with the conclusion that greater certainty
should be imported into the regime by a safe harbour for behaviour
that complies with the FSA Code of Market Conduct (paragraph 270).
This issue was also highlighted in the submission from the Committee
on Delegated Powers and Deregulation. We have therefore decided
that if a person undertakes any behaviour which the code specifically
states does not amount to market abuse, this should be an absolute
defence. The Committee was concerned that this protection should
not go too far and initially recommended that there should not be
a safe harbour where the FSA proves that the person concerned intended
to engage in market abuse or exhibited recklessness or possibly
negligence about the abusive effect of the behaviour. We understand
the reasons for this concern but believe that the qualification
is not necessary and that it could undermine the greater certainty
which other improvements are designed to give. It is not needed
to give protection to novel forms of abuse on which the Code is
silent, since in these circumstances the FSA will still be able
to take action for breach of Clause 95. It is possible - in theory
at least - that novel forms of unacceptable behaviour might emerge
which are expressly permitted under the Code. It is difficult however
in practice to see how that might arise, and if it happened the
FSA could be expected to amend the Code.
The Government welcomes the opportunity, as recommended, to consider
the case for giving guidance on the market abuse regime the same
evidential status as the Code (paragraph 275). We support the thinking
which underlies this suggestion, whilst recognising the reservations
expressed by the Committee in putting it forward. We have concluded
that it is not necessary and could indeed be unhelpful to the objective
of greater certainty which we share with the Committee. Guidance
is intended to provide additional material below the level of the
Code which allows the FSA to respond flexibly and rapidly to queries
and concerns. In cases where it is thought necessary to give such
material greater evidential weight it would be possible to incorporate
it in the Code itself.
The Government is also exploring possible ways to clarify the restriction
of the scope of the regime to market participants, so as to introduce
an additional element of certainty into the regime.
The Government's response regarding the likely ECHR characterisation
of the Code and necessary safeguards (paragraph 280) was dealt with
in detail in the Treasury's evidence in May.
7. The Ombudsman Scheme
The Government fully understands the Committee's concerns (paragraph
295) about the need to reconcile compliance with Article 6 of the
ECHR with the informality and flexibility that are the hallmarks
of an ombudsman approach. We believe that the Bill, which provides
expressly in clause 197 for "a scheme under which certain disputes
.... may be resolved quickly and with minimum formality", allows
a suitable framework for this. The Ombudsman Scheme must itself
be framed in a manner compatible with the Human Rights Act. The
Government welcomes the assistance given to the FSA by the existing
ombudsmen in helping to design a scheme with these characteristics.
The Committee's welcome for the FSA's approach to establishing the
scope of the scheme is appreciated (paragraph 289). The Government
also recognises the Committee's constructive support for the proposals
of the insurance industry that membership of the Ombudsman Scheme
should be a precondition for membership of the General Insurance
Standards Council (paragraph 88).
The Committee has rightly pointed out that the Scheme must have
sufficient funds to allow it properly to carry out its functions
and recommends that it should be required to report annually on
the adequacy of its budget (paragraph 291). Paragraph 10 of Schedule
14 to the Bill gives the responsibility for approving a budget to
the FSA, in line with its overall responsibility for maintaining
an effective complaints handling scheme. The scheme operator's annual
report under paragraph 8 of Schedule 14 on the discharge of its
functions could include material about resources and the use to
which they have been put. As mentioned in paragraph 4.5 above, the
Government would regard it as helpful for Parliament to take an
interest in these reports in connection with its broader scrutiny
of the regulatory system.
The Committee also recommends that the scheme should not be available
to persons who are themselves carrying on regulated business (paragraph
296). Rules on eligible claimants are for the FSA, and the Bill
allows it to include persons who are not individuals. The Government
believes that complaints handling arrangements should in principle
be available for some classes of business, for example small family
firms, who may in practice be in a position close to that of the
individual consumer. We agree with the Committee that resolving
complaints between professional counterparties does not appear to
be a natural function for the kind of arrangements envisaged. The
Government has therefore decided in the light of the Committee's
recommendation to amend the Bill and clause 198(7)(b) now makes
clear that authorised persons will not normally be eligible.
8. Process of pre-legislative scrutiny
The Government believes that the Joint Committee's valuable work
has strongly demonstrated the value of pre-legislative scrutiny
and is appreciative of the Committee's view in the context of the
Second Report, on the ECHR aspects, that "the Government's willingness
to listen and respond to argument on these matters ... seems to
us a powerful vindication of pre-legislative scrutiny" (Second Report,
paragraph 4).
The Committee specifically recommend certain procedural improvements
when similar Committees are set up in future (paragraph 11). The
Government is grateful for the hard work put in by the Committee
to complete its scrutiny of the draft Bill within the time available.
We will seek to establish committees for pre-legislative scrutiny
of draft bills as quickly as possible, but this does involve consultation
with other parties in both Houses. The Committee's recommendations
on these points will influence how future bills are handled. The
Leader of the House of Commons has invited the Procedure Committee,
in consultation with the Procedure Committee in the House of Lords,
to examine whether the arrangement for messages between the two
Houses on the appointment of joint committees can be updated.
The Committee also recommended that in responding to its Report
the Government should respond to points made in the helpful submission
of the Delegated Powers and Deregulation Committee (paragraph 13).
We have been more than happy to do so, as indicated in sections
2.4, 3.1, 4.5, 5.2, 5.7, 5.12 and 6.3 of this Response.
Finally, the Committee recommended that the two Houses should establish
a specialist Human Rights Committee as soon as possible (paragraph
16). The Government announced on 14 December 1998 that a joint committee
will be set up before the Human Rights Act 1998 comes fully into
force so that it will have time to prepare its work. The Home Secretary
announced on 18 May that the Act will come fully into force on 2
October 2000. No decision has yet been made about when both Houses
will be asked to approve motions appointing the joint committee.
HM TREASURY
17 JUNE 1999
PART 2: RESPONSE TO THE SECOND REPORT OF THE JOINT COMMITTEE
1. Introduction
In its first report the Joint Committee raised concerns about the
compatibility of parts of the draft Financial Services and Markets
Bill with the European Convention on Human Rights. The Committee
was asked by both Houses to produce a supplementary report covering
the compatibility of the market abuse, disciplinary and approved
persons regimes with the Convention requirements. The Committee
published its second report on 2 June.
The Government welcomes the Joint Committee's second report. The
issues which the Committee considered in preparing it are highly
complex and the Government is grateful to the Committee for the
thoughtful analysis it has brought to bear on these difficult legal
questions. The Government was pleased to be able to clarify its
position on these matters in the course of the extended inquiry
and welcomes the Committee's endorsement of the proposed changes
to the market abuse regime. The Government is concerned that regulation
should be as effective as possible while fully protective of human
rights as enshrined in the Convention and the Human Rights Act.
2. Discipline and enforcement
It will of course be necessary for the disciplinary regime under
the Bill to be compatible with the ECHR. The Government is however
of the firm view that the regimes for authorised and approved persons
under Parts V and XIII (formerly XII) of the Bill are compatible
with the Convention and that the Bill does not need to provide for
any additional protection. The reasons for this were set out in
the draft memorandum submitted to the Committee and in the oral
evidence presented by the Economic Secretary to the Treasury and
Counsel retained to advise the Treasury on these issues, Sydney
Kentridge QC and James Eadie.
The Government has considered carefully the alternatives which the
Committee put forward for further thought on possible changes to
the disciplinary regime (paragraphs 16 and 17 of the report). These
are that statutory provision should be made distinguishing between
different classes of disciplinary case or providing for the FSA
on its own initiative to apply criminal safeguards. However, given
our firm view on the compatibility of the disciplinary regime with
the Convention, we have concluded that neither change is necessary.
The Government has also considered carefully whether a provision
requiring the FSA to have regard to the seriousness of the mischief
and to whether the offender is an individual or a firm would be
helpful (paragraph 18). The Government does not agree that these
factors are relevant to determining whether the sanction is a criminal
one, either for UK or ECHR purposes. The Bill currently requires
the FSA to publish its policy on factors determining the amount
of fines. We agree with the Committee that it would be reasonable
for them to take factors of this kind into account. We are therefore
considering how best to meet the Committee's recommendation.
3. Market abuse
The Government welcomes the Committee's conclusion that changes
announced to the Part VII (formerly VI) regime meet many of the
points in its First Report. We recognise the remaining concern (paragraph
29) about the drafting of clause 95, which reflects the earlier
conclusion in the Committee's First Report (paragraph 263). We welcome
the Committee's recognition of the need to reconcile breadth with
clarity. Clause 95 is deliberately drafted quite widely in order
to make evasion difficult. Nonetheless our view is that the provision
does also offer clarity. The underlying concept of market abuse
is not a new one. Market participants have a common core understanding
of the kinds of behaviour which constitute abuse of the markets
as a result of well understood market conventions and expectations
and particular regulatory cases. The new regime builds on this.
The Government acknowledges that, as with any new legislation of
this type, people are anxious to know in more detail the kinds of
behaviour which might be caught. Rather than rely entirely on the
development of case law to provide greater certainty, the legislation
requires the FSA to produce a code of conduct setting out the kinds
of behaviour which will be acceptable and which will not. In the
light of consultation and the Committee's views the Government has
decided that if a person undertakes any behaviour which the code
specifically states does not amount to market abuse, this will be
a complete defence. In addition the Government is considering ways
of introducing protections into the legislation which will ensure
that where people take due care to ensure that their behaviour is
not abusive, they will not be proceeded against under the new provisions.
The Government believes that, taken as a whole, the regime provides
a high level of clarity.
As the Committee's report acknowledges (paragraph 21), the Government
is considering the details of arrangements to make available subsidised
legal assistance in cases involving the imposition of penalties
for market abuse. These will be announced in due course.
H M TREASURY
17 JUNE 1999
APPENDIX I
THE JOINT COMMITTEE'S SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS
Statutory objectives and principles
We support the principle that the Bill should set statutory objectives
and principles for the FSA, to inform its behaviour as it seeks to
ensure markets of integrity, and to provide a yardstick for accountability.
We agree that these should be set at a high level of generality, so
as to be adaptable to changing circumstances. We agree that they should
apply at the level of general policy and principles, rather than applying
directly to every single act and decision of the FSA. We agree that
they should not be ranked (paragraph 24).
For the purposes of the consumer protection objective, we recommend
that the Bill should require the FSA to recognise the different regulatory
needs of the wholesale and retail industries (paragraph 29).
We recommend that the principle of caveat emptor should
feature in the Bill; but that it should be redrafted in such a way
that it could not be used to negate the consumer protection objective
and excuse exploitation of sections of the general public (paragraph
37).
We recommend that the Bill should require the FSA, in considering
under Clause 5 what degree of consumer protection may be appropriate,
to have regard to the responsibility of authorised persons (i.e. financial
service businesses) to make full and prominent disclosure of the main
characteristics of a financial service which might affect consumer
choice (paragraph 40).
We recommend that the market confidence objective should refer to
"maintaining confidence in the soundness of the financial
system", and should be expanded to include a reference to the management
of systemic risk, in collaboration with the Treasury and the Bank
of England (paragraph 45).
The Committee is content that competition and competitiveness should
remain among the principles to which the FSA is required to have regard,
rather than being turned into objectives (paragraph 51).
We recommend that the FSA's annual report should address the regulatory
burdens and compliance costs of UK markets compared with overseas
jurisdictions (paragraph 54).
We welcome the public awareness objective. It is important to be
ambitious about bringing a wider understanding of financial services
to the public. We recommend that initiatives taken to achieve this
objective, and the criteria used to assess progress, should feature
in the FSA's annual report (paragraph 58).
We recommend that the FSA should not be given additional objectives
(paragraph 62).
Scope
We support the Government's intention to ensure that authorisation
of solicitors and other professionals is not required unnecessarily;
we urge the Treasury to ensure that its intentions are carried out
(paragraph 70).
We recommend that a decision in principle be taken now to bring mortgage
advice within the scope of the FSA. We recognise that the timetable
for implementation will have to take into account the need to manage
the appropriate transfer from a voluntary code to statutory regulation
and the availability of regulatory resources (paragraph 84).
We agree that long-term care insurance should be included in the
remit of the FSA. For the most part this would involve extending the
product coverage within the regulated sector. We agree that a decision
in principle should be taken and that it should be implemented without
delay (paragraph 87).
We welcome the work done towards creating a General Insurance Standards
Council (GISC) and the proposals of the insurance industry for this
standards body to make membership of the Financial Services Ombudsman
Scheme a precondition of GISC membership (paragraph 88).
We expect the FSA to put in place a system of signposting to ensure
that consumers concerned about any financial service are directed
to the appropriate body if an activity about which they are concerned
does not come within its remit (paragraph 89).
We recommend that the Treasury give active consideration, before
introducing the Bill, to the proposal to give them power to amend
the Lloyd's Acts by secondary legislation (paragraph 92).
We invite the Government to indicate how it intends to ensure that
Scottish solicitors, in common with members of the other professions,
are not faced with unnecessary regulatory overlap (paragraph 94).
We consider the FSA's approach to the handling of cases which might
also interest other agencies to be sensible and workable (paragraph
95).
The changing nature and growth of communications pose challenges
to the regulatory authorities which seem likely only to increase in
the future. We recommend that the Government should carry out a review
of these likely challenges and ways of dealing with them (paragraph
98).
Accountability
We support the proposal for a single regulator for all UK financial
markets (paragraph 102).
We are satisfied that the FSA's structure as a private company limited
by guarantee provides a greater degree of managerial flexibility and
independence while leaving scope for an appropriate system of accountability
(paragraph 105).
We welcome the steps which have been taken so far by the Government
to increase the FSA's accountability (paragraph 107).
We do not support giving the National Audit Office the right to access
to the FSA but note that under the proposed arrangements it is open
to the Treasury to appoint the NAO to undertake an independent report
into the efficiency and economy of the FSA's operations. In addition
it is important that the report of the FSA's auditors should be included
in the FSA's annual report to Parliament (paragraph 111).
In the longer term we recommend that the posts of FSA Chief Executive
and Chairman should be separated and that a non-executive Chairman
should be appointed (paragraph 113).
We are content for members of the FSA Board to be appointed by the
Treasury (paragraph 115).
We are content with the special role of the non-executive members
of the FSA Board in relation to efficiency, internal controls and
remuneration but we would prefer them to be organised in the form
of an audit committee and a remuneration committee. We would not want
to extend their role to other aspects of performance as it would be
anomalous for the non-executive membership of the Board to monitor
the performance of a Board of which they are the larger part (paragraph
117).
We welcome the fact that the members of the FSA Board have been,
and will continue to be, appointed in accordance with the Nolan principles.
We agree that such appointments should be made on the basis of relevant
experience and personal qualities and that seats should not therefore
be reserved for representatives of particular interest groups. We
would, however, stress, the importance of ensuring that the Board
maintains an appropriate balance of membership between consumer and
practitioner experience (paragraph 118).
Proper Parliamentary accountability is essential. We believe that
this can best be achieved by asking a Parliamentary Committee to review
the FSA's annual report and to take regular evidence from a broad
section of consumers and practitioners (paragraph 121).
Given the use of the Nolan procedures for the appointment of non-executive
members of the FSA Board we do not consider it would be appropriate
for them to be the subject of confirmation hearings. We recommend,
however, that the Chairman and executive appointees to the Board should
be subject to confirmation hearings by a Parliamentary Committee (paragraph
122).
We recommend that a requirement that the Chairman of the Consumer
Panel be appointed by the Treasury after consultation with the FSA
be included in the Bill (paragraph 127).
We recommend that the Government consider including in the Bill a
requirement that before proposing new, or revisions to existing, policies
and/or associated principles or rules, which could have a material
impact on regulated firms, the FSA will consult the Practitioner Panel.
Where it decides not to follow any formal guidance offered by the
Practitioner Panel, the FSA will report its reasons for so deciding
to the Practitioner Panel and in the FSA's Annual Report. We also
recommend that a requirement that the Chairman of the Practitioner
Panel be appointed by the Treasury after consultation with the FSA
be included in the Bill (paragraph 133).
We believe it is essential that both the Consumer and the Practitioner
Panels should have sufficient funds to allow them properly to carry
out their functions. We recommend that the Panels should be required
to report annually on the adequacy of their budgets. We hope that
the Parliamentary Committee which takes evidence on the FSA's report
will, as part of its examination, consider whether the Panels are
properly funded (paragraph 134).
We consider that the proposals for immunity for the FSA are appropriate,
provided that the complaints procedure is strengthened as we recommend
(paragraph 139).
We recommend that the immunity of exchanges should extend to actions
by non-members as well as members, provided again that there is an
adequate complaints procedure in place (paragraph 140).
It has been suggested that the FSA's proposed immunity may prove
incompatible with the ECHR. It would be highly undesirable for the
FSA to set to work on an assumption of immunity which later turned
out to be mistaken. We therefore recommend that the Government should
address this issue with the utmost urgency, and should publish a response
on this point as soon as possible (paragraph 141).
The appointment of the FSA complaints investigator should require
the approval of the Lord Chancellor (with appropriate protection for
the Scottish interest) (paragraph 146).
The investigator should have a continuing existence, with adequate
resources, and should be able to launch investigations into complaints
received directly as well as those referred by the FSA itself (paragraph
146).
The Government should give serious consideration to whether the investigator
should be able to award compensation to businesses or their employees
damaged by FSA maladministration, and if so, who should pay. If the
investigator is not to have this power, the FSA should consider whether
it should be its policy to give such compensation ex gratia
if the investigator so recommends (paragraph 146).
Discipline and enforcement
We accept that there is a good reason for a power to define "private
person"; but we are persuaded by the constitutional argument for not
giving this discretion to the FSA. We therefore invite the Government
to justify this provision or to amend it (paragraph 161).
We recommend that the Government should publish, as soon as possible,
its reasoned view as to what ECHR standards will apply to FSA disciplinary
proceedings, and its reasons for believing that the Bill will meet
those standards (paragraph 174).
The disciplinary process is an area of the Treasury's original proposals
which has given rise to great concern, and we commend both them and
the FSA for responding to this concern and clarifying their thinking
in this area. The Treasury's proposals in the Progress Report regarding
the Tribunal are crucial, and are now broadly satisfactory. Likewise
we are broadly satisfied with the latest proposals for the pre-Tribunal
stage (paragraph 199).
We recommend that the Bill should be amended to require the following:
(a) The FSA should set up an Enforcement Committee, or some equivalent
mechanism to separate the functions of investigation and enforcement.
(b) The Chairman of the Enforcement Committee should have appropriate
legal qualifications.
(c) The appointment of the Chairman of the Enforcement Committee
by the FSA should be subject to approval by the Lord Chancellor (with
appropriate protection for the Scottish interest).
(d) The Enforcement Committee should give the defendant the opportunity
of making oral representations before issuing a decision notice.
(e) The Enforcement Committee should reach decisions by majority
of all the members involved, rather than by the Chairman's decision
alone.
(f) In the interests of public confidence, all final decisions (i.e.
decisions which are subject to no further appeal) should be made public,
save in exceptional circumstances which would require to be justified
(paragraph 201).
The question how far the FSA Enforcement Committee or the Tribunal
may be shown evidence obtained by compulsion is better resolved by
Ministers and Parliament before enactment, rather than afterwards
by the courts; we therefore look forward to seeing what the Government
say about it in their reasoned response (paragraph 205).
We recommend that:
(a) At the FSA Enforcement Committee stage, each side should bear
its own costs, save that the Committee should be able to award costs
against the defendant or the FSA if they have behaved frivolously,
vexatiously or unreasonably.
(b) The FSA should be expressly prohibited from including its own
costs in the amount of any fine.
(c) The Treasury should consider whether the Tribunal's power to
award costs either way should be restricted to cases of frivolous,
vexatious or unreasonable behaviour.
(d) Legal aid should be available at the Tribunal stage, so far
as necessary to satisfy the ECHR (paragraph 218).
With regard to the position of individuals implicated in proceedings
between the FSA and their employer, we make no recommendation for
amendment to the draft Bill, beyond our recommendation above for legal
aid at the Tribunal. But we draw attention to the issue, which might
become relevant in the future (paragraph 220).
We are content that fine income should go to the FSA. However we
recommend that it should be returned gross to the regulated community
as a discount on fees, with no offset for enforcement costs, in order
to give the FSA the least possible interest in maximising fine income
(paragraph 226). To avoid excessive fluctuations in fees, the discount
could be spread over a period, perhaps 3 years (paragraph 227).
We have considered the case for setting an upper limit on the fines
which the FSA can impose; we consider it better that there should
be no such limit (paragraph 229).
We recommend that the following should be given enhanced evidential
status:
(a) FSA non-actionable rules, in respect of statutory requirements
and FSA actionable rules, including rules expressed as "principles";
(b) Codes of practice, in respect of principles of conduct for approved
persons (paragraph 247).
The enhanced status which we have in mind is as follows. When the
FSA or any other authority or person pursues an alleged breach of
a statutory requirement, actionable rule or principle of conduct,
the defendant may assert that he has complied with an underpinning
non-actionable rule or code of practice. Where the regulator cannot
disprove this, it should be required to prove either intent to breach
the requirement, actionable rule or principle, or recklessness or
possibly negligence as to whether it was breached (paragraph 248).
It will be important for the FSA to attract appropriately qualified
staff; this means that salaries need to be competitive. There is also
merit in practitioners with up-to-date experience of trading in the
regulated industries being seconded to the FSA, so as to bring that
experience to bear directly on the regulatory process (paragraph 253).
Market abuse
We accept in principle the need for a market abuse regime that complements
the existing criminal offences (paragraph 256).
We are persuaded that a clearer statutory definition of market abuse
than the one in Clause 56 as drafted is required (paragraph 263).
We recommend that the draft Bill should provide a safe harbour for
behaviour that complies with the FSA Code of Market Conduct except
where the FSA proves that the person responsible for it intended to
engage in market abuse or exhibited recklessness or possibly negligence
about the abusive effect of the behaviour (paragraph 270).
We recommend that the Treasury should consider the case for giving
FSA guidance on the market abuse regime the same evidential status
as the FSA Code of Market Conduct (paragraph 275).
We consider that there is a compelling case for the Government to
respond to the concern that the market abuse regime is criminal in
substance in ECHR terms and that the necessary safeguards do not appear
in the Bill as drafted (paragraph 280).
Ombudsman
We welcome the assurance that the FSA does not intend to apply cost
benefit analysis as to whether the Financial Services Ombudsman Scheme
should apply to an activity in a narrow (purely accounting) way, but,
as with cost benefit analysis elsewhere, will take account of the
objectives of the Ombudsman Scheme (paragraph 289).
We recommend that the Ombudsman Scheme should be required to report
annually to Parliament on the adequacy of its budget. We hope that
the Parliamentary Committee which takes evidence on the FSA's report
will, as part of its examination, consider whether the Financial Services
Ombudsman Scheme is adequately funded (paragraph 291).
It is important that the procedures under which the Ombudsman Scheme
operates should be fair and transparent but within those parameters
we hope it will prove possible to ensure that the Scheme does not
become over-legalistic because of ECHR requirements. We have not received
sufficient evidence to enable us to reach a judgement on this issue;
we look to the Government to resolve it before the Bill is introduced
(paragraph 295).
We believe that the Ombudsman Scheme is for individuals, not firms.
We therefore recommend that the Bill should be amended to preclude
authorised persons from using the Scheme (paragraph 296).
Process of pre-legislative scrutiny
In the light of our experience, we recommend for any situation in
the future when pre-legislative scrutiny by an ad hoc committee
is proposed, that, at the least, the terms of reference of the Committee
should be agreed, a Chairman-elect identified and staff allocated
before the Committee is expected to begin work, so that all necessary
preliminary steps can be taken and the Committee can begin its scrutiny
with the minimum of delay. If possible, membership of the Committee
should also be decided in advance (paragraph 11).
We recommend that in responding to our Report the Government should
respond also to the points made by the Delegated Powers and Deregulation
Committee in their submission printed in Annex B (paragraph 13).
On the basis of our experience, the two Houses should establish a
specialist Human Rights Committee as soon as possible (paragraph 16).
APPENDIX II
FSA Board Responsibilities
A note by the non-executive directors of the FSA
In its first report the Joint Committee on Financial Services and
Markets said "We understand the reasons for combining the roles of
Chairman and Chief Executive at this stage of the FSA's existence,
particularly when accompanied by the appointment of a senior non-executive
director as Deputy Chairman. The parallels with the corporate model
are not necessarily appropriate. However, in the longer term we recommend
that the posts of Chief Executive and Chairman should be separated
and that a non-executive Chairman should be appointed. We see advantages
in this of limiting the power of and focus on a single individual;
enhancing the power of non-executive directors; and ensuring that
control of the agenda does not lie exclusively with the executive."
The FSA Board was not asked for its view on this suggestion, on which
there was very little comment in the consultation on the Bill; nor
was it mentioned in HMT's March Progress Report. But, in the light
of the Joint Committee's recommendation, the non-executive members
of the Board have considered the arguments for and against a non-executive
Chairman for the Authority.
The Board recognises that a governance model with a non-executive
chairman and a full time chief executive would conform to usual corporate
governance standards, such as the Cadbury code. But the FSA is not
a commercial company, where a straightforward split can be made between
the interests of the organisation and of its shareholders, and the
shareholders need a non-executive Chairman to look after their interest:
all the Board are appointed in the public interest: Chris Bates of
Clifford Chance told the Joint Committee on 25 March: 'the corporate
model is inappropriate .... I do not think you can necessarily say
that it is a company, therefore you ought to separate the two roles.'
Derek Wanless (Chief Executive of NatWest) said on 13 April "Cadbury
is there for public companies who have got shareholders and I personally
have a view that the separation of Chairman and Chief Executive, particularly
if we are talking about a non-executive Chairman of the FSA, would
complicate the issue of accountability rather than clarify it."
FSA Board members agree. Furthermore, in their view, there are other
means of ensuring that executive power is not unduly concentrated.
Fears of an over-mighty executive are best addressed by a board that
is fully integrated into the decision taking of the organisation,
with their Chairman in a full time executive role. The governance
model currently in the Bill, with an executive board and non-executive
committee chaired by the senior non-executive director (in practice
the Deputy Chairman) is based on the model put in place for the Bank
of England and approved by Parliament last year.
There are other strong arguments for retaining an executive Chairman:
the number and significance of the decisions which the organisation
needs to take are such as to require the full time attention of an
individual with the full authority of both the organisation and its
board: there are some decisions (eg to close a bank) that must be
taken at the highest level, by someone with full time commitment and
involvement in the issues; even as old SIB, FSA has always had and
needed a full-time executive chairman;
there is a strong benefit in a single individual providing a recognisable
public face of the FSA: the organisation is sufficiently large and
mature not to be merely the creature of its chairman for the time
being;
the Standing Committee structure established by the Treasury/Bank
of England/FSA Memorandum of Understanding in 1997 establishes a set
of relationships between the organisations, and their heads, which
would be unbalanced if the FSA chairman were non-executive;
accountability is enhanced by a single individual taking responsibility
for the performance of the organisation as a whole: as the EST indicated
on 18 March to the Joint Committee, 'in the interests of accountability,
it seems to me that there is a good case for having one person who
fulfils the functions of both Chairman of the Board and Chief Executive
of the Authority, and he is the person with whom the buck stops';
it is standard for our international counterparts to be run and represented
by full time executive board chairs: the UK would risk losing authority
in international discussions if the FSA were represented by a non-Executive
Chairman, or a Chief Executive reporting to one.
even without a supporting board, the single individual model is currently
widely used among many UK regulators (the Director General of Fair
Trading, Director General of Telecommunications, Rail Regulator):
the DTI's July 1998 response to consultation on modernising the framework
for utility regulation said: "The government has concluded that for
energy and telecommunications, individual regulators should be replaced
by full-time executive boards composed of a Chairman and two
others."
the role is not about excellence in a particular specialism, as with
the DPP, with a separate function of running the organisation: leading
the organisation as a whole is the essence of the role;
The Board recognises that the organisation of management responsibilities
within the FSA may change over time. The current model, with two Managing
Directors covering the two halves of the business, and a Chief Administrative
Officer, works well and is similar to the current Bank of England
structure. There could be circumstances in the future in which it
would make sense to appoint a CEO, but only under a full-time executive
Chairman.
1. Technical Committee of the International Organisation
of Securities Commissions "Securities Activity on the Internet", September
1998.
2. "Report on Jurisdiction and the Regulation
of Financial Services on the Internet", October 1998.
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