The Joint Committee on Financial Services and
Markets has agreed to the following Report:
DRAFT FINANCIAL SERVICES AND MARKETS BILL
I. 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
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
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
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
We recommend that the FSA should not be given additional
objectives (paragraph 62).
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
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
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
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).
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
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
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
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
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
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
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
We recommend that the Bill should be amended to require
(a) The FSA should set up an Enforcement Committee,
or some equivalent mechanism to separate the functions of investigation
(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
(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
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
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
(a) FSA non-actionable rules, in respect of statutory
requirements and FSA actionable rules, including rules expressed
(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
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).
We accept in principle the need for a market abuse
regime that complements the existing criminal offences (paragraph
We are persuaded that a clearer statutory definition
of market abuse than the one in Clause 56 as drafted is required
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
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
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).
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
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
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