Financial Services and Markets Appendices to the Minutes of Evidence


APPENDIX 2

Note by HM Treasury on enforcement procedures

  In view of the considerable interest being taken by the Committee in the enforcement procedures and the nature of the tribunal, this memorandum is being submitted in order to provide further clarification of the Government's objectives for this part of the Bill, and the respective roles that are envisaged for the FSA's administrative procedures and the new independent tribunal's judicial procedures.

  This memorandum also responds to the Committee's enquiry concerning the possibility of persons who are not employees of the FSA making decisions on behalf of the FSA which have legal force.

THE OBJECTIVES

  1. The Government's overall objectives, which appear to be shared by many of the witnesses the Committee has heard on the subject, are:

    (i)  A procedure that is objectively fair, that secures a person's rights to a fair hearing as enshrined in the ECHR and the Human Rights Act.

    (ii)  Consistent with that basic fairness objective, we also want to avoid unnecessary dependence on the tribunal to rule in all cases, and enable them to be settled to the satisfaction of both parties without recourse to legal procedures which may be expensive and time-consuming. At present the vast majority of cases are decided without recourse to a tribunal, and we would wish to see that pattern continue. But the other party must have adequate opportunity to establish the basis of the proposed action and make representations.

    (iii)  The procedure must also allow justice to be done, and be seen to be done, from the point of view of any victims of regulatory breaches and the wider public, whose confidence in the financial services industry is central to the wider aims of this Bill.

  2. The way in which we have sought to achieve these objectives is by making a distinct separation between the regulatory procedures of the FSA, which are administrative in nature, and the judicial procedures of the tribunal. The Government would welcome the Committee's views on whether that separation is sufficiently clear at present.

  3. This separation of procedures is marked out by the two notices set out in clauses 210 and 211 of the draft Bill, referred to as the "warning notice" and the "decision notice" respectively. The changing nature of the procedures is reflected in the precise functions of these notices.

The administrative stage

  4. The first notice, the "warning notice" marks the transition between the FSA's informal supervisory procedures and the formal stage of the enforcement procedures (see attached diagram). It triggers certain statutory rights for the other party. He has a right to know the basis on which the FSA has formed its view, to make representations, and to see the relevant evidence if he so wishes. However, the existence of this formal stage does not, and should not, preclude there having been less formal discussions prior to the issuing of the notice. Indeed, where the other party is an authorised person we would generally expect the FSA to have raised and discussed emerging problems with him before such formal procedures were initiated. The significance of the warning notice lies in the fact that it defines the point at which the particular statutory rights to see evidence and make representations are triggered.

  5. The second notice, the "decision notice", marks the end of the regulatory procedures, and the point at which the judicial procedures may begin. It is the decision notice that informs the other party that the FSA has heard and considered any representations he may have made, and what action, if any, the FSA has decided is appropriate. So it is at this point that the FSA must decide whether, in their view, there has been a breach, and if there has, by whom it has been committed, and what the appropriate penalty is. That decision is intended to be an administrative decision, for which the FSA must be accountable alongside its other decisions, and which must be taken in a fair and reasonable manner.

The judicial or determinative stage

  6. At the point that the decision notice is issued, the other party has a choice. That notice triggers his right to have the matter referred to the tribunal. If he does not exercise this right, then after a prescribed period the decision must take effect. The FSA must be able to enforce it and be able to take it into account in subsequent regulatory dealings.

  7. If, on the other hand, the other party does choose to have the case referred, the FSA's decision does not take effect. Instead it is the Government's intention that it should become the basis of the FSA's case to be put before the first instance tribunal. Or, to put it another way, the decision is set aside in favour of the decision which the tribunal will reach in due course. The tribunal will then consider the case put before it by the FSA and hear all relevant evidence and representations put before it. It will be able to decide not only on the facts of the case, but also to take its own view as to the correct interpretation of those facts and on the appropriate action (if any) that should be taken in light of its findings. Its decision will be binding on both the FSA and the other party (subject to any appeal to the appropriate appeal court on a point of law). The tribunal will also have discretion whether to award costs against either party.

  8. The precise procedural rules for the tribunal will be a matter for the Lord Chancellor and will be consulted on in draft in due course.

Voting members of committees

  9. In the FSA's consultation paper, Financial services regulation: Enforcing the new regime (CP17) it was proposed that the decisions to issue either a warning or a decision notice should be taken on behalf of the FSA by an Enforcement Committee, established by the FSA Board, but independent of the FSA's operational supervisory and enforcement staff. The Committee has asked whether in this, or any other context, members of such a committee, who are not employees of the FSA, could vote on or take decisions on behalf of the FSA which have legal force.

  10. There is no problem of principle to this, so long as the decisions thus taken are properly those of the FSA. This requires that as a minimum the committee members who can vote or take the decisions are appointed by the board (though that does not require them to be employees), are given some policy directions by the Board as to how the powers should be exercised, and are meaningfully answerable to the Board for the exercise of those powers in accordance with those policy directions. It is, of course, vital that the establishment by the Board of this or any other committee does not detract from the overall accountability framework. Ultimately this must mean that the Board retains a review function in relation to the functioning of the committee, and that its members can be dismissed in appropriate, even if limited, circumstances.

13 April 1999


 
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