Financial Services and Markets Appendices to the Minutes of Evidence


Memorandum by the Association of Private Client Investment Managers and Stockbrokers (APCIMS)


  1.1 The overwhelming majority of private client stockbroking and investment management firms are members of APCIMS and they act for the estimated 12 million individual shareholders in the United Kingdom when they buy or sell shares. Most of our members are currently regulated by the SFA; the remainder are regulated by IMRO.

  1.2 APCIMS submitted a detailed response on the Financial Services and Markets Bill in October 1998 and we have commented on most of the Consultation Papers published by the FSA to date. We have also reviewed the recent Consultation Papers published by HM Treasury and the Progress Report on the Bill. Our submissions for the Joint Committee reflect the concerns which we continue to have regarding various elements of the proposed regime. These concerns are set out below:


  2.1 We are pleased by the proposals in the Progress Report regarding the introduction of additional measures to increase the accountability of the FSA not just to Parliament but also to the regulated community. When commenting on FSA Consultation Paper 13 on the Proposed Principles for firms, we suggested that the FSA should also have some Principles on how it should conduct itself. We saw this as an opportunity to create a "Charter for the Financial Services Industry" which would, in effect, be a pact on standards by authorised persons and their regulator. The adoption of this proposal would go a long way to reassure firms of the FSA's commitment to the openness and accountability of its role. It also highlights that firms too have expectations of their regulator and its responsibility to provide a quality service.

  2.2 If the suggestion of an industry Charter is adopted, then the FSA's compliance with its Principles could be included in the reports of the Practitioner and Consumer Panels and could also be subject to Treasury scrutiny.

  2.3 We suggested that the following Principles could initially be considered for adoption by the FSA. Alternative and/or additional Principles for the FSA will be developed when this suggestion is discussed more widely. (The Principle is set out in bold; the explanatory text is set out underneath in italics.)

  A. The FSA will conduct itself with integrity, due diligence and skill in the performance of its objectives.

  A1. This requires FSA staff to conduct themselves in a professional and proper manner. Staff will always take account of the size of an authorised person and the nature of its business and will act appropriately. Every effort will be made to ensure that the staff who have regular dealings with firms or who develop policy or act in an enforcement capacity will have direct experience of the financial services industry. All FSA staff will undergo regular training and will already have, or will acquire, qualifications suitable to their job function.

  B. The FSA will publish all rules interpretations and formal guidance to ensure that rules are understood and applied in a consistent manner and will respond promptly to all requests for advice and guidance from authorised persons.

  B1. FSA staff will not refuse to answer queries or give assistance simply because they have made a subjective decision that the request is unreasonable. It is inevitable that the staff which develop rules will occasionally receive queries from firms which indicate a lack of understanding of the requirements. Such queries could be classed by the staff as unreasonable and yet they may have arisen because the regulatory strictures or requirements have been written in ambiguous language, or because contradictory advice has been given by other FSA staff or because a situation has developed which was not envisaged at the time that the rules were prepared.

  B2. The best way for any regulator to understand how firms are receiving its regulatory announcements is for it to encourage firms to ask questions and to seek guidance when necessary. Such dialogue quickly exposes ambiguities in rules and misunderstandings which may exist in the market.

  B3. In the early months of the new regulatory environment, the FSA sends an unfortunate and unacceptable message to its constituent firms when it states that it will only respond to what it considers to be reasonable requests for informal guidance. Under this suggested Principle 2, the FSA will be proactive in encouraging firms to ask about the regulatory regime and to seek guidance when necessary either directly or via their representative trade associations.

  C. The FSA will ensure that any inspection visit to a firm is conducted under the management of a senior member of FSA staff who is suitable for this task either because he/she has direct experience of the business conducted by that firm or because they have visited the firm before. The FSA report on a firm following this inspection visit shall be issued promptly after the completion of the inspection.

  C1. This should prevent the continuation of the scenario where a firm is visited/inspected/advised by regulatory staff who have little or no understanding of its business, instruments, systems, organisation or the extent of its international involvement. The presence of a senior manager with suitable direct experience will reassure firms that they are more likely to be given pragmatic, common sense advice which is appropriate and does not entail needless processes and unjustifiable expense.


  3.1 Paragraph 4.14 of the Progress Report fails to address a key concern which we expressed on the Bill, namely the requirement that firms will have to detect financial crime. Currently, all firms have a responsibility to deter financial crimes such as money laundering. Firms take this responsibility seriously as is evidenced by the Money Laundering Guidelines which were developed by practitioners and which are updated on a regular basis.

  3.2 The new regime requires firms to detect money laundering rather than simply to assist in its deterrence. This change in emphasis places a considerable costs-burden upon firms as they will have to employ and train personnel to ensure the presence of staff with the appropriate set of skills to detect money laundering. Similarly, if the Treasury expects the FSA to seek out this activity then it too will have to employ a highly trained set of individuals who are conversant with the complexities of such transactions or it will have to contract out such expertise to other bodies. One need only speak to NCIS to understand the lengths that money launderers will go to in continuing their activities; it is big business with large sums at stake. It should therefore come as no surprise that such big business employs both highly paid and talented people to cover up their activities. We urge the Treasury to reconsider the stance taken in the Bill and to return to the lesser test of deterrence rather than detection.


  4.1 We are gravely concerned by the Treasury's view that firms can be punished as market abusers for the unintended consequences of their actions.[3] We strongly urge the Treasury to reconsider its stance vis-a-vis the role of "intent" in identifying market abuse as we believe it to be an essential element in the offence. We appreciate that it is impracticable to describe market abuse offences in primary legislation but we believe that the Bill should be amended to include a requirement that the offence of market abuse includes an assessment of the intention or motivation of the firm.

  4.2 The offence of market abuse is a combination of action (which may also be a decision not to act) and of motivation. It is a deception practised on the market and is a deliberate and wilful act. The motivation of a firm can be deduced from an objective assessment of its conduct over the relevant period, by ascertaining who would benefit from a particular action and by using tests of reasonableness.

  4.3 If the Bill proceeds in the absence of a test of intent, firms will be in the uncomfortable position of having no certainty regarding the assessment of their actions by regulators. Indeed they will be regulated by hindsight as they will be expected to know in advance the exact effect which any trade may have on the market and to decide whether there is any danger of that impact being negative and therefore liable to be deemed "abusive". No market is perfect as it inevitably involves an imbalance of buyers and sellers and it can be affected by many different events and developments both external and internal. All trades have an impact of some kind (especially in an illiquid market) without there being a sinister motive behind them. The assumption that if a trade impacts in a negative way on a market it necessarily involves market abuse is incorrect and potentially damaging for the UK financial markets.

  4.4 It will be almost impossible for Compliance Officers to advise trading desks on whether to proceed with various trades. It is likely that this will force firms to seek more guidance from the FSA in advance of trades as they will be striving to establish greater certainty in this area. There is also a danger that innovation may be stifled or that firms seeking to create new methods of dealing or new instruments may take their business to another regulatory regime which has more certainty.

  4.5 Paragraph 5.8 of the Progress Report states that it is unlikely that the FSA will wish to discipline firms who have followed its guidance. However, the FSA has notified firms that, in general, compliance with the guidance is not a guarantee against subsequent disciplinary action. We suggest that the Treasury and FSA discuss this matter further to agree a common approach which confirms that proven compliance with guidance is sufficient to ward off subsequent actions.

  4.6 The Treasury has stated that it is keen to close off all loopholes in order to protect consumers. Whilst this intention is laudable, in practice this leaves firms in a position where any action can be subsequently held to have been abusive. If an act falls outside the scope of the law, the rules or the code then the firm which committed that act cannot be disciplined. We believe that regulators should not twist rules or codes to pursue a firm for an act which was not foreseen or allowed for in the regulatory regime. Instead, we suggest that the regulator should learn from the experience and that the rules and/or code should be amended to address future repetitions of the particular act. We strongly urge the Treasury and the FSA to reconsider the apparent move towards regulating by hindsight and to favour the development of a regulatory regime which is based on certain, clear and simple rules.

  4.7 We challenge the statement in paragraph 5.8 of the Progress Report that " . . . it would be [inappropriate] to compel the FSA to provide specific guidance on request". We suggest that the FSA has a responsibility to help firms to understand their regulatory obligations and this involves acting as the provider of guidance on request. It would be unacceptable for the FSA to have the power to choose to reject requests for help from the firms which it regulates. We are not yet sure whether the FSA will be a regulator or a supervisor but the approach being adopted to market abuse and enforcement makes one fear that it will assume the role of a regulator.


  5.1 We are pleased that the Treasury will ensure that the Bill is in compliance with the European Convention on Human Rights. We look forward to receiving further information about how the re-named tribunal will interact with the Enforcement Committee being established by the FSA.

  5.2 We believe that a disciplinary action (for reasons other than deliberate misconduct or criminality) indicates a failure both by the firm and by the FSA. The supervision staff at the FSA play a key role in preventing the initiation of an enforcement/disciplinary action by ensuring that firms know what is expected of them and are well informed about regulatory developments. We firmly believe that the FSA has a role to play in encouraging firms to be compliant. It would be beneficial to the FSA and its regulated community if it assumed the persona of the approachable but pragmatic supervisor which encourages compliance through supervision and inspection teams which are staffed by people who understand the many businesses which they regulate and who are keen to help firms to "get it right".


  6.1 Paragraph 11.8 of the Progress Report states that the Ombudsman's decision will be binding on the respondent but not the complainant. Whilst this process is possibly acceptable when the claimant is a private individual, it is unacceptable if the claimant is an authorised firm. For example, it could be possible for one of the major banks to be a "customer" and one of our small member firms to be a defendant. We suggest that either the Ombudsman Scheme should not be used by authorised persons or that the Bill be amended to accommodate the possible use of the scheme by firms.

  6.2 There is no mechanism which requires the Ombudsman to verify that its interpretation of the rules is consistent with that of the FSA although this may be addressed via future Consultation Papers on this matter.

  6.3 We are concerned about the broadening of the scope of the Ombudsman's jurisdiction over services which would not otherwise fall within the scope of the Bill (see paragraph 11.6 of the Progress Report). This removes certainty about the exact scope of the Ombudsman's jurisdiction and leaves firms vulnerable to a challenge on matters which they did not know that the Ombudsman would decide to investigate.


  7.1 We accept that a policy decision to have one consumer compensation scheme has been agreed. However, if it is set up as proposed with one pot for deposit taking, one for insurance and the rest for the securities industry, then this will result in significant increases in contributions from prudent and well managed firms to pay for the losses incurred by others whose business is dramatically different. If the new scheme is to be fair then a firm should pay commensurate with the business that it undertakes and the risk involved and it should allow for a reduction in fees when a firm has sufficient insurance to cover its responsibilities to its clients.


  8.1 We are aware of the list of questions upon which the Committee has agreed to focus its inquiry. Nevertheless we have additional observations on the Progress Report which we would like to bring to the attention of the Committee. These are set out briefly below:

    (a)  in paragraph 4.11 the report states that regulation should ensure that consumers are able to make reasoned decisions. We suggest that this is too burdensome a requirement and that no regulation can ensure such a thing. We suggest instead that the Treasury seek a regulated environment in which consumers can make informed decisions and obtain independent advice to assist them with their investment decisions; and

    (b)  in paragraph 5.2 we ask that when the FSA publishes final versions of its rule changes, it should also explain how many comments it received during the consultation and the extent to which those comments influenced the new rule(s). This would highlight the quantity of input received by the FSA and it would let firms know the extent to which they were influencing developments.

29 March 1999

3   We note the FSA's plan to use "principal purpose" tests in its Code of Conduct but we believe that primary legislation should also include a reference to a test of intent. Back

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