Memorandum by the Compliance Register
Further to our conversation on Thursday 8 April,
I have pleasure in enclosing the following comments and observations
for the Committee's consideration. I have tried to contact all
members of our Advisory Board ("the Board") but given
the short time scale, it has not been possible to get all their
views nor to formulate a formal response that would be representative
of the Board as a whole.
However, the Board will be very pleased to lend
any assistance it can towards the re-drafting of the revised Bill
particularly with regard to any areas of difficulty. Please do
not hesitate to contact me if such assistance is required.
A. PROGRESS REPORT
The Treasury's recent Progress Report indicates
that although the Government has made many concessions, which
go far to redress the lack of balance in the draft Bill, there
is nonetheless a feeling among City firms that a number of the
concessions are token gestures and that others are about the minimum
that they could have done given the strength and loudness of the
objections in relation to FSA's power and accountability.
The opportunity now exists to focus on some
particular outstanding issues such as those set out below:
B. "NO ACTION"
Whilst it is still not yet clear the extent
to which FSA will gear itself up to providing ad-hoc guidance
(and we comment further on this below), they seem to have missed
the main point on no action letters. Of course, FSA can issue
guidance and interpret its own rules and grant waivers from them.
What is clear however, is:
(a) they cannot waive a provision of primary
legislation or a related statutory instrument, unless an expressed
power is included in the Bill (which is inconceivable);
(b) their guidance about provisions of the
Bill and statutory instruments under it is likely to be less helpful,
particularly if they continue their traditional approach of responding
that it is for the courts to decide.
We all recognise that the courts will decide
the meaning of the law, but there is nevertheless a role for the
FSA to state its position regarding enforcement. Here the "no
action" letter comes into its own, and is quite distinct
from waivers and guidance.
A "no action" procedure would involve
the FSA issuing a letter which states that, in the particular
circumstances described, the FSA would not take enforcement action
under a particular statutory provision. Of course, one can argue
that the Bill does not need to empower the FSA in order for it
to do this. However, we would argue strongly that the Bill should
make provision for two reasons.
(i) So that it is formally recognised
that such letters will be available
FSA seems to deny or dissemble
when asked whether such letters have been issued in the past (we
know of at least one occasion which is, of course, confidential);
(ii) Because the Bill could provide a
framework to ensure that, in general, such no action letters are
In relation to such a procedure, and in relation
to its own ad-hoc guidance (and possible waivers) there
seems to be a concern that the FSA will find its resources diverted.
What seems not to have been adequately considered, (although mentioned
briefly to FSA's chairman before the Joint Committee) at least
publicly, is FSA's potential to charge for no action letters,
guidance and waivers. This should be seriously considered, and
if necessary provision should be made in the Bill.
C. ENFORCEMENT POLICY
(a) Amidst all the arguments about investigation
powers, enforcement sanctions, appeals, etc., one important argument
seems to have been lost. We are being encouraged to take heart
from FSA's public statement of its enforcement policy (at least
what will presumably become a public statement once it has taken
into account responses to Consultation Paper 17). We cannot take
heart from this because FSA has the right to change it (even though
it is, of course, obliged to publish information about certain
aspects of its approach).
(b) The important point, therefore, is
that the critical elements of enforcement policy should be specified
in the Bill. It could perhaps be a provision which is amendable
by statutory instrument subject to positive resolution of both
Houses. Alternatively, the policy itself could be specified by
statutory instrument, subject to positive resolution of both Houses
and subject to prior consultation.
(c) The reference by Antony Hilton in the
Evening Standard last month to "bullying, intimidation and
seething vindictiveness in the old system" a reference which
was raised by the Joint Committee with Howard Davies on 16 March,
is a description which many in the industry can relate to. Most
do not believe it is all-pervading, but have encountered evidence
(d) Success and career advancement within
the FSA should not be dependent upon obtaining guilty pleas and
imposition of penalties.
(e) Most compliance professionals have some
(if not considerable) sympathy with their erstwhile brethren in
Morgan Grenfell. There is considerable concern at the impossibly
high standards (retrospectively assessed) being set for senior
management and compliance staff.
D. TRANSPARENCY OF
This is a matter which has been of
considerable concern to many in the industry over many years,
ever since they began to get full details of LIFFE's rules, which
before publication of their four-volumed glossy rule book, were
Although, now, all the exchanges
make their rule books publicly available, there is nevertheless
much that affects the rights and obligations of members which
is not made publicly available immediately on issue or upon taking
effect. We refer to board notices of exchanges, such as the London
Metal Exchange's board notices on give ups. In the context of
security exchanges, we mention the London Stock Exchange's trade
compensation scheme, details of which were circulated to members
in October 1997 in connection with the launch of SETS and are
considered by the Stock Exchange to be guidance, but do not appear
in its official list of guidance.
(b) FSA et al
Unfortunately, the exchanges are
not the only regulator guilty in this area. Again, in the area
of give ups, one can point to the circular letter issued by FSA/SFA
to LME members in August 1998. This is not a one-off omissionthe
problem goes back at least as far as FSA/SFA's letter to all members
years ago concerning the compliance responsibility of senior management,
which was subsequently incorporated in SFA Board Notice 87 (in
1992) and now covered by Appendix 38.
Even in the current consultation
agenda of FSA we find that those papers which are not formally
designated as consultation papers are given no reference and therefore
may not be easily identified at a later date. For example, "Meeting
our responsibilities", "The Open Approach to Regulation",
and "the Discussion paper on inter-professional business".
Other material, such as feed back on consultation seems to have
been released selectively.
Other examples concerning FSA/SIB
include standard form, circular letters to:
(i) Internet Service Providers and others
in connection with Internet regulation and their potential need
to obtain authorisation; and
(ii) traders and others in the new UK
gas markets several years ago, again concerning the possible need
to obtain regulatory status (e.g., authorisation under the 1986
Act or permission under Schedule 1, paragraph 23).
Transparent regulation should require
that any communication whatsoever which goes to all firms (or
members, in the case of a SRO or exchange) or a particular category
or categories of members (as distinct from a letter sent to a
specific firm and tailored and personalised to the circumstances
of that firm) be listed in the official publication listings of
the regulator. Thus post inspection visit letters could be based
on a template or precedent without requiring either to be published,
should be published and listed.
All of these matters are important
in helping firms and their advisors ascertain regulatory attitudes
as well as the rights and obligations of regulated firms. This
kind of transparency should be incorporated in:
(i) in the Bill itself so far as FSA
is concerned; and
(ii) the recognition criteria for exchanges
and clearing houses (to be set out by Treasury Statutory Instrument,
a draft of which has been published for consultation).
(a) Although some improvement in the drafting
of the Bill has been promisedfor example, to consolidate
the many different rule making powers and procedures of FSA, much
of the legislation proposed is difficult to track or essentially
(b) The proposed Regulated Activities Order
is a good example of the form. Its approach of repeating essentially
the same exclusion several times, once for each activity makes
it more difficult to analyse exclusions.
(c) The market abuse provisions in the Bill
are examples of uncertainty and lack of clarity.
F. TRANSITIONAL ARRANGEMENTS
More care needs to be taken about transition
to the new regime. For example, FSA seems to assume that its new
principles for business can be introduced on N2 date. Presumably,
they are seen as so basic as not to have systems implications.
Yet dramatic changes have been wrought in the effects of regulation
under the 1986 Act, based on the existing 10 principles. Principles
do indeed have detailed implications for conduct, which implies
(in turn) procedural IT, training and other implications.
G. CORPORATE GOVERNANCE
The FSA should be required, under provisions
in the legislation, to abide by corporate governance best practice
by separating the roles of Chairman and Chief Executive. It is
widely accepted that an independent chairman with a "detached"
view can have a considerable "moderating" influence
on the actions of the executive arm of the organisation.
H. DISCIPLINARY POWERS
It is right and proper that the FSA
should be given considerable powers in order that it may be an
effective regulator "with teeth".
However, as the saying goes "power
corrupts and absolute power corrupts absolutely", important
checks and balances must be provided for in the legislation.
One of the key controls will be to
provide for appeals against disciplinary decisions to be heard
by an independent commission whose members are not appointed by
the FSA. This should include appeals against decisions and awards
made by the proposed Ombudsman.
If you require any further information or assistance,
please do not hesitate to contact me.
13 April 1999