Financial Services and Markets Appendices to the Minutes of Evidence


ANNEX

1. "NO ACTION" LETTERS

  Both HM Treasury and FSA seem to have missed the main point on no action letters. FSA can issue guidance and interpret its own rules and grant waivers from them. On the other hand:

    (a)  FSA cannot waive a provision of primary legislation or a related statutory instrument, unless an expressed power is included in the Bill (which is inconceivable), and

    (b)  FSA's 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, to the effect that it is for the courts to decide.

  Of course, the courts will decide the meaning of the law, but there is nevertheless a role for the FSA to state its position regarding enforcement. The "no action" letter has a particular value here, 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. One can argue that the Bill does not need expressly to empower the FSA for it to do this. However, we strongly contend that the Bill should make provision because:

    (i)  then it will be formally recognised that such letters will be available;

    (ii)  the Bill could provide that, in general, such no action letters must be published—this would avoid suggestions of unjustified differential treatment.

  In relation to such a producer, 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, at least publicly (although mentioned briefly by FSA's chairman before the Joint Committee), is FSA's potential to charge for no action letters, guidance and waivers (so its concerns about being unduly distracted by requests for these are over-stated). This should be seriously considered, and if necessary provision should be made in the Bill.

2. ENFORCEMENT POLICY

  A very important point risks being forgotten among all the other arguments about investigation powers, enforcement sanctions, appeals, etc. The point 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 affirmative 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.

  The financial sector and its advisers are encouraged to take comfort from the proposed public statement of FSA's enforcement policy. We cannot do so because FSA has the right to change it.

  A critical issue which concerns many in the sector (and their advisers) is how Mr Davies and his Board will ensure that success and career advancement in many parts of his organisation will not depend upon obtaining guilty pleas and imposition of penalties. People who have done nothing wrong but, with hindsight, could have performed their job differently are being forced to choose between a ruined career and reputation, if they accept the regulator's charges, and bankruptcy if they fight (and both plights, of course, if they fight and lose).

3. TRANSPARENCY OF REGULATION

Exchanges

  This is a matter which has been of considerable concern to us over many years. From our discussions with other lawyers closely involved in advising firms which carry out business on securities and futures exchanges, we know it is of concern to many of them.

  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 (if at all). Examples include:

    —  the London Metal Exchange's board notices on give ups (sent to members only), and

    —  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).

Regulators

  The Financial Services Authority itself, and the self-regulating organisations, have also been guilty in this respect.

  On "give up" arrangements again, FSA/SFA issued a circular letter to LME members last August. This is not a one-off omission—the problem goes back at least as far as FSA/SFA's letter to all members some 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 of SFA's rules.

  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".

  A good example of FSA's failure, in the context of the current consultation process, has occurred very recently. At FSA's recent (and expensive) conference on market abuse it released to delegates its feedback statement on the consultation on this subject. No press release was issued nor publication made—indeed both the FSA's Markets Department and FSA's publications unit denied existence of the feedback statement. We ultimately tracked it down on FSA's web-site, where it had been "filed" in a different manner to other feedback statements—an extraordinary approach in relation to one of the more controversial aspects of the new regime.

  Other examples concerning FSA/SIB include standard form, circular letters to:

    (a)  Internet Service Providers and others in connection with Internet regulation and their potential need to obtain authorisation; and

    (b)  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 requires that any communication whatsoever which goes to all firms (or members, in the case of an exchange), or to a particular category or categories of firms, should be published and listed in any list of the publications of the regulator concerned. On the other hand a letter sent to a specific firm and tailored and personalised to the circumstances of that firm (even if based on a template or precedent) need not be published.

  Publication in a readily identifiable and accessible form is critical to 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:

    (a)  in the Bill itself, so far as FSA is concerned; and

    (b)  in the recognition criteria, which are to be set by statutory instrument for exchanges and clearing houses.

4. SCOPE OF REGULATIONPRECAUTIONARY AUTHORISATION

  Neither the draft Bill nor the draft Regulated Activities Order adequately address the position of businesses such as solicitors, accountants and actuaries, who are, generally, currently authorised by their Recognised Professional Body to carry on investment business. Such business is specifically excluded from the Investment Services Directive. Authorisation is currently regarded as necessary because of a perception that it is unsafe to rely on the exclusion currently contained in paragraph 24 of Schedule 1 to the Financial Services Act 1986 for "advice given or arrangements made in course of profession or non-investment business".

  The Treasury proposes to clarify definitions so that authorisation will clearly not be required for such firms where the activities either "may reasonably be regarded as necessary" in providing its professional services or where those activities comprise general advice or certain non-discretionary services. Further clarification in FSA guidance is proposed.

  We are concerned that the proposals do not address the activities of the medium and large professional firms which act for businesses rather than private clients, particularly those with substantial practices supporting the corporate and finance sectors. Services include legal and accounting analysis, and advice, valuation, drafting of documents and negotiation of deals. With no substantial change to the terms of the current paragraph 24, it is hard to see how businesses which do not fall within that would fall within the equivalent exclusions proposed in Schedule 3 to the draft Order. The proposals appear to focus on small, high street practices.

5. USER-FRIENDLY REGULATION

  The Treasury has promised to improve the drafting of the Bill—for example, to consolidate the many different rule making powers and procedures of FSA. But much of the primary and secondary legislation proposed is difficult to follow or essentially unclear.

  The proposed Regulated Activities Order is a good example of the former. Its approach of repeating essentially the same exclusion several times, once for each activity makes it more difficult to analyse exclusions. More imaginative forms of presentation are desirable (for example a matrix indicating the relationships among investments, activities, and exclusions).

  We strongly disagree with the approach described in paragraph 2 of Part One of the Regulated Activities Consultation Document. The current need to consider that much in Schedule 1 to the Financial Services Act 1986 is qualified (for some purposes, at least) by reference to the Investment Services Directive (ISD) via the statutory instruments which implemented that directive in the UK is unsatisfactory, and inconsistent with the Government's stated objectives and concerns in Part One, paragraph 2.3 of last July's Consultation Document on the Bill.

  We recommend a unified approach. The Government is accustomed to implementing European Community/European Union Directives in other fields through legislation which in effect interprets directives within a UK legal and commercial environment. Whilst we accept that the extreme care is necessary, we see no reason in principle why it should not adopt the same approach here.

  The market abuse provisions in the Bill are examples of uncertainty and lack of clarity.

6. TRANSITIONAL ARRANGEMENTS

  Greater sensitivity than has so far been evident is necessary in transition to the new regime. For example, FSA seems to assume that its new principles for business can be introduced on N2 (the date upon which the Bill will come into force). Presumably, these principles are seen as so basic as not to have business or organisational implications. Yet the existing 10 Statements of Principle effective from April 1990 have, in their practical application, affected dramatically the regulatory environment (despite purporting to express then existing standards). The new principles are bound to have detailed implications for conduct, which implies (in turn) procedures, IT, training, etc., and consequently time and costs to implement.


 
previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries

© Parliamentary copyright 1999
Prepared 14 May 1999