Financial Services and Markets Appendices to the Minutes of Evidence


APPENDIX 36

Memorandum by the Halifax Group

1. INTRODUCTION

  Our views of the Bill reflect:

    —  our experience of being regulated under building societies regulation until June 1997;

    —  our experience of being regulated under banking regulation since June 1997;

    —  the Clerical Medical Group's long experience of being regulated under Insurance Companies legislation;

    —  the experience of Halifax Group subsidiaries of being regulated by each of PIA, and IMRO, and SFA.

2. FSA ACCOUNTABILITY

  While we understand the anxieties over the powers which FSA will have, we perceive the real issue as being their accountability in exercising them. In this respect debate has focused on FSA's accountability through the enforcement process after disciplinary action is taken. However, insufficient attention has been paid to the question of FSA accountability in exercising its supervisory and enforcement powers before disciplinary action is taken.

  In practice, badly informed or administered regulation on a day to day basis poses actual and opportunity costs to a regulated firm which can be far greater than those which might result from any subsequent disciplinary action. For example FSA can require firms to:

    —  take onerous steps to demonstrate compliance with ad-hoc and subsequently overturned interpretations of rules;

    —  pay for external consultants' reports into areas where there may be no justification for regulatory concern; and

    —  undertake costly, time consuming and diverting remedial action where there is no real mischief to remedy.

  The process of "challenging" FDA's requirements at this stage can aggravate the firm's relationship with FSA and so can be a gamble which management are unwilling to take for fear that perceived resistance will escalate administrative action to disciplinary intervention.

  What is missing therefore from current debates is how to create what we would term "real time" accountability by the FSA, that is to say the ability of a regulated firm to seek a review of "requests" or orders from a regulator before disciplinary action is even a possibility. This accountability could be delivered through the right of administrative appeal to a Committee (say of non-executive directors) within FSA. Or FSA could establish a mediation/conciliation process under which disagreements between the entity and the regulator can be discussed without fear of reprisal.

3. DISCIPLINARY PROCESS

  Much of the fear generated about FSA's powers stems from the way in which these have been perceived to have been exercised by current regulators in certain circumstances (and perceptions can influence opinion more than reality where there is inadequate information about the reality). In particular significant concern has arisen through regulators having inflicted severe punishment on individuals who have acted honestly and with integrity. Using discipline in this way creates an environment in which:

    —  good quality management, and those with the attributes to serve as high quality non-executive directors, will be deterred from choosing to exercise their talents in the regulated financial services sector; and

    —  those who do serve in the sector will demand prescriptive and authoritative guidance from FSA on how they should behave in order to ensure safety from disciplinary action. This will obviously frustrate achievement of FSA's ambition to let good management manage, and to rely on the maximum extent possible on high level principles and codes rather than detailed rules as the means for spelling out regulatory expectations.


  These fears would largely be dispelled if FSA—and preferably the Bill—were to make it clear that disciplinary action would be taken only where a firm or individual had acted deliberately or recklessly in breaching regulatory requirements. However FSA have made it clear that they see disciplinary action as going beyond this and (a) being appropriate to address issues of competence and aptitude, and (b) serving as an effective means of sending out messages to deter others.

  We believe that using disciplinary powers in this way is both unnecessary and self-defeating. There are ample ways in which individuals who lack competence or aptitude can be dealt with through normal employer/employee and market disciplines. And regulators have means, other than disciplinary actions, of sending out effective messages to their audiences. FSA's taking unto itself the power to ruin an individual and his/her family even where the individual has acted honestly and with integrity adds nothing to the prospects of creating the relationship of trust and compliance between regulator and regulated to which FSA (and we) aspire—but it detracts from these prospects very seriously.

  And if FSA remain wedded to their current disciplinary policy, that relationship will be worsened further by the fact that the staff employed by the regulator are immune from the personal financial jeopardy to which they can subject those employed within the industry even were they to act incompetently or worse.

31 March 1999


 
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