Financial Services and Markets Appendices to the Minutes of Evidence


Memorandum by the Independent Financial Advisers Association (IFAA)

  In our view there are five questions which should be asked when creating or recreating regulatory architecture. These are:

    —  Who are you trying to protect?

    —  What are you trying to protect them against?

    —  Is it cost-effective?

    —  Is it fair?

    —  Can you explain it to the public?


  A general question that needs to be asked, "Under what circumstances could the Chairman of the FSA refuse to take actions demanded by HM Treasury?"

  The Treasury is not only the sponsoring Ministry for the financial services industry but is also the creator of its own financial services products, the creator of tax regimes and the controller of government welfare spending and policy and the overall controller of the Economy.

  This puts the Treasury in control of most of the major factors that could compromise any financial advice given by the industry. We fear that unless there is a framework that clearly delineates the powers of the FSA, the Government might be tempted to use the FSA to cover up embarrassing failures of Government policy or taxation.


  We wish to suggest a finessing of the current proposals that might add further clarity and flexibility. Currently there are two options for the FSA namely, either regulate in-house as part of the one-stop shop concept or not regulate at all.

  We suggest a third option:

    —  Allow voluntary regulators to regulate under an inspection and systems control regime created by the FSA.

The Regulation of Mortgages and General Insurance

  The current voluntary system will not lead to efficient or sustainable regulation.

    —  GISC and MCRI are not in the information "matrix" enjoyed by more formal regulators. Proven miscreants from other regulated areas will therefore be able to invade the voluntary sector without those regulators knowing about it.

    —  FSA has no powers to homologate systems and standards between the voluntary sector and itself thus leaving those who need to be both in the statutory and voluntary forms of regulation to trade with a confusing array of standards. In practice, this will lead to the same information being requested by different regulators in different ways. Three regulators also mean three sets of costs and three sets of overheads.

    —  The voluntary regulators suffer from a lack of the legal protection afforded to other regulators against being sued by the regulated. This can lead to a toothless and lengthy form of regulation and much of the regulatory effort being subsumed in litigation.

    —  The voluntary structure is endemically unstable dependent as it is on the continuing good will of product providers to refuse to deal with those outside the code. Those tasked with regulating under this regime find some of their actions compromised by the will of providers. Independent intermediaries find their independence compromised by such regulation as it gives providers influence over the way intermediaries can go to the market.


  Our proposal allows a third way which will not impact too heavily on the structure of FSA but will ensure effective and structured regulation in areas which are deemed to be of a lesser risk. It may be in the fullness of time that areas currently regulated in-house may be better regulated externally by such bodies. Our approach will allow that to happen without further legislation.

  Whilst the intellectual argument for the current Bill is the "one-stop shop", intermediaries who trade across the borders of Financial Services, Mortgages and General Insurance will face three regulators and three lots of costs. More importantly their clients will face a confusing array of regulators and complaint schemes. We are fully aware of the danger of overloading the FSA particularly early in its life. Thus our suggestion allows for both MCRI and GSCI to be brought into the "one-stop shop" without the disruption that full integration would bring.


  We believe the FSA should be subject to scrutiny by external and independent examiners.

  In pursuing the concept of compliance cost assessments, we suggest that the Better Regulation Unit should appoint an independent task force to make regular inspections of the Authority's expenditure and also ad hoc cost assessments of the effect of specific rule changes.


  We do not believe it is appropriate for the Treasury, as the FSA's sponsoring department, to appoint the members of the Authority's Board. This function should be carried out by a different department of Government.

  We recommend that the Minister for the Cabinet Office should be appointed to this role.

  We take the view that the ad hoc reporting of the Securities and Investments Board—(now FSA) and other regulators to the Treasury Select Committee is unsatisfactory. Select Committees have a wide range of issues to address and cannot exercise adequate supervision even of a single financial services regulator.

  We suggest that it might be appropriate for the Treasury Select Committee to appoint a sub-committee (as for the Civil Service) for the purpose of parliamentary scrutiny.

  We believe that there must be a check on the regulator's actions outside the concept of judicial review. It is our opinion that regulators have expanded beyond their powers confident in the knowledge that the judicial review route is cumbersome and expensive. The previous Act was drawn so widely that any action from the regulator was unlikely to be deemed ultra-vires and the test of reasonableness is often in itself unreasonable.

  In essence we wish to see a clear framework of duties and responsibilities enshrined within the Bill so that the regulator's powers are clearly defined.

  There is a balance to be achieved between flexibility and the creation of an over mighty being which the current draft singly fails to address.


  Polarisation is the current process under which all those distributing financial services products must disclose for which party in a transaction they are working. In essence; are they working for the provider (Tied Agent or Company Salesman) or the Client (IFA)?

  We therefore suggest that consideration be given to incorporating the disclosure of distribution status in the Bill. This would put an end to the arguments, create certainty for the industry and underpin investor protection.

Other Issues

  As suggested earlier the draft is remarkable for what it does not contain as much as what it does. We would wish to add the following areas for consideration.

Basis of Redress

  There are lessons to be learnt from the Pensions Review. The most important was the wholesale dismantling of the process of common law by SIB. This opened a Pandora's Box which far from shortening the process, had the reverse effect and prolonged the review.

  We cannot see that any reasonable investor would expect to receive redress above and beyond his entitlement in a court of law. That said, we do not wish for those who feel they have a complaint to need to resort to the courts. It is therefore necessary for all redress procedures to offer complainants a parallel system to the courts at less cost.

  Any other method of redress is by definition profoundly unfair on the policyholders and shareholders who would effectively fund such payments. It is also unfair to professional advisers who do not have access to policyholders and shareholders money and depend on professional indemnity to pay redress. Any deviation from common law creates a hiatus in the PI market with cover becoming either unavailable or prohibitively expensive.

  We believe that all redress procedures must be based on common law and this concept should be enshrined in the Act. This would be an invaluable curb on any regulatory excesses ensuring policyholders and shareholders funds are not raided for inappropriate purposes.

  A competitive and healthy market can only be achieved by the involvement of professional advisers. The involvement of professional advisers is only possible by the use of professional indemnity insurance and a regulatory system that in turn is based on the common law.

  Both for reasons of asset protection and the continued existence of the professional adviser, we believe that such protection should form part of the Act and be reflected in all the processes of regulation including Ombudsman and Compensation schemes.

The Office of Fair Trading

  The current FSA 1986 puts a duty on the OFT to comment and make recommendations on issues of competition. We believe this should continue but be tempered by considerations of investor protection.

Whose side is the FSA on?

  This may seem a strange question but an important one. We understand that one of the FSA's major tasks is to protect the investor but it is important that the regulator holds the ring for all stakeholders in the process and is not perceived as favouring any single party.

  As both the FSA and its Ombudsman have a judiciary function it would be wrong for them to be anything but independent. This needs to be clarified within the wording of the Bill. It also needs to be both de jure and de facto independent of Government.

Discipline and access to the Industry

  The denial of rights to the regulated does not enhance the rights of the consumer

  Both parties should be able to rely on due processes, checks and balances which will protect even those who might be an embarrassment either to their employers, the regulators, politicians or the industry.

  The current disciplinary regimes fall short of the high standards we are entitled to expect. Hearings do not keep the defendant properly informed and represented. The appeals process is expensive and inaccessible.

  The procedure for making a complaint against the regulator also requires revision. Pressure can be applied to dissuade a complainant from pursing a complaint. Furthermore, the process is unduly lengthy and unwieldy.

  It is for the common good that those who are unable to come up to the standards of the industry are removed from it but it should be remembered that such processes impact completely on the lives of those in the industry and must be seen to be both fair and timely.

  It is likely that a firm that finds itself under regulatory pressure will produce a "sacrificial lamb" which will find itself cast out of the firm without the means financially or evidentially to defend itself.

  Thought also needs to be given to the role of compliance officers and whistle blowers and what protection regulation should be offering.

  If the fining of top management were to become a regular event consideration would need to be given to the long-term impact on the recruitment of top managers into the sector.

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