Financial Services and Markets Appendices to the Minutes of Evidence


Memorandum by the Law Society's Company Law Committee


  1. This memorandum is submitted to the Joint Committee in the context of its consideration of the draft Financial Services and Markets Bill. The Joint Committee has received our November 1998 Memorandum submitted to HM Treasury. This Memorandum supplements the points we made in our November 1998 Memorandum in respect of certain questions on which the Joint Committee is focusing its inquiry, taking into account HM Treasury's recently published Progress Report.

  2. We have no additional comments to offer at this stage on Questions 2 (Statutory Objectives) 5 (Ombudsman and Compensation Scheme) and 6 (Market Abuse). With regard to market abuse, the comments we expressed in detail in our November 1998 Memorandum, and in particular:

  2.1 The general lack of a mental element in the ingredients of the offence is unduly severe and will give rise to great uncertainty and potential injustice. The draft legislation opens up the possibility that a person who reasonably believed that his behaviour would not distort the market could still be penalised. In these situations the regulator will have the considerable benefit of hindsight;

  2.2 The provisions designed to prevent use of unpublished information are so wide that they raise the risk that a person can be penalised for acting while in possession of information which is so imprecise that its significance can only be judged with hindsight;

remain and nothing in the Progress Report or the recent report of the FSA on the response they received to Consultation Paper 10 lead us to change the view we previously expressed.

  3. We therefore offer in Part B of this Memorandum further comments on questions 1 (proposed arrangements of accountability of the FSA), 3 (Discipline, enforcement and the Tribunal) and 4 (Scope of the new regime). Our comments are summarised in paragraphs 4 to 17 below.

  4. We believe that the blanket statutory immunity for the FSA is no longer justified and should be limited, if at all, to an immunity for staff and officers of the FSA rather than the body itself (see paragraphs 8 to 11 below).

  5. The FSA's abilities to keep the fines it imposes creates a clear conflict of interest. They should be paid either into the Ombudsman Scheme or the Compensation Scheme (see paragraph 14 below).

  6. The scope of the new regime should be clearly limited in the face of the Bill, to business activities, except within strictly defined exceptions (see paragraph 16 below).

  7. The Treasury should, like the FSA, be under a statutory duty to consult on changes to the scope of the regime (see paragraph 17 below).


Proposed arrangements for the accountability of the FSA

  8. We welcome the additional provisions to be built into the Bill, as set out in paragraph 3.7 of the Progress Report.

  9. We are now broadly content with the arrangements proposed, subject to one issue. We question the justification for the continuation of the FSA's blanket statutory immunity bearing in mind its significantly increased powers (particularly with regard to prosecutions and rights to enter premises). In paragraph 3.10 of the Progress Report the Government justifies the continuation of the immunity on the grounds that without it "the regulator's staff would be unable to go about their business without being unduly hampered by concerns about legal action". As lawyers, we find that a remarkable statement. Accountability under the law is vitally important for any public authority. It is our understanding that other Public Authorities such as the Police, the Serious Fraud Office and the Customs and Excise do not have such a wide ranging immunity and this does not seem to hamper these authorities in carrying out their legal functions.

  10. We are aware of the argument that if the FSA were made liable for damages, then this is a cost that the regulated community will have to bear, so that the regulated community will end up bearing the cost of paying its own damages claim. This is rather similar to the argument that mutual insurance companies should not be fined because those who end up paying the costs are the policyholders themselves, an argument that the FSA has rejected on the grounds that this risk is one the policyholder takes when acquiring such a policy. The effect of a damages claim where the immunity exists is that the aggrieved party bears the loss; where immunity does not exist the cost is effectively shared across the whole regulated community. It seems obvious to us what is the fairer result.

  11. We therefore strongly urge that the draft Bill be amended to remove the statutory immunity for the FSA itself. We accept that different considerations may apply in relation to individual officers or members of the FSA's staff. The argument for the statutory immunity in the case of SRO board members and staff enshrined in the Financial Services Act 1986 was that without it individuals would be discouraged from filling regulatory positions. This may still be a valid consideration, although it does not seem to be a deterrent as far as the Police and other authorities referred to above are concerned. The financial risk can of course be covered by insurance. It would therefore be possible to retain the immunity for individual officers and staff members whilst removing it for the FSA itself.

  12. We should also mention that we are aware of legal action before the European Court of Justice questioning the legality of the current statutory immunity regarding banking regulators and whether such immunity is consistent with the EU Banking Directives.

Discipline and Enforcement

  13. A representative of our Committee will be giving oral evidence to the Joint Committee relating to the issues on which we have expressed concerns.

  14. We continue to have concerns in that all fine income is retained by the FSA. As we stated in our November 1998 Memorandum, we regard the ability of the FSA to keep fines levied as giving rise to a serious conflict of interest and will appear to undermine its impartiality as the FSA, and potentially its staff have a direct interest in the monies collected by it. We are disappointed that our suggestion, made in discussions with Treasury Officials, that fines be paid to the Ombudsman or Compensation Schemes, thus removing the conflict whilst at the same time helping to fund the costs of the regulatory system has not been taken up.

  15. We welcome the Government's proposal to impose a new statutory duty upon the FSA to establish and publish procedures and to act in accordance with those procedures. FSA Consultation Paper 17 indicated that these procedures would be detailed in a Broad Resolution of the FSA. We consider that this is too informal; we believe that the rules of procedure should be set out in formal rules of procedure, which would be subject to the specific requirements of the Bill regarding consultation.

Scope of the new regime

  16. We have previously expressed concerns that the potential scope of the new regime was far too widely drawn in the draft Bill and, in particular, did not limit the scope to activities carried on by way of business. This concern remains. The Treasury has recently consulted on the secondary legislation regarding scope and except in one instance relating to trustees of occupational pension schemes (mirrored in the current law) the scope is limited to activities carried on by way of business. We therefore see no difficulty in this limitation being contained in the Bill itself; the extension of the legislation to activities of a private character is something which in our view should properly be a matter of primarily legislation except in clearly defined circumstances.

  17. The Progress Report contains a commitment by the Treasury to consult fully not only on the initial secondary legislation but on future changes. We are therefore disappointed that there is no statutory duty imposed upon the Treasury to consult in these matters, equivalent to that imposed upon the FSA in relation to its legislative powers. Our concerns appear justified in the light of the fact that the Treasury published on 17 March a very important consultation paper on Financial Promotion with a deadline for comments of 30 April which is totally inadequate for a subject of this importance. We are concerned that without a clear statutory duty to consult within adequate procedures the temptation to pay lip-service to the principle of consultation will easily arise.

22 March 1999

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