Memorandum by the Law Society of Scotland
1. This paper sets out the submission of the
Law Society of Scotland on the Government's proposals for regulation
of financial services, embodied in the draft Financial Services
& Markets Bill which is to be considered by the Joint Committee.
2. The Society is the recognised professional
body for Scottish solicitors and is recognised as such under the
Financial Services Act 1986. The Society presently regulates 550
firms of solicitors, who provide a wide range of financial services
in many cases, integrated with legal advice.
3. The Society recognises that the creation
of the Financial Services Authority will provide a single financial
regulator for the industry and consumers which should bring the
benefits of clarity and uniformity. However, the Society is concerned
that these objectives of clarity and uniformity may not be achieved
in respect of Scottish solicitors who may conduct investment business
under the new regime.
4. The Society has already expressed its concern
to the Economic Secretary at the Treasury on the interplay between
the Scottish and Westminster Parliaments on the future regulation
of investment business for Scottish solicitors. While financial
services regulation is a reserved area for the Westminster Parliament,
the Scottish Parliament will have responsibility for the regulation
of Scottish solicitors. The draft Bill seeks no amendments to
the existing primary legislation governing Scottish solicitors
contained in the Solicitors (Scotland) Act 1980. The existing
compensation, disciplinary and Ombudsman arrangements governing
all aspects of a Scottish solicitor's work will continue in parallel
with the proposed arrangements under the draft Bill. Scottish
solicitors will therefore be subject to two compensation, disciplinary
and Ombudsman's schemes in respect of their investment business
and such schemes will be regulated by different Parliaments. More
importantly consumers will be confused.
5. The Society has raised these concerns in
greater detail with the Treasury and the FSA.
6. The Society has serious concerns about the
accountability and powers of the FSA. The draft Bill has been
so constructed that it is in essence an enabling Bill and will
provide the FSA with such powers as it deems necessary to regulate,
discipline and supervise the financial community. It is essential
that such powers should be balanced with an appropriate degree
of responsibility to Parliament and to the financial services
community and consumers. The Society is not aware of any other
body with such wide policy-making and enforcement powers conferred
by Statute which is not a direct Ministerial responsibility. While
the FSA has addressed some of these concerns, there still appears
to be a lack of an effective control mechanism built into the
FSA structure whereby an effective and quick review of the FSA's
decisions could be made to ensure that the FSA does not act ultra
7. The Society believes that the FSA may wish
to consider some of the following measures to increase its own
The FSA should be asked to explain
the methodology used in its cost/benefit exercises;
The FSA has established a Practitioner
Forum and Consumer Panelthese should be provided for by
Statute in the Bill;
The FSA should be subject to an annual
audit by the National Audit Office.
8. The Society welcomes the inclusion in the
draft Bill of the statement of the statutory objectives of the
9. The Society suggests that an annual assessment
should be undertaken by the FSA to demonstrate whether or not
in each year the FSA has met its stated statutory objectives.
A report on this assessment should be published annually.
10. The Society believes the Treasury should
give consideration to including as an additional objective the
maintenance of the international competitiveness of the UK's financial
services and markets.
FSA DISCIPLINE AND
11. The Society is concerned that the FSA may
be able to exercise its disciplinary and enforcement powers in
a punitative manner. Furthermore, the FSA disciplinary regime
would appear to have a criminal rather than civil character and
should, in accordance with the European Convention on Human Rights,
respect the rights to fair trial and due process which the criminal
law provides for defenders.
12. The Society further believes that the FSA's
approach to discipline and enforcement should not solely be directed
at the detection and punishment of breaches of Rules but rather
that the focus should be on achieving and maintaining compliance.
The Society believes that insufficient consideration has been
given to compliance through self-assessment which is a philosophy
which this Society, through its own experience, believes raises
compliance standards considerably.
13. The FSA should base any enforcement action
on the principles of proportionality and consistency so that the
cost of compliance for any firm is minimised by ensuring that
any action required is proportionate to the risks.
14. The Government, on 7 April 1998, announced
its initial decision on the future regulation of mortgage advice.
The Treasury will be taking a reserved power to extend the FSA's
responsibility to include mortgages, as part of the draft Bill.
The Society has some difficulty in understanding how a mortgage,
which is a debt over heritable property, could be defined as an
investment in terms of the draft Bill.
15. The Society supports the extensions to the
Mortgage Code as a means of ensuring adequate protection for consumers
where mortgage advice is given.
16. The Society supports the Council of Mortgage
Lenders' approach to the evolving nature of mortgage regulation
in the UK. The Society believes that the extension of the Mortgage
Code to cover mortgage intermediaries from 30 April 1998 should
be subject to a formal review in 1999 to assess whether the Code
17. The Society is concerned that the definition
of "investment" proposed under Clause 1(4) which, taken
together with the terms of Schedule 2, may significantly widen
the definition of an investment and investment business. The definitions
proposed for both terms appear contrary to the Treasury's stated
intention of narrowing the scope of investment business to eliminate
the need for "precautionary authorisation" currently
undertaken by many professional firms. There is a real concern
that general business advice, particularly that provided by solicitors
to small and medium sized enterprises may be inadvertently caught
by the new regulatory system. This could result in significant
investment business compliance costs being incurred which may
price such advice beyond the scope of many small and medium sized
18. While the Society recognises the Treasury's
wish for flexibility for the future in terms of the absence of
precise definitions within the draft Bill, the Society is concerned
about this approach given that Parliament will be asked to approve
the new regulatory structure when the scope is still uncertain.
This uncertainty would appear to breach two fundamental principles
of regulation that such regulation should be clear and legally
19. The Society has grave concerns as to the
practicality of dual regulation which will apply to Scottish solicitors
who conduct investment business. The Society will still, act as
a regulator for all areas of a Scottish solicitor's practice bar
investment business. This regulation will be subject to oversight
by the Scottish Parliament. The investment business activities
of Scottish solicitors will be subject to the regulation of the
FSA under its powers delegated and provided for by the Westminster
20. The Society is concerned that little, if
any, regard has been given to the interplay of the two Parliaments
in their future regulation of Scottish solicitors. For example,
the Scottish Solicitors Discipline Tribunal is charged with the
ultimate responsibility for the disciplining of Scottish solicitors.
This Tribunal has powers to discipline Scottish solicitors in
respect of their conduct of investment business. However, the
draft Bill also proposes that a separate Tribunal be established
under the auspices of the FSA which will also be able to discipline
Scottish solicitors in their conduct of investment business. As
no amendments have been sought to the Solicitors (Scotland) Act
1980, Scottish solicitors will in this and other areas be subject
to two regulatory systems determined by separate Parliaments which
will neither create certainty or clarity for such solicitors and
consumers. This duplication and potential conflict also arises
in the interface between the Society's complaints handling, compensation
and professional indemnity insurance schemes as determined by
the Scottish Parliament and those of the FSA as determined by
the Westminster Parliament.
21. The Society has raised these concerns in
greater detail with the Treasury and the FSA.
22. The existing Ombudsman Scheme, covering
all aspects of a Scottish solicitor's work is that of the Scottish
Legal Services Ombudsman. This Ombudsman Scheme is established
under the Solicitors (Scotland) Act 1980. The Society's concerns
on the interplay of this Scheme and that of the FSA Ombudsman
Scheme are similar to the concerns raised in paragraph 21.
23. The Society's compensation scheme is a guarantee
fund of unlimited liability which, under the system of dual regulation,
will continue to apply through the Scottish Parliament to Scottish
solicitors who conduct investment business. This again will result
in Scottish solicitors who conduct investment business being subject
to two compensation schemes. Consumers will be confused which
compensation scheme will handle particular compensation claims
and there is a danger that some claims may "fall between"
the two schemes.
The Society's principal concerns which it wishes
to identify to the Joint Committee on Financial Services and Markets
as contained within this Memorandum are as follows:
Greater accountability of the FSA
should be enshrined in the Financial Services and Markets Bill;
An annual audit of the FSA to be
conducted by the National Audit Office;
An annual assessment by the FSA as
to whether it has met its statutory objectives;
The principles of proportionality
and consistency to be applied by the FSA to its enforcement philosophy
to ensure that the cost of compliance for firms should be minimised
by ensuring that any enforcement action required is proportionate
to the risks;
The definition of an investment and
what activities constitute investment business should be clear
and legally certain;
Urgent steps to be undertaken to
ensure that there is not constitutional conflict between the Scottish
and Westminster Parliaments in their respective regulation of