Financial Services and Markets Appendices to the Minutes of Evidence


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 vires.

  7. The Society believes that the FSA may wish to consider some of the following measures to increase its own accountability:

    —  The FSA should be asked to explain the methodology used in its cost/benefit exercises;

    —  The FSA has established a Practitioner Forum and Consumer Panel—these 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 FSA.

  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.


  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 is working.

  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 enterprises.

  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 certain.

  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 Parliament.

  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 Scottish solicitors.

March 1999

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