Financial Services and Markets Appendices to the Minutes of Evidence


Memorandum by Dr Oonagh McDonald CBE



  Concern has been expressed about the breadth of the FSA's powers and its dual role as supervisory authority and the body responsible for enforcing rules and regulations governing the financial services industry. I wish to deal with these concerns from the point of view of a former Board member of the Securities and Investments Board and subsequently the Financial Services Authority, and a member of the Enforcement Committee.

  Establishing a single regulatory authority does concentrate the powers of enforcement, which were previously dispersed amongst several entities, thus giving rise to the perception that they are more formidable than the powers under the old regime. That observation has to be qualified by the fact that certain enforcement powers in the field of market abuse have been added, such as the power to investigate insider dealing and market abuse and manipulation together with a civil standard of conduct of universal application. The arguments for extending the civil powers of the regulatory authorities remain as valid as they were when the SIB sought to extend its powers and received the support of the then Government and the Opposition, which now forms the present Government.

  Concern has also been expressed about the accountability of the FSA. The lines of accountability have been clearly set out both in the Bill and the FSA documents. The FSA has been set objectives for the first time and will be accountable to the Treasury and to Parliament for the way in which it has achieved those objectives. The legislation also contains a set of general duties, which provide a basis for Parliamentary scrutiny.


  The first consideration is the breadth of the FSA powers and the perceived lack of accountability both to Parliament and the financial services industry. The temptation with the establishment of a large and powerful regulatory authority is to continue to add to the layers of accountability without understanding the effectiveness of the constraints already properly placed on the authority.

  Obviously the Board of the FSA has the ultimate responsibility for the full range of decisions and policies of the FSA. The FSA is itself subject to judicial review on both the achievement of statutory objectives and the general duties laid down in the Bill as well as on specific decisions (e.g., enforcement decisions). Of course, one's duties as a director oblige one to act in the public interest.

  That commitment is strengthened by the possibility of judicial review. My experience both as a Member of the Board of the Investors Compensation Scheme and as a member of the Securities and Investments Board, and subsequently the FSA, taught me that such a Board takes its decisions impartially on the basis of the evidence before it. The Board (and its committees) are aware that the decisions must be taken according to Wednesbury criteria of "reasonableness", and such "reasonableness", must be demonstrable.

  Both the practitioner panel and the consumer panel will have a significant role to play in determining FSA policies and regulations. A strong and well-informed consumer panel can have a vital role to play in ensuring that regulation protects the investor. Although I was not a member of the consumer panel of the PIA, I chaired the ad hoc consumer panel which was set up to assist SIB in the preparation of the Guidance for the Pensions Review. I was a member of the Board at the time but other members of the Panel were not. The Panel had full access to all the papers on the range of issues, which had to be considered and the views of the Panel were taken into account by the Board in the final formulation of the Guidance. These are also important elements in the accountability framework of the FSA and should not be overlooked.

  The Practitioner Forum will have an important role to play in ensuring accountability in terms of reporting annually on the FSA's performance and will also have privileged access to the Board and to the staff. But that is not the only form practitioner involvement should and will take. Thorough consultation both formally and informally with practitioners in the development of regulatory policy is essential. Regulations must be designed to protect the investor and the integrity of the markets; but must also be both practicable and feasible, and extensive practitioner consultation is essential to achieve this.


  Most of the debate has focused on the FSA's enforcement procedures and, in particular, that the FSA will act as "prosecutor, judge and jury". It is important to appreciate the nature of the boundaries drawn within the FSA to ensure that full and proper procedures are in place. The structure of supervision and enforcement has been designed to ensure there is separation of function and that the principles of natural justice are preserved. These have been set out in the FSA's Consultation paper on Enforcement and subsequently. These safeguards are important; they separate the operational staff from decision-makers, leaving the enforcement staff to recommend issuing disciplinary proceedings to a separate Enforcement Committee, which makes the decision. The Chair of the Enforcement Committee, once the committee has reached its conclusions, issues the warning notices, which start the proceedings and the decision notices, which impose sanctions.

  The Chair of the Committee will be a full-time position, appointed (and removable by the Board) after an open selection process. The Chair would report directly to the Board and would have support staff separate from the enforcement directorate. Practitioners and public interest directors would be involved in the decision-making process, and the subjects of disciplinary action would be able to make representations and have an oral hearing. In the light of pressures from certain quarters, it is tempting to create ever more elaborate structures with increasingly opaque Chinese walls. But there must be a balance between avoiding conflicts of interests, and demonstrating that they have been avoided and an effective means of enforcement, which will both protect the individual or company in the sense that decisions are reached in a reasonable period of time, and protecting investors, who also need to know that the problems within a firm are going to be put right within a reasonable period of time.

  The FSA can draw on the considerable experience of the SROs and the SIB in enforcement action. I was a member of the SIB enforcement committee for three years. That Committee was responsible for overseeing the enforcement actions of the SROs and, on occasion, for enforcement actions against companies directly regulated by SIB; as well as for banning individuals from the industry in certain circumstances. As regards investor protection, SIB's hands were tied in that the current Act does not generally allow the regulators to name the individual, who had been banned from the industry. (If the case went to the Financial Services Tribunal and the tribunal upheld the decision to ban that individual from the industry, then the SIB could publish their report).

  The Committee was chaired by a lawyer, a non-executive director of the Board. The manner of its deliberations (bearing in mind the possibility of judicial review and other legal challenges such as the failure of the case to stand up in court) are important factors to take into account, when considering whether the proposed system has adequate safeguards built into it.

  The SIB committee was able to question and test our staff recommendations, modify them, insist that charges or an enforcement case in its entirety was dropped, guide policy and consider issues of costs and benefits of pursuing enforcement actions in certain cases. Open and frank discussion between staff and non-executive members of the committee were the order of the day. It was a question of weighing the evidence as a committee and coming to conclusions, which could and did lead to the rejection or modification of staff recommendations. All of these safeguards are implicit or explicit in the new legislation.

  It is also important to bear in mind the purpose of enforcement actions. The overriding aim is to ensure that the company recognises its failings and to put them right. Those failures are not always some relatively minor breach of the rules, but can, for example, in the case of a direct sales force, involve far-reaching management failures, leading to a poorly trained and poorly supervised sales force engaged in selling inappropriate products to customers. It is vital both to secure the company's co-operation in developing an appropriate strategy for putting the management and training of its sales force in order, and through the fine and public reprimand, making sure that they take the obligation to carry out remedial work seriously. A formal judicial process will not achieve those aims.

  Of course, the process of enforcement must conform to the requirements of Article 6 of ECHR. Those requirements are as follows:

    (i)  A fair and public hearing within a reasonable time.

    (ii)  An independent and impartial tribunal established by law.

    (iii)  The right to be present.

    (iv)  Balanced procedures (equality of arms).

    (v)  Access to the court.

    (vi)  Permitted to examine and cross-examine witnesses.

  Sometimes, those who argue that the FSA's enforcement procedures do not conform to Article 6, seem to suggest that Article 6 implies that the procedures must be judicial procedures. The Article does not define a "tribunal" and the Court has itself stated:

  "The Contracting States enjoy a wide discretion as regards the choice of means calculated to ensure that their legal systems are in compliance with the requirements of Article 6(1) in this field. The Court's task is not to indicate those means to the States, but to determine whether the result called for by the Convention has been achieved". (Colozza v. Italy, 1985, 7, E H H R 516). It would seem that the Court is much more concerned with the fairness of the procedures, not with the particular form that they take. The emphasis in the debate over conformity to ECHR should be on achieving the objectives of "fairness".

  The Court recognises that an offence may be designated as a disciplinary offence by a contracting state. This will not necessarily be accepted by the Court. In coming to its decision, the Court will consider whether the provisions defining the so-called "disciplinary offence" belong to the legal system of the respondent state, to criminal law, disciplinary law or both. It will also consider the nature of the offence, and that will be the most important consideration. The Court will also consider the severity of the penalty, which the person concerned faces. This suggests that there is considerable scope for the enforcement actions of the FSA to be regarded as disciplinary actions.

  The other criteria for a fair hearing are much more straightforward: "equality of arms" and a "reasonable" length of time both for the initial hearing and for any appeal. The first criterion refers to the requirement that each party has to be given a reasonable opportunity to present his case, including the presentation of evidence, in conditions, which do not place him at a substantial disadvantage. Obviously, the FSA must always take care that its procedures are designed to give the individual, or the company a proper chance to present relevant evidence.

  There is, of course, one clear advantage, which the use of the FSA's proposed enforcement procedures has. One of the Court's judgments indicated that the length of time from charge to appeal is an important consideration in "fairness". Three and a half years was considered to be too long for that process to be completed under Article 6 (Zimmermann and Steiner v Switzerland, 1979). The latest average figures for judicial procedures in England and Wales are better than that. The average length of time from charge to completion in indictable cases in magistrates courts is approximately three months, and, if committed, the average waiting time in the Crown Court is about four months. The waiting time for appeals at the Court of Appeal is approximately 11 months. The defendant can, if there is reason to suspect a miscarriage of justice, take his case to the recently established Criminal Cases Review Commission but would no doubt face further delays, since the Commission currently has over 2,000 cases pending.

  The Bill also establishes an independent tribunal, a tribunal of first instance to which all enforcement decisions may be referred. It will be able to consider the full merits of cases referred to it. It is important to have such safeguards, but it is also vital that the regulators and the regulated do not lose sight of the purpose of disciplinary action. Its purpose is to begin the process within the firm of putting the training and management procedures into place to ensure that investors are protected in the future.

  The FSA, including its constituent bodies, has consistently sought to achieve the agreement of the firms concerned. For example, in 1997-98, 97 SAO "cases" were concluded; that is, a warning notice has been issued to a firm with some disciplinary action to follow. Of the 97 cases, 57 were settled between the regulator and the firm, 36 were decided by a disciplinary committee and four were decided by the tribunal.

  The process of enforcement must, inter alia, be efficient and speedy if it is to be effective. The FSA supports that. It must be able to provide an efficient and cost-effective service. The public perception must be that the firm or individual has been disciplined and that the appropriate actions have been taken to prevent the recurrence of the problem. That has by no means always been the case when the procedures involved have been entirely judicial. The trail of Roger Levitt is a case in point. He was charged with 62 counts of fraud after this financial empire collapsed with debts of £34 million, but was finally convicted (which caused some controversy at the time) on a single lesser charge and sentenced to 180 hours community service in 1993. The case cost over £2 million in legal aid.

  Whatever the reasons for the outcome of that particular trial, the fact remains that many in the industry feel that their honour and their attempts to provide a proper service have been impugned by the failure to punish fraud. Of course, whilst the public perception of a judgment of that kind will affect the industry, it does little or nothing to protect investors as it suggests that such activities can be undertaken with impunity.

3 March 1999

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