Financial Services and Markets Appendices to the Minutes of Evidence


Memorandum by the Securities Institute


  The Securities Institute is the major examining body for the securities and derivatives industry and provides a wide range of industry qualifications which attract over 30,000 entries each year. The Institute is also a substantial provider of training courses and of relevant publications. Unlike the regulatory bodies and trade associations, it is focused on individuals not corporations. Its prime purpose is to set and maintain professional standards and promote excellence in matters of integrity, skill and competence. With 12,000 members in 1,800 firms, the Institute's additional purposes are to promote, for the public benefit, the advancement of knowledge in the field of securities and investments and to consult and research in matters of public interest concerning investment in securities. As such, it is deeply interested in regulatory and other issues which touch on public investment in securities.

  As noted above, the Securities Institute is an association of individuals. The draft Bill puts emphasis on individual responsibility and will recognise individuals who will have to be "fit and proper" to carry out their designated responsibilities. These individuals include senior executive officers and we welcome this emphasis on individual responsibility. People not companies are ultimately responsible for conducting the affairs of a firm and having clear and defined personal responsibility for the way in which it is run strengthens the commitment of individuals to run a compliant business.

  This submission addresses the issues raised by the Scrutiny Committee and is presented in the order requested.

  As a preamble, however, the Institute emphasises that its most important issues are the training and competence of individuals, consumer education and the recognition of specific individuals in regulated firms. In particular, we draw the Committee's attention to the dual role played by Compliance Officers and the need for this to be recognised.


  The Securities Institute acknowledges the additional accountability which has now been introduced into the new FSA regime since the publication of the draft Bill and we welcome the changes. The additional arrangements outlined in the Progress Report have clearly taken account of the comments made after the Bill was first published.

  We note recent comments from Howard Davies and that the FSA is regarded as being subject to judicial review and welcome this clarification.

  However the Securities Institute continues to recommend that the FSA should be subject to review by the National Audit Office and that this requirement should be included in the Bill. This audit should not be simply an audit of the accounts but should include the FSA's effectiveness and whether it provides value for money in regulatory terms. In making this proposal, we note that various component organisations of FSA including the Friendly Societies Commission and the Building Societies Commission are themselves currently subject to audit by the Office.


Consumer education

  Consumer education and consumer protection go hand in hand. The Securities Institute therefore warmly welcomes the inclusion of consumer education in the objectives of the FSA. We firmly believe that a financially literate consumer is an essential building block for effective financial services regulation. The FSA itself can do a number of things directly including:

    —  providing easy to absorb information on the basics of regulated activities;

    —  providing general information on the suitability of particular products for different groups of savers.

  Given the finite nature of its resources the FSA's priority should be to identify organisations and material which meet the needs of consumers, to sponsor approved courses, to encourage and stimulate the development of such material where gaps exist and to orchestrate the provision of information, not attempt to provide it all. FSA's direct resources should be used only to fill gaps which are not being adequately filled by others.

  We believe that the FSA might consider "badging" approved products and services in the education field and encouraging companies to work with the Plain English Campaign. In this way, the regulator could stimulate a wide range of material from many suppliers, catering for individual needs and providing a wide range of choice for users. In this context, the Securities Institute stands ready to play its part in achieving this important goal.

  Given the FSA's regulatory objective of promoting public awareness of financial products, the Securities Institute also suggests that the FSA should report at least annually to the Secretary of State for Education and Employment on the progress it is making so as to co-ordinate its initiatives with those of the DfEE in this area. This report to the Secretary of State should also be published as part of the FSA's Annual Report.

Recognition of Individuals

  The Securities Institute supports the FSA in its proposals that principles as well as detailed rules should guide regulated firms in the conduct of their affairs. Among the principles outlined by the FSA are requirements that firms must conduct their businesses with integrity and that they must organise and control their affairs effectively.

  In supporting these aims, the Securities Institute places great emphasis on individual responsibility being taken by those who run and control firms. While a firm's directors have collective responsibility for the actions of the firm, individual responsibilities should be clearly defined so that individuals know what they are and take those responsibilities seriously in the course of their work.

  The purpose of the Securities Institute is to help individuals acquire the knowledge and skills to discharge those responsibilities effectively. We also emphasise the importance of integrity to our membership as something beyond mere compliance. "Is it right?" is a more powerful question than "Is it allowed by the Rule Book?".

Keeping advisers up to date

  At present there is no clear requirement either in the Bill or in the FSA's proposals for advisers to demonstrate continuing professional development in terms of keeping up to date with changes in products and market practice.

  Professor Jim Gower, one of the leading influences on modern financial regulatory thinking, said in his Report[13] "the investor is entitled to some protection from ignorant fools as well as from convicted crooks". We agree. As an investor what I need to know above all is: Can I be sure that this adviser has the information I need? Is that information up to date? Is it relevant to me? Are there better alternatives? Can I rely on his skill and judgment? These are questions that uninformed savers cannot judge easily for themselves but on which they need to be reassured.

  The use of computer-based methods of carrying out transactions will continue to develop, bringing cheaper and more efficient dealing services for those who are confident in their own judgments and do not require advice. For many, the provision of good, customer-focused advice on financial products will become an even more critical element in delivering the right financial services to them.

  The Institute also emphasises its continuing support for individual regulation. A qualification to demonstrate basic competence is an essential part of a benchmark to ensure that individuals justify being approved to engage in investment business. The draft Bill refers to the holding of a qualification or undergoing training as evidence of being "fit and proper". The Institute is pleased to note that the FSA, in "Meeting our responsibilities" recognises that individual qualification, in terms of knowledge and skills, as well as awareness of regulatory requirements and obligations, will form the basis of individuals being allowed to fill key roles in the industry. In our view this regime should extend to all those who advise customers on the choice of investments.

  This element of the regulatory regime is of particular interest to the Securities Institute. We shall seek to work closely with the FSA in building on the existing training and competence framework. We shall play our full part, using our past experience of developing successful and widely used examinations and training, to help develop and deliver the necessary qualifications and the means of attaining them, both in attaining basic competencies and in developing professional expertise, whether in the front office or in operations. We support the FSA view that demonstration of competence is no less than consumers have a right to expect and that it will help maintain confidence in the system and provide effective protection. Knowledge and skills are necessary building blocks; an ethical approach to putting the customer's interest first is a further essential element.

The position of Compliance Officers

  The Compliance Officer of a regulated firm is in the position of being recognised as the regulatory point of contact by the regulator and has to comply with requests for information from the regulator. Compliance Officers can thus face a major conflict of interest between their duty to the regulator and that to their own firm. Yet Compliance Officers have no legal standing within the regulatory framework as to their particular duties when complying with regulatory demands. The Securities Institute urges that Compliance Officers and their dual responsibility both to the regulator and to the firm be recognised in the legislation. As an example, recent Jersey law defines the duties of a Compliance Officer as being responsible for:

    (a)  ensuring that the registered person, i.e., the company, has robust arrangements for compliance with law, any orders made under it and the Jersey Codes (of practice);

    (b)  securing appropriate monitoring of operational performance and promptly instigating action to remedy any deficiencies; and

    (c)  being the principal point of contact on regulatory matters.

  This provides a suitable framework for his duties.

  An extract from the Jersey law is attached in an Annex.

Product design

  The Bill sets the overall agenda for the reform of financial services regulation and basic standards and includes the duty on FSA to have regard to innovation. But competition in the market place will better serve the interests of savers and investors than regulatory control of products. FSA should concentrate on being the market regulator, not the designer of products. We support the Treasury's views, expressed in the recent Progress Report, that product design should not be a primary objective of the FSA.


Enforcement and discipline

  To work effectively in protecting investors, an enforcement system must command the respect of the regulated community. To do this, it must be fair, seen to be fair, transparent and consistent. A regulatory regime in which time, money and effort are spent by regulated firms fighting the regulator will ultimately harm the consumer's interests.

Differentiating retail and wholesale markets

  Howard Davies in his evidence to the Committee, outlined a three-way approach:

    (1)  market professional to market professional;

    (2)  market professionals to expert investors (e.g., Corporate Treasurers);

    (3)  the retail market.

  The intention is that elements of the regulatory burden would be disapplied in the cases of 1 and 2. However, one important area appears to be missing from this analysis: that is market professional dealing with an expert counter-party who in turn has responsibilities to the retail market, e.g., a fund manager. It remains unclear where such a transaction would fit.

  We appreciate that both the legislation and the FSA seek to uphold the London market's competitive position, but definitions of different types of customer and the extent of the protection offered must be clarified as quickly as possible. Over-regulation will drive business from London.

The enforcement process

    —  There appears to be no right of redress if the FSA takes action which is subsequently found to be wrong.

    —  The impact of regulatory action should be proportionate to the concerns being addressed. Greater safeguards from punitive action for small transgressions are needed.

    —  Co-operation with overseas regulators should be subject to reciprocity.

    —  Intervention and enforcement activities should be carried out without publicity until the matter has been resolved. This is acknowledged by the FSA in its enforcement paper and the Securities Institute strongly supports this stance.

    —  We welcome the FSA's attempts to clarify the uncertainty surrounding criminal and civil remedies. In particular we welcome the proposal not to pursue a civil case if a criminal one fails. However, the criterion still appears to be almost exclusively whether the regulator has enough evidence for a criminal conviction rather than the seriousness of the case.

    —  The fining policy should be fair and consistent. FSA should carry out an annual review of the year to make sure that consistency is being followed. It is proposed to allow FSA to levy unlimited fines on a civil law standard of probabilities. This open-ended regime is potentially subject to abuse.

    —  The public interest and practitioner members of the Enforcement Committee should have full voting rights.


    —  We applaud the intention to introduce legislation to curb market abuse which will be more effective and flexible than its predecessors.

    —  The Securities Institute welcomes the introduction of a proposed Code intended to be more effective than earlier legislation in tackling abuse and in building confidence in the market process.

    —  We accept the points made by FSA that the level of proof in a serious civil case will be very close to the criminal measure and that no civil action will be pursued once a criminal charge has failed. However there remains no clear view on what is a civil offence and what is a criminal one.

    —  The proposed regime appears draconian. A course of conduct might be subject to a 7-fold jeopardy if it breached the Code of Market Conduct.

    —  Notwithstanding the comment in paragraph 13.5 of the Progress Report, the Securities Institute believes that the concept of "intent" should be introduced into the legislation. In general, the law deems a person to intend the consequences of an action. At the moment, however the Precepts and Code can be breached where conduct has an effect of breaching the Code even if there is no intention to do so. To introduce the concept of intent would not destroy the enforceability of the Code, but would offer a measure of protection to practitioners who seek to devise legitimate new and untested market strategies.

    —  We welcome Howard Davies's comment in evidence to the Scrutiny Committee that the FSA may be prepared to look at innovatory developments in advance.

    —  With the prospect of draconian action being taken against them and with the possibility of unlimited fines (FS Bill Clause 58), it is important that practitioners should have the assurance that they can discuss in advance proposed courses of market action with the FSA to obtain a clearance or otherwise. Alternatively, there should be a number of well defined "safe harbours" from the operation of the Rule.

March 1999

13   Review of Investor Protection: 1982. Back

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