Memorandum by Mr C M Williams
This submission focuses on the proposed accountability
of the FSA in the light of its conduct to date and that of its
predecessor, the SIB.
1. Despite all the claims to the contrary the
structure of the proposed regulatory organisations, the FSA, and
therefore ultimately its actions and its accountability will be
little different from those of the past. The appointment of board
members and their removal, the making of rules and the annual
report are similar to the present, and previous, regimes. Of particular
significance is the structure as a private limited company with
immunity from claims for damages. This in the past has enabled
the regulators to disregard the justifiable criticisms of the
private investor and in the view of many the regulators are discredited.
2. The structure for regulation with many of
the staff recruited from the industry which it regulates and who
expect their future career to be back in that industry is biased
towards that industry.
3. The structure used by the present system
and proposed for the new system makes regulation unaccountable
to either the public it is supposed to protect or to government.
4. Regulation structured as proposed has been
shown not to work satisfactorily in the past and there is no reason
to think that it will be any different in the future.
5. This opinion and the evidence to support
it comes as a result of seven years of personal experience of
the workings of the regulatory bodies, initially as a private
individual and latterly as a member of an action group and is
therefore based on actual events and experience. This submission
is made as a private individual.
6. The documentary evidence to support this
opinion is in my possession but for reason explained in my letter
of 17 February 1999 to the Clerk of the Treasury Committee I am
unable to quote directly from the documents.
Basis for the opinion expressed above
7. The minutes of evidence of the Treasury Committee
held on Tuesday 8 December 1998 contain Mr Davies' response to
a question put by Mr Kidney concerning the rationale for the FSA
to be structured as a private limited company. Mr Davies' reply
gives credence to the view that the structure of the FSA needs
a fundamental change if it is to be accountable, particularly
to those it is supposed to protect. His answer at paragraph 232,
final sentence was: "That is what our institutions want us
to do, they want us to employ people who understand their business
and go in and out, and that would be facilitated by the private
company model . . . "
So the rationale for the FSA to be structured
as a private limited company with immunity from actions for damages
(a) that this is what our industry
(b) so that staff move more easily from the
financial services industry to the FSA and back out again.
The first priority of the FSA is therefore to
satisfy the financial services industry, a rather peculiar first
priority for a regulator. It must be the first priority in Mr
Davies' mind because it is fundamental to the structure of the
FSA from which all else flows.
8. Mr Davies' comment reveals all too clearly
that the regulators are and will continue to be too close to those
they are supposed to regulate. The problem in the past was not
the FSA86, it was the failure of the regulators to carry out their
responsibilities. Once the new broom enthusiasm has died down
we shall be back to the same situation as before.
9. To suggest that the private limited company
format allows staff to move more easily from the financial services
industry to the FSA and back out again overlooks a very important
point. When a regulator has found it necessary to use the full
regulatory powers on a number of firms in the financial services
industry, what will be the chances of employment back in that
10. There is another important feature that
inevitably follows on from the structure of a private limited
With no outside shareholders the board of directors
is only answerable to itself and, as in the past, once appointed
is able to act autonomously. Accountability to any other body
is difficult to enforce. This was the case in the past and the
Treasury was powerless to act. I have letters from officials which
prove this point. Once the Delegation Order of the Financial Services
Act 1986 came into effect the Treasury was virtually powerless
to control the actions of the SIB in any more than a general way.
The new legislation contains little to stop this happening again.
11. The Chairman of the Treasury Committee,
Mr Radice, in a recent letter to me states that the proposed legislation
now takes accountability into consideration. This is not my view.
The Treasury may "expect" its appointees to the FSA
board to "take account of the need to pursue the objective
of protecting consumers . . ." but with members of the financial
services industry prominent on the board we know from experience
that they have other far more pressing priorities.
12. None of the appointments to any of the boards
of the regulatory bodies in the financial service industry including
the FSA, come under the remit of the Commissioner for Public Appointments,
though lip service is paid to the "guidance" issued
by the Commissioner.
13. Consumer Panels, which have an advisory
function, are claimed to give the private investor influence in
the operations of the regulator. Those of us with experience of
organisations know only too well that it is the board that holds
and uses the power.
Bodies which only have advisory powers are very
easily "fobbed off" and become nothing more than "talking
14. My experience of the operation of the regulators
reveals a catalogue of regulatory events which some would describe
as incompetence, others that it reveals too close a relationship
with those who were supposed to be regulated. What is certain
is that the regulators showed a reluctance to act and when they
eventually did it was too little as well as too late.
Two agreements negotiated by SIB, contained
fatal flaws. There are other examples of a failure to safeguard
the interests of the private investors.
When finally it came to paying compensation
the "rules" were invoked to ensure that as little as
possible was paid out. The iniquitous formulae used to calculate
compensation was only possible with a structure which makes the
regulatory body, in this case the ICS, virtually unassailable
by private individuals. The FSA which now has the responsibility
for the ICS "rules", refused to intervene despite numerous
requests. At the meetings at which this problem was discussed,
the first with the ICS and the second with both the ICS and the
FSA we met with prevarication and claims that the "rules"
allowed the particular stance being taken.
This, I believe, was due to the structure of
the regulators as private limited companies and their close relationship
with the industry.
15. It appears that the Government is relying
on the FSA annual report and the Treasury Committee to monitor
and control the actions of the FSA. Annual reports are notorious
for being smokescreens and are often little more than vehicles
for self congratulation. They are also historic, but many situations
in the financial services industry require immediate action. The
Treasury Committee, powerful body that it is, is unlikely to get
at the grass roots level of regulation.
19 March 1999