Financial Services and Markets Appendices to the Minutes of Evidence


Supplementary Memorandum by the Association of British Insurers



  1.1 The Association, jointly with the British Bankers' Association, has already made a written submission to the Committee. We recognise that improvements to the Bill have been made in response to earlier consultation, but, for the reasons given in the answers to questions below, we do not yet consider that all our concerns on accountability have been fully met. Parliament is delegating a unique set of powers to lay rules which will have the force of law and to enforce the regulatory regime. There needs to be a proper balance in the accountability of FSA for the exercise of these powers.


2.1 The Government has made several proposals for enhancing the accountability of the FSA. Are you now happy with the FSA's proposed level of accountability?

  We recognise that changes have been proposed to the Bill in response to concerns expressed during the earlier consultation. Treasury, in its Progress Report considered questions of accountability under three main headings; accountability to Ministers and Parliament; ensuring the regulator takes account of the views of practitioners and consumers and discipline and enforcement.

  The regulated community will look to the Government and Parliament to ensure that the FSA is operating in an open and fair manner. We set out below ways in which the accountability of FSA under the first two headings could be addressed. In particular:

    —  As well as consulting on proposed rule changes and publishing a statement of alterations we consider that where the FSA rejects positions widely argued by practitioners and/or consumers it should be obliged to make clear in full why it has done so.

    —  The Bill already provides that the FSA should give Treasury copies of any rules or standing guidance that it makes. In addition, Treasury should have the right to state whether or not they agree that any changes or additions are in line with the FSA's statutory objectives. In doing this, they would clearly take into account any statements made by the FSA on the results of its consultation.

    —  We further consider that there needs to be a government power of direction on specific policy issues. As a last resort, this could be used by Treasury in instances where they consider that rule or policy changes are not in line with the FSA's statutory objectives.

    —  We welcome the proposal that the FSA will be required to provide an annual report to Parliament through Treasury Ministers and that the content of the report will be agreed between Treasury and FSA. The report should be debated by Parliament or by a Committee.

    —  Changes to the fees are to be treated as rule changes. However, this may mean that only the mechanism by which these are set and not the actual level will be subject to consultation. Consultation on the actual level of fees would be desirable. To date, this has not existed in the setting of insurance fees but in the initial years of FSA it may be more important in order to ensure that FSA takes account of the costs of its proposals.

    —  The joint BBA/ABI submission to the Committee suggested that there should be an additional statutory objective, in addition to the general duty set out in Clause 2(3)(e)(f) requiring the FSA to have regard to the impact on the competitive position of the industry of any proposed rule changes. This may become more important if the requirements for FSA to report on the impact of its proposals on its statutory objectives are strengthened.

2.2 Do you think making the establishment of the Enforcement Committee a statutory requirement would improve accountability?

  We see no reason why the establishment of the Enforcement Committee should not be a statutory requirement. However, we consider that the role played by the Enforcement Committee in the enforcement process is more important than whether or not its existence is enshrined in statute. The Enforcement Committee should be in a position to make robust and well informed decisions.

  We consider that, as a point of principle, enforcement decisions should be made at the lowest competent level possible within FSA. We are concerned that the procedure currently set out will not result in a hearing by the Enforcement Committee of the case presented which is perceived to be impartial and may thus result in more cases than necessary being referred to the Tribunal.

  This is because the Warning Notice (the notice to the regulated entity that FSA considers there may be a case for disciplinary action) will be issued after the Enforcement Committee has reached a view on whether there is a case to answer. The person under review has no opportunity to put his case before that decision is reached. We would suggest that the Warning Notice should give notice that an alleged breach is to be referred to the Enforcement Committee. The Enforcement Committee would then consider the case presented both by the regulated entity and by FSA before issuing a "Decision Notice", rather than satisfying itself that a possible breach has occurred on the basis of evidence presented by the operational divisions only.

2.3 The Bill requires only that the FSA should have a Chairman. What do you see as the advantages and disadvantages of combining this role with that of Chief Executive? Do you think it will enhance the FSA's accountability?

  The Hampel Committee devised principles of good governance. Among these are that there are two key tasks at the top of every public company—the running of the Board and the executive responsibility for the running of the company's business. There should be a clear division of responsibilities at the head of the company which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision. This predicates against the combination of the role of Chairman and Chief Executive.

  We recognise that there is not an exact parallel between the FSA and public company models but consider that FSA should be able to justify the structure adopted. We welcome the suggestion that other models may be examined in future.

2.4 It has been suggested that appointments to the FSA Board should be subject to confirmation by Parliament? What is your view?

  We do not consider it essential that all appointments to the Board should be subject to confirmation by Parliament.

2.5 It has also been suggested that some seats on the Board should be reserved for dedicated consumer experts. What do you think of that suggestion? Do you agree with the Government's view that the Board will be most effective if appointments are made on the basis of people's experience and qualities as individuals?

  We consider that appointments should be made on the basis of experience and qualities as individuals and also that consideration should also be given to the balance of backgrounds, views and experience on the Board as a whole.

2.6 What do you see as the main role of the Consumer/Practitioner Panels? Should there be an explicit requirement on the FSA to consult the Panels when making rules and broad policy statements?

  The Consumer and Practitioner Panels will have the role of providing independent input from the consumer and practitioner point of view, and in assessing FSA's performance against its statutory objectives.

  We consider that the FSA should consult the Panels when making rules and broad policy statements. However, we do not consider that the FSA's obligation to consult is met by consulting with the Consumer and Practitioner Panels alone. They are not substitutes for effective consultation with the areas of industry particularly affected by proposals and with their trade associations. The FSA should be able to demonstrate that it has specifically sought the views of market sectors affected by proposals as part of its consultation process.

2.7 Should the Bill require the Treasury to maintain an appropriate balance between consumer and practitioner representatives? If so, what would you regard as an appropriate balance?

  Given that the Consumer and Practioner Panels are intended to be composed of consumers or practioners, we assume that this question relates to the Board as a whole. Our views are set out above.

2.8 The Chairman of the Panels are appointed by the FSA. What do you see as the advantages and disadvantages of this? Do you think it would be more appropriate for the Chairman to be appointed by some other body, for example the Treasury, or the non-executive committee, or for the FSA's nominations to require the approval of the Treasury?

  We consider that a mechanism should exist whereby there can be independent review of appointments made. Thus, if appointments are made by FSA, they should be subject to approval by Treasury.

2.9 The budget for the Consumer Panel has been set by the FSA at £420,000. The FSA has committed itself to an early review of the budget. Are you concerned that the budget will prove inadequate? Are you content with the way in which the budgets of the Panels are set?

  We have no strong views on this issue. We note that the FSA needs to be adequately resourced to do the work it has to do, but at the same time should have due regard to considerations of economy and efficiency. Review of the budget will doubtless be necessary in the light of experience.

2.10 How do you consider the independence of the Panels can be best safeguarded?

  Mechanisms such as rotation of membership, independence of chairmen and scrutiny of the functions of the Panels, possibly via the FSA annual report, are important.

2.11 Howard Davies said that the Practitioners Panel in particular was likely to launch quickly some surveys of industry opinion which would provide a sort of benchmark about regulatory sensitivity and regulatory intensity against which they could measure the FSA in the future. Will the Panels be carrying out any such surveys and, if so, when will the first survey be held?

  We welcome Howard Davies' proposal. The timing and running of such surveys is in the hands of the FSA.

2.12 How do you regard the role of the non-executive committee? Are there any other responsibilities which you would like the committee to fulfil?

  The role of the Non-Executive Committee is set out as being to keep a watch on value for money aspects of FSA's performance. The Committee will also be required to determine the remuneration of the Chairman and executive members of the Board and will be required to report within FSA's annual report. The Chairman of the Board is to be appointed by Treasury.

  We do not at the moment see any further role for this committee, but we recognise that it should have an important role in monitoring the cost effectiveness of FSA's operation.

2.13 Some concern has been expressed at the proposal that income from fines should be returned to the industry as a discount against fees. Do you share this concern? What do you think should happen to the income from fines?

  The key point is that there should be transparency in the use of the income from fines. The income from fines should not be used to offset current years running costs, as we fear that could prejudice the independence of the fine setting process.

2.14 What type of arrangements for independent investigation of complaints made against the FSA do you think would be most effective?

  We consider it crucial that there should be a robust independent investigation of complaints, particularly given that the Bill proposes that the FSA should have statutory immunity. The independent complaints body should have the power to publish findings, and to order redress, and we look forward to commenting on the FSA's detailed proposals.

  Our submission on the Financial Services and Markets Bill recognised that the FSA will need to be robust in its decision making but that there are natural concerns in authorised firms that its immunity is too wide and that appeal procedures are expensive and time consuming and too late in the process to reflect the necessary balance of interests between the regulator and regulated. If there is a gap it is in respect of negligence in the exercise of FSA powers.

2.15 It is not intended that the FSA should be subject to the jurisdiction of the Parliamentary Commissioner for Administration. Do you think it would be useful if the FSA were brought within the PCA's remit? Do you think such a move would be of benefit to aggrieved "consumers"/investors?

  We understand that, if an individual's complaint related to the operation of Treasury oversight of the FSA, this would come within the PCA's existing remit.

  We recognise that there would be benefits in bringing the FSA within the PCA's remit. Of particular importance are the PCA's wide powers to investigate, and its power to order administrative changes. The PCA's normal procedures mean that complaints could only be made to the PCA via an MP and after FSA's internal complaints procedures have been used.

2.16 The draft Bill requires the FSA to carry out public consultation, whenever it proposed to change its rules. The Association of Unit Trusts and Investment Funds (AUTIF) has suggested that the FSA should also be required to consult on all policy initiatives affecting one or more sections of the regulated community. Do you think there is a need to require the FSA to consult on matters going beyond proposed rule changes?

  We consider that the FSA should consult on policy initiatives affecting one or more sections of the regulated community. At the very least, this should smooth-out the process of rule change by allowing a dialogue on the policy behind the rule change before any detailed drafting is undertaken.

2.17 The AUTIF has also suggested that the FSA should hold public hearings on important policy proposals. Do you think that would be a useful step towards increasing the FSA's accountability?

  We consider that public hearings on important policy proposals could be useful, and that FSA should use all appropriate routes of consultation.

2.18 Are you satisfied that the rule making procedures fully accord with the Better Regulation Unit's principles of good regulation?

  The Better Regulation Task Force commented in October 1998 on the consultation draft of the Bill, using as a template its "Principles of Good Regulation" and expressed a number of concerns about the Bill. Some of their concerns, notably on the penalty regime and accountability, have not yet fully been addressed. The Task Force will no doubt be commenting on further drafts of the Bill.

2.19 Several bodies have suggested that the FSA should be subject to periodic efficiency audit by the NAO. What is your view?

  We consider it essential that the efficiency and cost effectiveness of the FSA should be subject to periodic assessment. The NAO, with extensive experience of public sector bodies, may be well-equipped to do this.

2.20 Several submissions have suggested that the Treasury should retain in reserve powers of direction over the FSA. Do you agree?

  As mentioned above, we are strongly of the view that Treasury should retain reserve powers of direction over the FSA, although they would only be used in extreme circumstances. The existence of such powers is an important factor in ensuring that the FSA remains fully accountable to Treasury and through them to Parliament. This is a necessary balance to the sweeping powers of rule making with the force of law which are being delegated by Parliament to FSA.

15 April 1999

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