Financial Services and Markets Minutes of Evidence

Examination of witnesses (Questions 320 - 338)




  320.  So you would prefer the even-handed approach whereby the costs should be separated out and either party can claim against the other depending on the outcome of the case?
  (Mr Sylvain)  Yes.

Mr Loughton

  321.  But if that were the case, on the deep pockets of the FSA, those deep pockets will not be as deep if you do not let them have the fine income, as was suggested earlier. So how are you going to gel with that? The implication is that the costs will fall with the fees of the members subscribing to the FSA. Presumably it will not be terribly welcome?
  (Miss Hutchinson)  We feel it is inherently wrong for the fines to be a source of funding for the FSA because that is bound to lead to people deciding how much they need to fine by comparing it to the budget, as it were.

  322.  But are they not required to publish their basis for that? To play devil's advocate, Howard Davies would say that, although nearly 70 per cent. is variable income, they are going to set a norm of a budget for a year and that will be the benchmark against which they are fining too much or not. So to take his view, he is looking at it quite closely as to what is a fair amount to fine, and I fully admit that on the face of it I do not like in principle the fines going because it is an incentive to fine if the fee income has gone down because market conditions suggest it has gone down whereas people have gone out of business.
  (Miss Hutchinson)  It means if you are being an effective FSA in providing all the right guidance and people are not doing anything wrong, you will not have any money.


  323.  Could I press this particular case because as I said last week I was slightly astonished at this suggestion that the industry should volunteer to give money to the Treasury. I have not come across this in many years in the Treasury. It seems to me it should not be beyond the bounds of possibility to design something which avoids the apparent incentive to levy fines in order to cover costs, either by returning the money in its gross form back to the industry in the form of a discount on their fees or by allowing some modest offset of the enforcement cost against it. I find it difficult to believe there is not a way of designing it such that you can return the money to the people who paid it in the first place as a discount, and which quite clearly avoids the apparent incentive to impose a fine rather than another form of discipline where there is a choice. The extreme conclusion of having the money come to the Treasury surprises me.
  (Mr Sylvain)  My Lord Chairman, I think we have heard that, as you say, in the proposals that have been put forward by Howard Davies it will be separately accounted for and be discounted. That actually sounds like something you can control and you can do, so that sounds sensible from the point of view of a practitioner.

Mr Loughton

  324.  But does that not encourage a culture of one firm ratting on another to keep the fees down?
  (Mr Sylvain)  I hope not.
  (Mr Buxton)  My Lord Chairman, we would vote in favour of the fines going back to the FSA.


  325.  To the industry?
  (Mr Buxton)  Then being accountable in the way that has been suggested.

Lord Montague of Oxford:  My Lord Chairman, they do not necessarily have to go back to the industry. Perhaps these fines could be considered for consumer education.

Lord Eatwell:  All the activities of the FSA have to be funded out of its fees anyhow, so you are having some form of reduction of fees.

Lord Poole

  326.  I thought it was very interesting that the view over there was as it was.
  (Mr Clarke)  My Lord Chairman, it would be ideal if you were right and there was a system for making sure that fines were not used as an incentive to the FSA, but I think you would have to add on another independent layer to make sure that it was not impliedly motivating the FSA. Once upon a time, I understand, back in the Middle Ages judges got a percentage of fines they levied but eventually that was thought not a good idea.


  327.  I understand that. I am very familiar with the arguments. I wrestled with them a lot in the Treasury, particularly the question of whether the police authority or whatever should have any access to the fines that were levied, which is why I am taking an interest in this. But I would have thought it would be possible to design something whereby the money went to the industry in a form which did not touch the FSA's pockets in any way. If it did not affect the amount they actually spent, then it would not affect the decision that they took, other than if they suddenly set themselves an objective to maximise the discount going back to the industry.
  (Ms Hutchinson)  The point may be dealt with to some extent because the body that makes the adjudication, which imposes the fine, I suppose, is the independent tribunal and not a part of the FSA.
  (Mr Clarke)  It does in a way get back to it, that because of the conflict of interest I think it is actually something the industry does not want. It does want a quicker and better procedure at the first stage and that should be seen to be fair. The other thing one would hope is that the junior members of the staff of the FSA would always act perfectly reasonably, but if a prosecutor has to spend a great deal of money developing a case which could be recovered if there was a decision, it can be, I suspect, in cases of perhaps the less strong-minded prosecutor a strong incentive not to admit halfway through, "I have made a mistake. This person has not acted unreasonably and if you pursue it you can actually recover your costs."

Mr Beard:  But there is a requirement for guidelines on fines to be set out and consulted on beforehand. You cannot just decide in the middle of a case what your new principles of fining are. You would have to stick to the guidelines which have been published.

Lord Poole

  328.  Furthermore, this is a system which has been running for rather a long time in various institutions around the City. Would you like to produce a couple of cases where you are utterly certain that the amount of the fines and the way the thing was handled and generally conducted clearly indicated that the fact that the SRO would keep the fine really influenced the outcome of how that was conducted?
  (Mr Clarke)  I cannot, but I still believe in this principle and, therefore, the procedures——

  329.  All of us who have been on the other side of this thing, curiously enough, and some practitioners over there, may say it is possible to envisage this vision but it seems to me it is fair to ask whether you are not envisaging something to do with angels on the tops of pins?
  (Mr Clarke)  I hope not.


  330.  If I could take the Chairman's privilege, I would like to move on to the question of statutory immunity, which I think was raised by one or two people. Can I put the other side of this, as I see it. I hear a lot about the desire not to have over-regulation. We do not want people to be very bureaucratic and heavy-handed about this. If there were not statutory immunity would that not turn the FSA into a very different sort of body that had to be really immensely concerned about everything that it did? Every time a firm went under and somebody lost any money—and occasionally that is going to happen—we would find they were being sued by the investors. In order to avoid that, you have to pursue a policy of saying no firm can ever go under and the whole process becomes enormously cautious. Would not that on its own be a very strong motivating force towards a very heavily regulated business and, therefore, is not the statutory immunity in the Bill a safeguard against excessive regulation?
  (Mr Turner)  Could I say that why we have statutory immunity in the current system, the self-regulatory system that is fading away, is because way back in 1985 nobody would agree to play, if I can call it that. Practitioners would not take part without the assurance of immunity from discharging their role on SRO boards and committees. What I simply do not know is in moving this system to a statutory system whether that force still applies. Certainly the community believed implicitly a decade ago that without it regulation would not work.
  (Mr Buxton)  We believe that the FSA should have immunity. I think it is necessary. The other side of that is that we do not believe that the complaints procedures set up in Schedule 1.7 are sufficient. We think they should be more independent and we think they should be more transparent as a result of the complaints.

  331.  So you see these two things going together. You see statutory immunity requiring that you have a strong and independent complaints system.
  (Mr Buxton)  Yes, absolutely.
  (Mr Sylvain)  This is all of a piece, is it not? If there is strong accountability for the FSA, if there is a complaints procedure, if there is a tribunal then, as you say, there are probably enough safeguards that the freedom that immunity might give an over-zealous regulator can actually be checked. I think that is what has to be in place.
  (Ms Hutchinson)  I think our concern started really because granting statutory immunity may be in breach of the European Convention in a case that the European Court heard last year. Obviously that would be a problem.

  332.  That would be a problem.
  (Ms Hutchinson)  We cannot have that, can we? If there is no statutory immunity then is the FSA really going to be on the receiving end of a large number of claims? For a claim to succeed a plaintiff or claimant, as we will have to call them in a few weeks' time, will have to show that the FSA owed it a duty of care in a particular way. If you look at the case law of people who have tried to sue the police and other authorities they probably would not get very far. It may be that if the Convention is a problem and there can be no immunity then it will not be too much of a problem for the FSA anyway. There may be examples of cases where the FSA should be liable, for example if it acts in breach of confidence or there is some act by a member of staff when they have intervened in someone's business or exercising their powers of inspection and have caused some damage there, there should be a claim then.

  333.  But what about the suggestion that this should be seen alongside a strong complaints procedure too?
  (Ms Hutchinson)  I think that is a very good idea, yes.

Mr Loughton

  334.  How would that work in practice? How would that be accountable? Would it come out as a subsidiary to the annual report in terms of complaints investigated and successfully taken up or whatever? It seems slightly against the trend to me where at the moment there is pressure on the police to be far more accountable and for disciplinary action against them to be much more easily taken by members of the public aggrieved by measures they have taken. Putting it the other way, the point I always make is that it will become a haven for duff compliance officers who cannot do their job because they would get prosecuted anywhere else in the City but they can do the job in the FSA with immunity from prosecution, just to take it to its extreme. I am not particularly concerned about the malicious possibilities of somebody acting with immunity for the FSA, and I think Howard Davies reassured us that there are a number of procedures in hand to do that, it is more those of incompetence and various actions taken by the FSA leading to the whole industry being prejudiced in the eyes of its competition.
  (Ms Hutchinson)  Dealing with the malicious point, that would not be covered by statutory immunity on the current drafting. On the other one, I have not given a huge amount of thought to the complaints procedure but having heard what Andrew Buxton has said I can quite understand that you are going to need a strong complaints procedure if you are not going to have the ability to bring civil proceedings.
  (Mr Vipond)  The key feature we would see is that it is a continuing and independent body that does produce its annual report. At the moment, as drafted in Schedule 1 of Part 7, it is very much an underdeveloped and un-thought through complaints procedure. It is something that will happen on a case by case basis. Given the power that the FSA has, given the need for accountability, that is simply not adequate, you need something much more robust, particularly if it has statutory immunity. The FSA can come into your offices, it can trash them, it can go around and do a full investigation and they can walk away and come back two days later and say "sorry, we got it wrong, we came to the wrong offices". There has got to be some redress.


  335.  Thank you very much. I think that more or less gets us to the end of our agenda. I would like to offer David Roe and Andrew Whittaker the chance to make any remarks. If they say something particularly controversial we may come back. Do you have anything to say by way of concluding remarks?
  (Mr Whittaker)  Just on the point of statutory immunity. We have made a number of points about this in the past and the way that it affects us in practice. One point we have not made up until now is to report to the Committee on the extent of statutory immunity available elsewhere in the world. We understand that the Basle Core Principles on how they relate and operate include a statement that there should be "a suitable legal framework for banking supervision... including... legal protection for supervisors". They expressly refer to "protection ... from personal and institutional liability for supervisory actions taken in good faith in the course of performing supervisory duties..." In accordance with that principle legal protection for the banking supervisors is available in Australia, Canada, Germany, India, Ireland, Malaysia, New Zealand, Philippines, Singapore, South Africa, Sweden, Switzerland, the UK and the US. Thank you.

Lord Poole

  336.  Do you have anything to say about the complaints procedure because that was a very interesting point?
  (Mr Whittaker)  It is an entirely fair point. Certainly if the volume of complaints were such as to justify it we would need to have an ongoing continuing complaints arrangement.

  337.  Does that satisfy you over there?
  (Mr Vipond)  I think there will be that volume of complaints so there ought to be consequences.


  338.  I think that is something we can return to. David Roe?
  (Mr Roe)  I was going to make the same point on statutory immunity but I did not have quite such an impressive list as the one that Andrew has provided to you. I do think that it is very important not to under-estimate the importance of statutory immunity and the fact that it is rooted in other jurisdictions and in previous arrangements we have here. On the complaints arrangements, yes, I think this is a very interesting area which I am sure we would welcome the Committee's thoughts on.

Chairman:  Thank you very much. David, one of the interesting things is trying to judge your language, particularly the words you use as to whether these are possibilities which may be open or whether they are possibilities which may be closed. Thank you all very much for coming, I have certainly found it very interesting and illuminating. You have given us a lot of evidence which we will do our best with. We have a very tight timetable, as you know, so we are going to have to get down quite soon to the whole question of taking a view about these things. Thank you all very much.

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