The Single Regulator
99. In its overview of financial regulatory reform
published in July 1998, the Government set out its reasons for
establishing the FSA: "The existing arrangements for financial
regulation involve a large number of regulators, each responsible
for different parts of the industry. In recent years there has
been a blurring of the distinctions between different kinds of
financial services business: banks, building societies, investment
firms, insurance companies and others. This has added further
to the complexity of financial regulation. The Government believes
the current system is costly, inefficient and confusing for both
regulated firms and their consumers. It is not delivering the
standard of supervision and investor protection that the public
has a right to expect. We are therefore establishing a single,
statutory regulator for the UK financial services industry, with
clearly defined regulatory objectives and a single set of coherent
functions and powers."
100. The new FSA will take over the responsibilities
of, and have powers at least equivalent to, those of nine regulators.
- the existing FSA (formerly the Securities and
- the Self Regulating Organisations (SROs): Personal
Investment Authority (PIA), Investment Management Regulatory Organisation
(IMRO), and Securities and Futures Authority (SFA);
- the former Supervision and Surveillance Division
of the Bank of England (already transferred to the FSA under the
Bank of England Act 1998);
- the Building Societies Commission;
- the Insurance Directorate of Department of Trade
- the Friendly Societies Commission;
- the Registrar of Friendly Societies.
101. The FSA is currently responsible for supervising
banks and for overseeing the regulation of investment business.
Further powers for the regulation of the other financial sectors
listed above are to be transferred to the FSA by this Bill. In
the meantime, the existing regulators continue to have responsibility
under the various statutes for regulating individual sectors.
The FSA agreed with the other constituent bodies to integrate
relevant staff as quickly as possible in order to reduce uncertainty
for them and so minimise any risk to regulatory effectiveness.
This managerial integration was completed in January 1999. In
the FSA's view it "is already leading to a more efficient
and focused approach to areas of common interest."
102. As the Treasury made clear in its Progress Report,
there has been almost unanimous support for the proposal to have
a single statutory regulator.
The Treasury Select Committee too, in its report on Financial
Services Regulation, concluded that the "balance of advantage
lies in having a single regulator, able to combine consumer protection,
prudential assurance and policing, rather than separate regulators
for these aspects."
Further, the International Monetary Fund has commented favourably
on the proposed shift to a single regulator.
We too support the proposal for a single regulator for all
UK financial markets. We hope and expect that the establishment
of a single regulator will help to avoid overlaps, prevent gaps
in regulation and bring a greater degree of consistency to regulation.
103. On the passing of the Financial Services and
Markets Act, the FSA will become one of the most powerful financial
regulators in the world in terms of scope, powers and discretion.
Given the power and discretion that the FSA will have, accountability
needs to be wider than merely being held accountable for the particular
decisions it makes. In a broader context, the FSA needs to be
judged and monitored for its effectiveness (whether it
achieves its mandated objectives), its efficiency (the
manner in which it deploys its own internal resources), and the
economy of its regulation and supervision. The last mentioned
relates to the wider economic impact that regulation has on, for
instance, competition, and fostering a climate of innovation in
the financial sector; and to the proportionality of regulation
as indicated, for example, by rigorous cost benefit analysis.
It also covers the question whether the same degree of regulatory
effectiveness could be achieved at less cost at both consumers
and regulated firms. Different mechanisms will be needed for these
different dimensions of accountability.
The FSA's structure
104. The FSA is a private company limited by guarantee.
This means that it has members, not shareholders. The members
of the company are the same as the members of the Board and as
such are all appointed by the Treasury. The Treasury Select Committee
raised with Mr Davies the reasons for this structure. Mr Davies
said the answer was somewhat historical in that that was the conclusion
reached in 1986 in relation to the Securities and Investment Board.
The FSA had inherited that structure and adapted it to take on
other responsibilities. His understanding was that "Parliament
concluded that because it wanted a regulatory system which was
as far as possible rooted in the markets that it regulated and
funded by those markets, it should be constructed as a private
company operating within those markets with private company-type
corporate governance procedures and funding direct from institutions
with public powers given to it. That would allow it to relate
more effectively to the market place, and would allow it to employ
people on broadly speaking private sector terms". The protections
which people needed in relation to their ability to challenge
the FSA and judicially review its decisions still applied.
105. Mr Christopher Bates, a partner at Clifford
Chance, thought the question of whether the FSA was a company
or not was not of particular importance. "What is important
is the role that it has, the powers it has, and the accountability
controls that the Bill provides for which the Government has gone
a long way in its recent statements to strengthen and enhance
in line with and in response to comments made by the industry."
Mr Bates has indeed identified the important factors. We are
satisfied that the structure provides a greater degree of managerial
flexibility and independence while leaving scope for an appropriate
system of accountability.
106. In January 1999, following consultation on the
draft Bill, the Economic Secretary announced new measures intended
to ensure that the new regulatory regime is open and accountable:-
- The Treasury will have the power to commission
an independent report, at periodic intervals, into the efficiency
and economy of the FSA's operations;
- the Bill will require a majority of the FSA Board
members to be nonexecutives;
- the FSA will be required to maintain consumer
and practitioner panels. The panels will have a role in assessing
the performance of the FSA against its statutory objectives;
- the FSA will be required to hold an annual public
meeting to discuss its annual report;
- the FSA will be required to consult upon its
arrangements for independent investigation of complaints made
against it. As well as being able to report publicly on his investigations,
the investigator will also have the power to publish the FSA's
responses to his recommendations.
Announcing the measures, Ms Hewitt said, "These
measures will build on the accountability framework in the draft
Bill. The framework will ensure that the FSA is properly accountable
to Ministers and Parliament, and to practitioners and consumers."
107. The Treasury's subsequent Progress Report acknowledged
that a strong consensus had emerged from the consultation process
on the need to improve the accountability framework.
In the light of that the Government had considered various aspects
of accountability. First the consultation responses generally
acknowledged the importance of effective accountability arrangements
to Ministers and Parliament. Second, most of those responses which
expressed views on the accountability framework focused on suggestions
about how to ensure that the regulator takes proper account of
the views of practitioners and consumers. In addition to the changes
announced in January, the Government said that it would also be
discussing with the FSA an agreed list of the contents of the
annual report and that it would be including new safeguards in
the Bill covering the FSA's rulemaking process. We welcome
the steps taken so far to increase the FSA's accountability. Some
of these changes are discussed in the following paragraphs; the
remainder we accept without comment.
Evaluation of the FSA's performance
108. As a Companies Act company the FSA will, in
the normal way, appoint its own external auditors. But, although
the Government has announced its intention to give the Treasury
power to commission and publish independent value for money audits
of the FSA, the Bill does not make provision for independent examination
and evaluation of the Authority's performance. The Comptroller
and Auditor General (C&AG), in a written submission to our
Committee, described the provisions announced by the Government
as "a significant response to the concerns that have been
expressed about the need for independent scrutiny of the FSA"
but questioned whether they go far enough in that the timing of
such examinations and their terms of reference would not be fixed
independently of the Executive. The C&AG argued that though
the FSA was constituted as a private company, it exists to carry
out public policy. The C&AG could be given rights of access
to the FSA to undertake value for money scrutinies: he "would
bring the necessary authority and independence to the role of
independent assessor and would be well placed to report on the
Authority's performance against statutory objectives."
109. The NatWest Group, in their comments on the
Consultation Document, also stressed the need for an independent
review and assessment of the FSA's operations. "Such an arrangement
could be undertaken by the National Audit Office (NAO) with its
direct responsibility to publish its findings and report to the
Public Accounts Committee. This is transparent, attracts publicity
and demonstrates a clear line of accountability." A similar
view was expressed by the Securities Institute, which recommended
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 its proposal
the Securities Institute noted that various component organisations,
including the Friendly Societies Commission and the Building Societies
Commission are themselves subject to audit by the NAO.
110. The NAO suggested several ways in which the
arrangements for independent scrutiny of the Authority could be
strengthened. "The legislation could provide the C&AG
with full access rights to the FSA on the basis of which he could
periodically report to Parliament on the Authority's performance.
Alternatively the Comptroller and Auditor General could be given
the same powers as the Treasury to carry out or otherwise commission
and publish periodic performance audits of the Financial Services
111. We agree that it is important that the activities
of the FSA should be subject to independent audit. The NAO rightly
seeks to follow public money wherever it goes, but the FSA will
be paid for by the industry, not the taxpayer. We do not support
giving the NAO the right to access to the FSA but note that under
the proposed arrangements it is open to the Treasury to appoint
the NAO to undertake an independent report into the efficiency
and economy of the FSA's operations. In addition it is important
that the report of the FSA's auditors should be included in the
FSA's annual report to Parliament.
The Chairman/Chief Executive
112. Mr Davies is both the Chairman and Chief Executive
of the FSA. The Minister thought that "In the interests of
accountability. ..there is a good case for having one person who
fulfils the functions of both chairman of the board and chief
Mr Roe subsequently explained that the Bill currently leaves open,
as does the current legislation, whether the Chairman should also
be the Chief Executive. "Whilst there is no intention to
change the current arrangements whereby Howard Davies is the Chairman
and Chief Executive and there is a non-executive Deputy Chairman,
Ministers recognise that in the longer term there may be other
arrangements which could work. They are however mindful of the
fact that parallels with other models of corporate governance
are not exact....There is also a good case for a strong line of
direct accountability to Treasury Ministers from the senior executive
of the regulator."
Dr Oonagh McDonald CBE, a former board member of the SIB and the
FSA, thought that in this interim period it has probably been
an effective way of establishing a new regime. "As you are
moving on to become a fully established board, a fully established
regulatory authority, so the specific tasks that had to be completed
in this two year period will fall away and the main focus will
be the conduct of regulations."
Mr Philip Telford of the Consumers' Association agreed that at
the moment there was a big job to do bringing the different SROs
together and establishing a consistent theme to the FSA. It "may
be appropriate to have the joint function at the moment."
"If there is the flexibility to change that structure and
to have a division between those two roles I think that is right."
113. We understand the reasons for combining the
roles of Chairman and Chief Executive at this stage of the FSA's
existence, particularly when accompanied by the appointment of
a senior non-executive director as Deputy Chairman. The parallels
with the corporate model are not necessarily appropriate. However,
in the longer term we recommend that the posts of Chief Executive
and Chairman should be separated and that a non-executive Chairman
should be appointed. We see advantages in this of limiting
the power of and focus on a single individual; enhancing the power
of non-executive directors; and ensuring that control of the agenda
does not lie exclusively with the executive.
The FSA Board
114. The FSA is governed by a Board whose Chairman
and members are appointed, and may be removed, by the Treasury.
The Board has a majority of non-executive members. In addition
to the Chairman there are currently three executive Managing Directors
and ten non-executive members, of whom one, the Deputy Governor
(Financial Stability) of the Bank of England, is an ex officio
director. One of the non-executive members is the Deputy Chairman.
115. The Association of Unit Trusts and Investment
Funds (AUTIF) and the IFAA expressed reservations about the Treasury's
role in appointing the Board. They argued that it was inappropriate
for the Treasury, as the FSA's sponsoring department, to appoint
the members of the FSA's Board. The IFAA recommended that the
Minister for the Cabinet Office should assume this role.
We do not consider that this extra safeguard is necessary and
we are content for the appointment to be made by the Treasury,
which will in turn be accountable to Parliament for the success
of the regime as a whole.
116. The Bill gives a new statutory role to the nonexecutive
members of the Board, similar to the arrangements introduced for
the Bank of England under the Bank of England Act 1998. There
will be a committee of the nonexecutive members of the Board,
whose Chairman will be designated by the Treasury. The role of
that committee will be to monitor the FSA's performance against
the requirement that it should be efficient and economic and the
adequacy of the FSA's internal financial controls. The committee
will also determine the remuneration of the FSA Chairman and executive
members of the Board. The nonexecutives will report on the
performance of these functions within the FSA's annual report.
117. The Institute of Chartered Accountants welcomed
the number, appointment procedures and reporting responsibilities
of the non-executive directors but argued that, if the Board was
to operate effectively, the non-executive directors must take
a full part in the decision making process. "They will thus
be, quite rightly, committed to the decisions made. While this
has many advantages in improving the quality of decision making
and the breadth of experience employed, it also has the effect
of reducing the independence of the non-executive committee. It
is not realistic to expect non-executive directors to take a neutral
stance in preparing a report on the effect of decisions that they
have themselves been involved in making."
We are content with the special role of the non-executives
in relation to efficiency, internal controls and remuneration
but we would prefer them to be organised in the form of an audit
committee and a remuneration committee. We would not want to extend
their role to other aspects of performance as it would be anomalous
for the non-executive membership of the Board to monitor the performance
of a Board of which they are the larger part.
118. The non-executive members of the Board are appointed
in accordance with the principles of public appointment set out
in the Nolan Report. Appointments are made on the basis of people's
experience and qualities as individuals, not as representatives
of particular interest groups. The Consumers' Association argued
that there should be a commitment to reserve a number of seats
on the Board for dedicated consumer experts.
The National Consumer Council, by contrast, while it would have
liked greater consumer representation on the Board, acknowledged
that "the position is helped by the fact that all directors
must act in the public interest. Nevertheless we consider that
Directors who have an industry background should be in a minority
on the Board."
We welcome the fact that the members of the Board have been, and
will continue to be, appointed in accordance with the Nolan principles.
We agree that such appointments should be made on the basis
of relevant experience and personal qualities and that seats should
not therefore be reserved for representatives of particular interest
groups. We would, however, stress the importance of ensuring that
the Board maintains an appropriate balance of membership between
consumer and practitioner experience.
119. The draft Bill confers on the FSA "legislative
functions". This fact, as the Delegated Powers Committee
pointed out, is illustrated with the utmost clarity in paragraph
1 of Schedule1 where those functions are defined as "the
Authority's functions of making rules and codes of practice and
publishing statements of principle and statements of policy."
The Committee noted that "the FSA's 'legislation' will not
be set out in statutory instruments and so is not intended to
be subject to direct parliamentary control, yet is of far greater
practical importance than the statutory instruments which Ministers
are empowered to make under the draft Bill and which are rightly
subject to Parliamentary control. If powers of this kind were
to be vested in Ministers, we would undoubtedly advise that there
should be a measure of Parliamentary control."
120. The Economic Secretary said that accountability
to Ministers and Parliament was absolutely crucial given the public
purposes of the FSA. "We are achieving that because the Treasury
has the power to appoint but also to remove the board. The Treasury
will have the power to commission statutory inquiries in the public
interest. There will be an annual report to Ministers on the FSA's
performance measured against its statutory objectives and any
other matters the Treasury specifies. These reports, of course,
will be laid by the Minister to Parliament and will thus be available
for parliamentary scrutiny." The Minister hoped that the
Commons Treasury Committee would wish to play a full role in holding
the FSA accountable to Parliament.
121. The Association of Unit Trusts and Investment
Funds (AUTIF) argued that there was a pressing need to improve
the FSA's accountability to Parliament and suggested that the
best way of achieving Parliamentary accountability would be to
ask a Committeeprobably the Treasury Select Committeeto
review the FSA's annual report. The Commons should then have the
opportunity to debate the Committee's findings.
The IFAA, however, thought that ad hoc reporting by the
FSA to the Treasury Committee was unsatisfactory. "Select
Committees have a wide range of issues to address and cannot exercise
adequate supervision of even a single financial services regulator."
Proper accountability is essential. We believe that this scrutiny
can best be achieved by asking a Parliamentary Committee to review
the FSA's annual report and to take regular evidence from a broad
section of consumers and practitioners.
122. The Treasury Select Committee, in its examination
of the Bill, sought views on whether it should hold confirmation
hearings for those appointed to the FSA Board. The Minister expressed
concern that such hearings might conflict with Nolan principles,
though she acknowledged that a process whereby the Committee could
only encourage second thoughts rather than veto a candidate would
not conflict with the principle of Ministerial accountability.
The Treasury Select Committee concluded that there were advantages
in confirmation hearings for FSA Board members.
In evidence to us Dr Oonagh McDonald agreed that the Nolan procedures
provide important checks and argued that it was important that
the process of selection should be open and fair but also efficient.
We believe that it is essential that the Nolan principles are
adhered to and that Committees should not take actions which would
conflict with them. However, we agree that giving a Committee
the right to suggest an appointment is reconsidered would not
conflict with those principles and we believe that it would introduce
a welcome degree of transparency to the process. Given the
use of the Nolan procedures for the appointment of non-executive
members of the Board we do not consider it would be appropriate
for them to be the subject of confirmation hearings. We recommend,
however, that the Chairman and executive appointees to the FSA
Board should be subject to confirmation hearings by a Parliamentary
Accountability to Consumers and Practitioners
123. In November 1999, the FSA established a Consumer
Panel and a Practitioners Forum. As we noted above, the Government
has now announced that it intends to make the maintenance of Consumer
and Practitioner Panels a statutory requirement.
124. The FSA established the eleven member Consumer
Panel to advise the Authority on the interests and concerns of
consumers and to report on the FSA's effectiveness in meeting
its consumer protection and public awareness statutory objectives.
The Panel can raise its own concerns, initiate research and publish
its own reports.
125. The Consumer Panel welcomed the Government's
decision to include in the Bill a statutory requirement for the
FSA to establish a Consumer Panel. It urged that the provisions
should be drafted so as to secure the independence of the Panel
and suggested various ways by which that independence could be
safeguarded. The Panel proposed that its members should be appointed
by open competition; and that the Bill should give the Panel powers
to provide advice, to evaluate the effectiveness of the FSA in
meeting its statutory public awareness and consumer protection
objectives, to make recommendations, to conduct research and publish
its work, and to spend its budget on investigating any aspects
of financial services which impact on consumers. The FSA should
be required to provide resources adequate to the Panel's needs;
and to include in its annual report the Panel's assessment of
the FSA's effectiveness in meeting its statutory objectives.
126. We agree that it is essential that the Consumer
Panel should be independent and be seen to be independent although
we understand the FSA's arguments in favour of not completely
separating the Panel from the FSA: "the point of having a
Consumer Panel which is inside the FSA is of course that it therefore
has a legitimacy within the organisation."
127. The members of the Consumer Panel were appointed
by the FSA board after open advertising using Nolan principles.
Ms Barbara Saunders, as Chairman of the PIA consumer panel, was
involved throughout the selection process. She thought that it
might be helpful to have a separate procedure for the appointment
of the chairman from that of the panel members and "it may
well be that it would be another of the checks and balances so
that the FSA was not seen to appoint all of them."
We agree. We recommend that a requirement that the Chairman
of the Panel be appointed by the Treasury after consultation with
the FSA be included in the Bill.
128. The Consumer Panel's current budget is around
£420,000, about half of which will be spent on consumer research
and about half on its staffing costs.
The budget had been agreed by the FSA board on the advice of its
consumer relations division at about the time the Panel was established
but, as Ms Saunders explained, did "not take account of the
[FSA] staff support that we get which is very significant and
I would not want to see the degree of involvement between staff
from across the FSA compromised by arguments over how much we
should pay for that."
129. Mr Davies suspected that in the long run the
budget would not be sufficient but added that "until we have
our full statutory responsibilities and in particular our new
statutory objective of promoting consumer understanding of the
financial market place, we do not think that we can justify to
ourselves, and therefore to our fee payers, spending a large amount
on the Consumer Panel." He did, however, commit the FSA to
an early review of the budget.
Ms Saunders thought that, "as a point of principle in the
future the panel would wish to identify its own budget and negotiate
that with the FSA."
She would be seeking a review of the budget in the third quarter
of this year.
130. The Practitioner Forum was also established
in November 1998. Its membership comprises senior representatives
from the businesses which are regulated by the FSA. The Forum
regards it as its role to make representations to the FSA on any
matter it believes is causing concern among practitioners about
the way in which the FSA's operations are conducted in practice.
Mr David Challen, the Chairman, said that from his experience
so far he thought the current management was making good progress
in establishing an open and responsive relationship.
131. Mr Derek Wanless, Group Chief Executive at NatWest
and a member of the Practitioner Forum, saw the establishment
of the Forum as "a very important step in terms of how consultation
should happen...the important issue is that there is openness
in the process and the panel has the opportunity to report publicly
The practitioners would be expected to do research among the regulated
firms and use that research as a basis of an annual report. "The
issue about resources for that sort of research is obviously an
important issue. Again the attitudes of the FSA so far are rather
positive in that respect because they themselves see the benefits
they get from it."
132. Mrs Angela Knight, the Chief Executive of the
Association of Private Client Investment Managers and Stockbrokers
(APCIMS), supported the idea of the FSA being required to consult
the Panels when making rules or broad policy statements. APCIMS
also believed that the Panels should appoint their own chairmen,
possibly for a three year period only. In addition it would expect
regular reports on what FSA money was being spent as it would
be the regulated firms which would be providing the money.
133. We sought Mr Challen's view on how the FSA's
relationship with the Practitioners' Panel, as the Forum seems
likely to be renamed, might be described in the Bill. Mr Challen
suggested "Before proposing new, or revisions to existing,
policies and/or associated principles or rules, which could have
a material impact on regulated firms, the FSA will consult the
Practitioner Panel. Where it decides not to follow any formal
guidance offered by the Practitioner Panel, the FSA will report
its reasons for so deciding to the Practitioner Panel and in the
FSA's Annual Report."
This is a very helpful suggestion, combining as it does both consultation
and transparency. We recommend that the Government consider
including a requirement on these lines in the Bill. We also recommend
that a requirement that the Chairman of the Panel be appointed
by the Treasury after consultation with the FSA be included in
134. We believe it is essential that both the
Consumer and the Practitioner Panels should have sufficient funds
to allow them properly to carry out their functions. We recommend
that the Panels should be required to report annually on the adequacy
of their budgets. We hope that the Parliamentary Committee which
takes evidence on the FSA's report will, as part of its examination,
consider whether the Panels are properly funded.
135. Under Schedule 1, paragraph 17, the FSA is immune
from suit for damages for acts in good faith in discharge of its
functions. The FSA is not immune from judicial review,
from challenge under the Human Rights Act 1998,
or from criminal prosecution.
136. The Minister defended the proposed immunity.
It replicated the immunity given to the SIB by the Financial Services
Act 1986; and it was necessary for the efficiency and effectiveness
of regulation. Mr Whittaker told us that immunity for banking
supervisors is found in many comparable regimes overseas.
137. Some people regard this immunity as excessive.
Mr Tim Herrington, a partner at Clifford Chance, speaking for
the Law Society Company Law Committee, said, "Accountability
under the law is vitally important for any public authority and
we do not believe that the case for the continuation of the immunity
has been clearly made in the light of the increased powers of
the FSA. We are particularly concerned that negligent action taken
by the Authority in the execution of its powers could have serious
financial effects on a firm's business".
He conceded that the Bank of England has immunity, but pointed
out that the police and many other public authorities do not.
138. LIBA suggested that immunity should be set aside
in case of recklessness, as well as bad faith.
APCIMS suggested setting immunity aside in case of negligence.
The Securities Institute suggested that immunity was an inheritance
from the regime of self-regulation, and not necessarily appropriate
at all for a statutory regulator.
Herbert Smith see immunity as unnecessary.
139. On the other hand, the BBA and AUTIF are content
with the proposed immunity,
provided that there is a proper procedure for complaints (see
below). Mr Herrington likewise indicated that a stronger complaints
procedure would help. We consider that the proposals for immunity
for the FSA are appropriate, provided that the complaints procedure
is strengthened as we recommend below. An essential aspect
of regulation is that supervision should not take place to the
extent necessary to prevent all possible business failures. If
the FSA are vulnerable to suit in the event of business failure,
they will go as far as possible to avoid all failures; this will
be a recipe for over-regulation.
140. Under Clause 167, exchanges are immune from
suit for damages for regulatory acts in good faith, but only in
respect of actions by their own members. The London Metal Exchange
want this extended to actions by members' clients or employees
or approved warehouses, who are much more likely to sue than members.
Mr Kit Farrow, Director General of LIBA and an unpaid director
of the LME, expressed unhappiness at being personally liable in
damages for carrying out his regulatory duties; he wants the immunity
extended, and would be content if it did not extend to acts of
recklessness or negligence.
Mr Alan Whiting is an executive director of the same exchange;
he pointed out that, like the FSA, exchanges are liable to judicial
review. We recommend that the immunity of exchanges should
extend to actions by non-members as well as members, provided
again that there is an adequate complaints procedure in place.
The LME has made a convincing case, to which we have heard no
141. It has been suggested that the proposed immunity
may prove incompatible with the ECHR.
In the light of judgements of the European Court of Human Rights
in the cases of Tinnelly and Osman, it is possible
that a blanket immunity against civil actions, e.g. for negligence,
would be held in the courts, in the circumstances of a particular
case, to breach the right of access to the courts guaranteed by
Article 6. It would be highly undesirable for the FSA to set
to work on an assumption of immunity which later turned out to
be mistaken. We therefore recommend that the Government should
address this issue with the utmost urgency and should publish
its response on this point as soon as possible.
142. Under Schedule 1, paragraph 7 of the draft Bill,
the FSA will be required to set up and publish a procedure for
complaints against itself, involving an independent investigator
with power to publish his report, and a requirement on the FSA
to respond to it. According to the Progress Report, the investigator
will also have power to publish the FSA's response.
The FSA is currently consulting on this procedure.
143. The Treasury Select Committee wanted the FSA's
complaints procedure "enshrined in law".
It is not clear what this would involve over and above the current
provisions of the draft Bill. LIBA see the complaints procedure
as a counterbalance to the FSA's immunity from suit; but they
consider that it should be "substantially more robust and
The BBA take the same line.
They consider that the independent investigator should be a standing
Mr Whittaker indicated that the FSA would set up a standing body
if the volume of complaints required it.
144. Clifford Chance also call for independence for
They suggested that the investigator should be able to award compensation.
They raised but did not answer the question who should pay: "The
FSA is funded entirely by the industry, and if it is the FSA that
has to pay, then essentially the industry is being required to
fund the costs of maladministration by a body which it did not
appoint and whose members it does not control". In LIBA's
view, compensation for maladministration by the FSA should come
from public funds.
145. The FSA was concerned that if the compensation
suggestion were adopted, it could lead to the same kinds of difficulties
as liability in damages before the courts. "In any case where
a major institution needed to be closed, for example, there would
be complaints from consumers who lost out as a result, as well
as from commercial counterparties and others affected....We are
concerned that this would be likely to reduce our readiness to
take difficult decisions." The FSA believed that "the
statutory compensation scheme provides the proper safety net for
consumers in such circumstances and that commercial counterparties
should be encouraged to make their own judgements about those
with whom they deal rather than relying on the regulator."
146. Mr Roe indicated that this was an area where
the Treasury might be open to suggestions for improvement to the
We agree with those who see a robust complaints procedure as an
essential counterbalance to the FSA's statutory immunity. We
therefore recommend that:
(i) The appointment of the investigator
should require the approval of the Lord Chancellor (with appropriate
protection for the Scottish interest).
(ii) The investigator should have
a continuing existence, with adequate resources, and should be
able to launch investigations into complaints received directly
as well as those referred by the FSA itself.
(iii) The Government gives serious
consideration to whether the investigator should be able to award
compensation to businesses or their employees damaged by FSA maladministration,
and if so, who should pay. If the investigator is not to have
this power, the FSA should consider whether it should be its policy
to give such compensation ex gratia if the investigator
116 Financial Services and Markets Bill: A Consultation
Document, Part One, para
cit, chapter 2 Back
cit, para 54 Back
Article IV Consultation-Concluding Statement of the Mission (HM
Treasury News Release 216/98) Back
cit, QQ 232 and 233 Back
Hansard, 19 January 1999, col 395-6w Back
to the July Consultation Document Back
to the July Consultation Document Back
cit, para 59 Back
Q 340 Back
Q 94 Back
380, 411 Back
330, cp Herrington Q 397 Back
50, QQ 202, 234, 236 Back
332, 402, 434, 443 Back
cit para 83 Back
234, 379 Back
235, 377 Back