Memorandum by the Association of Private
Client Investment Managers and Stockbrokers (APCIMS)
1.1 The overwhelming majority of private client
stockbroking and investment management firms are members of APCIMS
and they act for the estimated 12 million individual shareholders
in the United Kingdom when they buy or sell shares. Most of our
members are currently regulated by the SFA; the remainder are
regulated by IMRO.
1.2 APCIMS submitted a detailed response on
the Financial Services and Markets Bill in October 1998 and we
have commented on most of the Consultation Papers published by
the FSA to date. We have also reviewed the recent Consultation
Papers published by HM Treasury and the Progress Report on the
Bill. Our submissions for the Joint Committee reflect the concerns
which we continue to have regarding various elements of the proposed
regime. These concerns are set out below:
2.1 We are pleased by the proposals in the Progress
Report regarding the introduction of additional measures to increase
the accountability of the FSA not just to Parliament but also
to the regulated community. When commenting on FSA Consultation
Paper 13 on the Proposed Principles for firms, we suggested that
the FSA should also have some Principles on how it should conduct
itself. We saw this as an opportunity to create a "Charter
for the Financial Services Industry" which would, in effect,
be a pact on standards by authorised persons and their regulator.
The adoption of this proposal would go a long way to reassure
firms of the FSA's commitment to the openness and accountability
of its role. It also highlights that firms too have expectations
of their regulator and its responsibility to provide a quality
2.2 If the suggestion of an industry Charter
is adopted, then the FSA's compliance with its Principles could
be included in the reports of the Practitioner and Consumer Panels
and could also be subject to Treasury scrutiny.
2.3 We suggested that the following Principles
could initially be considered for adoption by the FSA. Alternative
and/or additional Principles for the FSA will be developed when
this suggestion is discussed more widely. (The Principle is set
out in bold; the explanatory text is set out underneath in italics.)
A. The FSA will conduct itself with integrity,
due diligence and skill in the performance of its objectives.
A1. This requires FSA staff to conduct themselves
in a professional and proper manner. Staff will always take account
of the size of an authorised person and the nature of its business
and will act appropriately. Every effort will be made to ensure
that the staff who have regular dealings with firms or who develop
policy or act in an enforcement capacity will have direct experience
of the financial services industry. All FSA staff will undergo
regular training and will already have, or will acquire, qualifications
suitable to their job function.
B. The FSA will publish all rules interpretations
and formal guidance to ensure that rules are understood and applied
in a consistent manner and will respond promptly to all requests
for advice and guidance from authorised persons.
B1. FSA staff will not refuse to answer queries
or give assistance simply because they have made a subjective
decision that the request is unreasonable. It is inevitable that
the staff which develop rules will occasionally receive queries
from firms which indicate a lack of understanding of the requirements.
Such queries could be classed by the staff as unreasonable and
yet they may have arisen because the regulatory strictures or
requirements have been written in ambiguous language, or because
contradictory advice has been given by other FSA staff or because
a situation has developed which was not envisaged at the time
that the rules were prepared.
B2. The best way for any regulator to understand
how firms are receiving its regulatory announcements is for it
to encourage firms to ask questions and to seek guidance when
necessary. Such dialogue quickly exposes ambiguities in rules
and misunderstandings which may exist in the market.
B3. In the early months of the new regulatory
environment, the FSA sends an unfortunate and unacceptable message
to its constituent firms when it states that it will only respond
to what it considers to be reasonable requests for informal guidance.
Under this suggested Principle 2, the FSA will be proactive in
encouraging firms to ask about the regulatory regime and to seek
guidance when necessary either directly or via their representative
C. The FSA will ensure that any inspection
visit to a firm is conducted under the management of a senior
member of FSA staff who is suitable for this task either because
he/she has direct experience of the business conducted by that
firm or because they have visited the firm before. The FSA report
on a firm following this inspection visit shall be issued promptly
after the completion of the inspection.
C1. This should prevent the continuation
of the scenario where a firm is visited/inspected/advised by regulatory
staff who have little or no understanding of its business, instruments,
systems, organisation or the extent of its international involvement.
The presence of a senior manager with suitable direct experience
will reassure firms that they are more likely to be given pragmatic,
common sense advice which is appropriate and does not entail needless
processes and unjustifiable expense.
3.1 Paragraph 4.14 of the Progress Report fails
to address a key concern which we expressed on the Bill, namely
the requirement that firms will have to detect financial
crime. Currently, all firms have a responsibility to deter financial
crimes such as money laundering. Firms take this responsibility
seriously as is evidenced by the Money Laundering Guidelines which
were developed by practitioners and which are updated on a regular
3.2 The new regime requires firms to detect
money laundering rather than simply to assist in its deterrence.
This change in emphasis places a considerable costs-burden upon
firms as they will have to employ and train personnel to ensure
the presence of staff with the appropriate set of skills to detect
money laundering. Similarly, if the Treasury expects the FSA to
seek out this activity then it too will have to employ a highly
trained set of individuals who are conversant with the complexities
of such transactions or it will have to contract out such expertise
to other bodies. One need only speak to NCIS to understand the
lengths that money launderers will go to in continuing their activities;
it is big business with large sums at stake. It should therefore
come as no surprise that such big business employs both highly
paid and talented people to cover up their activities. We urge
the Treasury to reconsider the stance taken in the Bill and to
return to the lesser test of deterrence rather than detection.
4.1 We are gravely concerned by the Treasury's
view that firms can be punished as market abusers for the unintended
consequences of their actions.
We strongly urge the Treasury to reconsider its stance vis-a-vis
the role of "intent" in identifying market abuse as
we believe it to be an essential element in the offence. We appreciate
that it is impracticable to describe market abuse offences in
primary legislation but we believe that the Bill should be amended
to include a requirement that the offence of market abuse includes
an assessment of the intention or motivation of the firm.
4.2 The offence of market abuse is a combination
of action (which may also be a decision not to act) and of motivation.
It is a deception practised on the market and is a deliberate
and wilful act. The motivation of a firm can be deduced from an
objective assessment of its conduct over the relevant period,
by ascertaining who would benefit from a particular action and
by using tests of reasonableness.
4.3 If the Bill proceeds in the absence of a
test of intent, firms will be in the uncomfortable position of
having no certainty regarding the assessment of their actions
by regulators. Indeed they will be regulated by hindsight as they
will be expected to know in advance the exact effect which any
trade may have on the market and to decide whether there is any
danger of that impact being negative and therefore liable to be
deemed "abusive". No market is perfect as it inevitably
involves an imbalance of buyers and sellers and it can be affected
by many different events and developments both external and internal.
All trades have an impact of some kind (especially in an illiquid
market) without there being a sinister motive behind them. The
assumption that if a trade impacts in a negative way on a market
it necessarily involves market abuse is incorrect and potentially
damaging for the UK financial markets.
4.4 It will be almost impossible for Compliance
Officers to advise trading desks on whether to proceed with various
trades. It is likely that this will force firms to seek more guidance
from the FSA in advance of trades as they will be striving to
establish greater certainty in this area. There is also a danger
that innovation may be stifled or that firms seeking to create
new methods of dealing or new instruments may take their business
to another regulatory regime which has more certainty.
4.5 Paragraph 5.8 of the Progress Report states
that it is unlikely that the FSA will wish to discipline firms
who have followed its guidance. However, the FSA has notified
firms that, in general, compliance with the guidance is not a
guarantee against subsequent disciplinary action. We suggest that
the Treasury and FSA discuss this matter further to agree a common
approach which confirms that proven compliance with guidance is
sufficient to ward off subsequent actions.
4.6 The Treasury has stated that it is keen
to close off all loopholes in order to protect consumers. Whilst
this intention is laudable, in practice this leaves firms in a
position where any action can be subsequently held to have been
abusive. If an act falls outside the scope of the law, the rules
or the code then the firm which committed that act cannot be disciplined.
We believe that regulators should not twist rules or codes to
pursue a firm for an act which was not foreseen or allowed for
in the regulatory regime. Instead, we suggest that the regulator
should learn from the experience and that the rules and/or code
should be amended to address future repetitions of the particular
act. We strongly urge the Treasury and the FSA to reconsider the
apparent move towards regulating by hindsight and to favour the
development of a regulatory regime which is based on certain,
clear and simple rules.
4.7 We challenge the statement in paragraph
5.8 of the Progress Report that " . . . it would be [inappropriate]
to compel the FSA to provide specific guidance on request".
We suggest that the FSA has a responsibility to help firms to
understand their regulatory obligations and this involves acting
as the provider of guidance on request. It would be unacceptable
for the FSA to have the power to choose to reject requests for
help from the firms which it regulates. We are not yet sure whether
the FSA will be a regulator or a supervisor but the approach being
adopted to market abuse and enforcement makes one fear that it
will assume the role of a regulator.
5.1 We are pleased that the Treasury will ensure
that the Bill is in compliance with the European Convention on
Human Rights. We look forward to receiving further information
about how the re-named tribunal will interact with the Enforcement
Committee being established by the FSA.
5.2 We believe that a disciplinary action (for
reasons other than deliberate misconduct or criminality) indicates
a failure both by the firm and by the FSA. The supervision staff
at the FSA play a key role in preventing the initiation of an
enforcement/disciplinary action by ensuring that firms know what
is expected of them and are well informed about regulatory developments.
We firmly believe that the FSA has a role to play in encouraging
firms to be compliant. It would be beneficial to the FSA and its
regulated community if it assumed the persona of the approachable
but pragmatic supervisor which encourages compliance through supervision
and inspection teams which are staffed by people who understand
the many businesses which they regulate and who are keen to help
firms to "get it right".
6.1 Paragraph 11.8 of the Progress Report states
that the Ombudsman's decision will be binding on the respondent
but not the complainant. Whilst this process is possibly acceptable
when the claimant is a private individual, it is unacceptable
if the claimant is an authorised firm. For example, it could be
possible for one of the major banks to be a "customer"
and one of our small member firms to be a defendant. We suggest
that either the Ombudsman Scheme should not be used by authorised
persons or that the Bill be amended to accommodate the possible
use of the scheme by firms.
6.2 There is no mechanism which requires the
Ombudsman to verify that its interpretation of the rules is consistent
with that of the FSA although this may be addressed via future
Consultation Papers on this matter.
6.3 We are concerned about the broadening of
the scope of the Ombudsman's jurisdiction over services which
would not otherwise fall within the scope of the Bill (see paragraph
11.6 of the Progress Report). This removes certainty about the
exact scope of the Ombudsman's jurisdiction and leaves firms vulnerable
to a challenge on matters which they did not know that the Ombudsman
would decide to investigate.
7.1 We accept that a policy decision to have
one consumer compensation scheme has been agreed. However, if
it is set up as proposed with one pot for deposit taking, one
for insurance and the rest for the securities industry, then this
will result in significant increases in contributions from prudent
and well managed firms to pay for the losses incurred by others
whose business is dramatically different. If the new scheme is
to be fair then a firm should pay commensurate with the business
that it undertakes and the risk involved and it should allow for
a reduction in fees when a firm has sufficient insurance to cover
its responsibilities to its clients.
8.1 We are aware of the list of questions upon
which the Committee has agreed to focus its inquiry. Nevertheless
we have additional observations on the Progress Report which we
would like to bring to the attention of the Committee. These are
set out briefly below:
(a) in paragraph 4.11 the report states that
regulation should ensure that consumers are able to make
reasoned decisions. We suggest that this is too burdensome a requirement
and that no regulation can ensure such a thing. We suggest instead
that the Treasury seek a regulated environment in which consumers
can make informed decisions and obtain independent advice to assist
them with their investment decisions; and
(b) in paragraph 5.2 we ask that when the
FSA publishes final versions of its rule changes, it should also
explain how many comments it received during the consultation
and the extent to which those comments influenced the new rule(s).
This would highlight the quantity of input received by the FSA
and it would let firms know the extent to which they were influencing
29 March 1999
3 We note the FSA's plan to use "principal purpose"
tests in its Code of Conduct but we believe that primary legislation
should also include a reference to a test of intent. Back