Memorandum by the Association of Unit
Trusts and Investment Funds (AUTIF)
FSA's accountability to Parliament
and public needs to be strengthened.
Treasury Select Committee should
review FSA Annual Report and present findings to House of Commons
FSA should consult on all significant
policy initiatives, not just rule changes.
FSA should also hold public hearings
on important policy proposals.
FSA needs to promote a culture of
mutual trust between regulator and regulated. Discipline should
be the exception, not the norm.
Role of proposed Enforcement Committee
should be enshrined in Bill.
Bill should require FSA to delay
publicising disciplinary action against a firm until any parallel
investigations into the firm's employees have been completed.
Enforcement Committee should exercise
independent oversight of cost and timescale of disciplinary proceedings.
There is also a need for independent
scrutiny of the FSA's use of fines.
Both Enforcement Committee and Tribunal
should be able to award costs against FSA.
Statutory immunity of FSA staff from
civil suit should be removed.
Early publication of missing provisions
relating to collective investment schemes is essential.
1. The Association of Unit Trusts and Investment
Funds welcomes the opportunity to comment on the issues identified
by the Joint Committee. Our main concerns are set out below.
2. The FSA will be independent of both Government
and industry. Although accountable to the Treasury, the link is,
by design, very weak. There is thus an accountability deficit
which is best mitigated by increased, and statutory, openness
and consultation requirements.
3. The draft Bill gives the FSA extremely wide
ranging powers, especially in the area of enforcement and discipline.
Whilst these powers are designed to make the FSA an effective
regulator, it is essential that they are balanced by a robust
framework of accountability. We therefore welcome the recent announcement
by the Economic Secretary, Patricia Hewitt, of further measures
to strengthen the FSA's accountability.
4. However, the provisions of the draft Bill
largely focus on accountability to Treasury ministers. We believe
there is a pressing need to improve the FSA's accountability to
Parliament and the public. The best way to achieve Parliamentary
accountability would be to ask a Committee of the Houseprobably
the Treasury Select Committeeto review the FSA's Annual
Report, in order to assess how well the FSA is performing in meeting
its statutory objectives. The House of Commons should then have
an opportunity to debate the Committee's findings. We believe
that this would be a far more effective discipline on the FSA's
activities than the procedure currently envisaged by the Treasury,
whereby the FSA's Annual Report will simply be laid before Parliament
without debate. We are aware that the FSA will be required to
hold an annual public meeting, but we doubt whether this will
be as effective in maintaining accountability as a debate in the
House of Commons.
5. The draft Bill requires the FSA to carry
out public consultation whenever it proposes to change its rules.
We think that the Authority should also be required to consult
on all policy initiatives affecting one or more sections of the
regulated community, even where they do not involve rule changes.
This would be in line with the Inland Revenue's formal practice
of consulting "wherever it is practicable to do so".
6. It would also be desirable for the FSA to
publish a summary of responses to consultation, with individual
responses available for scrutiny, except where respondents specifically
7. Finally, we believe that the FSA should be
willing to learn from the practices of overseas regulators in
this area. It would improve the openness and transparency of the
policy making process if the FSA were to adopt the practice of
the US Federal Reserve and Securities and Exchanges Commission
of holding public hearings on important policy proposals. This
would have the incidental benefit of helping the FSA to raise
its public profile, and thus to meet its consumer education objective.
8. The draft Bill gives the FSA far reaching
powers of enforcement and discipline. It is clearly desirable
for the FSA to be able to deal swiftly and effectively with those
who breach regulatory obligations wilfully or recklessly. At the
same time, there is a perception that some of the FSA's constituent
organisationsnotably IMROhave sometimes exercised
their (more limited) powers in an oppressive manner. Enforcement
in the FSA is in the hands of the ex-IMRO team. This has naturally
given rise to a concern amongst industry and legal practitioners
that the FSA's enforcement regime should contain appropriate checks
and balances and adequately protect the rights of firms and individuals.
We believe it is important for these safeguards to be incorporated
in the Bill itself. In our view, the safeguards announced so far
do not go far enough.
9. We recognise that the Treasury and FSA have
a difficult balance to strike in this area. The FSA will clearly
need to exercise its enforcement powers in a way that is fair
and just to those accused. But equally, it is essential that the
FSA's procedures do not become inflexible or legalistic. Against
this background, we believe there are a number of relatively simple
measures that could be taken to improve the fairness and transparency
of the proposed enforcement regime whilst leaving the FSA with
the required degree of flexibility:
(i) Most importantly, the FSA needs to
promote an atmosphere of mutual trust and dialogue between a firm
and its regulators. It is counter-productive to impose a fine
and/or issue a public reprimand for minor or inadvertent rule
breaches, since this will inhibit the flow of information between
the firm and its regulators. In a recent case, one of the SROs
publicly disciplined a firm for a rule breach which the firm itself
had brought to its regulators' attention. Public censure should,
in our view, be reserved for those who deliberately breach regulatory
requirements or act negligently. For occasional, minor rule breaches,
the FSA should use private reprimands instead. The need to discipline
should be seen as a failure of regulation, not a success.
(ii) AUTIF welcomes the proposal to establish
an Enforcement Committee, with practitioner and public interest
members, to hear disciplinary cases. It would help reinforce
the separation of powers between the FSA enforcement staff and
the Committee if the latter's role were enshrined in the Bill
itself (as per the Practitioner and Consumer Panels).
(iii) In some recent disciplinary cases,
there has been a protracted delay between the conclusion of disciplinary
proceedings against a firm and the completion of follow up enquiries
into the firm's employees. It is very difficult to maintain the
presumption of innocence of the individual in these circumstances.
We believe that the Bill should require the FSA to delay publicising
the outcome of a disciplinary case against a firm until any related
proceedings against the firm's employeesincluding any appeal
to the Tribunalhave been completed.
(iv) In recent cases, the unnecessarily protracted
nature of SRO proceedings has meant that the accused have run
out of defence funds. This has introduced an element of injustice
for the individuals concerned. We believe, therefore, that the
Enforcement Committee should have a formal role in monitoring
the cost and timescale of disciplinary proceedings, in
order to ensure that the FSA enforcement staff conduct their investigations
as quickly and efficiently as possible. The Committee should review
the progress of active enforcement cases on a regular basis to
check whether target service standards are being met.
(v) The proposal that the FSA should use
the proceeds of fines to meet its general costs gives the Authority
an artificial incentive to use fines as a disciplinary tool. Consequently,
we believe there is a need for independent oversight of the
FSA's use of fines, to ensure that any fine imposed on a firm
or individual is proportionate to the nature of the offence. Within
the FSA, the Enforcement Committee could provide this oversight,
but we would also encourage the Treasury Committee to monitor
the FSA's use of fines.
(vi) Legal costs arising from a disciplinary
action can be so prohibitive as to deter individuals and firms
from taking their case to appeal. It is therefore vital that both
the Enforcement Committee and the Tribunal should be able to award
costs against the FSA if they find in favour of the firm or
individual. It is not clear that the Bill makes adequate provision
(vii) We believe that a key check is missing
from the Bill in that the FSA staff will enjoy a statutory immunity
from civil suit. Given the oppressive manner in which some SROs
have acted in the past within powers not dissimilar to those in
the Bill, we believe that this statutory immunity should be removed.
10. We are studying the Treasury's Consultation
Document on Regulated Activities and will respond separately on
this. In our earlier submission to the Joint Committee, dated
2 March, we emphasised the need for the Committee to have an opportunity,
and sufficient time, to examine the new draft legislation in its
entirety before completing its report. We remain very concerned
that most of the main Bill clauses relating to collective investment
schemes (unit trusts and open ended investment companies) have
still not been published for comment. It will be impossible
for the Committee to meet its terms of reference if it has no
sight of these important parts of the Bill. We would encourage
the Committee to press for immediate publication of these missing
provisions, which are central to the Government's intentions on
savings and pensions.
17 March 1999