Memorandum by Dr Oonagh McDonald CBE
ACCOUNTABILITY AND THE FSA
Concern has been expressed about the breadth
of the FSA's powers and its dual role as supervisory authority
and the body responsible for enforcing rules and regulations governing
the financial services industry. I wish to deal with these concerns
from the point of view of a former Board member of the Securities
and Investments Board and subsequently the Financial Services
Authority, and a member of the Enforcement Committee.
Establishing a single regulatory authority does
concentrate the powers of enforcement, which were previously dispersed
amongst several entities, thus giving rise to the perception that
they are more formidable than the powers under the old regime.
That observation has to be qualified by the fact that certain
enforcement powers in the field of market abuse have been added,
such as the power to investigate insider dealing and market abuse
and manipulation together with a civil standard of conduct of
universal application. The arguments for extending the civil powers
of the regulatory authorities remain as valid as they were when
the SIB sought to extend its powers and received the support of
the then Government and the Opposition, which now forms the present
Concern has also been expressed about the accountability
of the FSA. The lines of accountability have been clearly set
out both in the Bill and the FSA documents. The FSA has been set
objectives for the first time and will be accountable to the Treasury
and to Parliament for the way in which it has achieved those objectives.
The legislation also contains a set of general duties, which provide
a basis for Parliamentary scrutiny.
The first consideration is the breadth of the
FSA powers and the perceived lack of accountability both to Parliament
and the financial services industry. The temptation with the establishment
of a large and powerful regulatory authority is to continue to
add to the layers of accountability without understanding the
effectiveness of the constraints already properly placed on the
Obviously the Board of the FSA has the ultimate
responsibility for the full range of decisions and policies of
the FSA. The FSA is itself subject to judicial review on both
the achievement of statutory objectives and the general duties
laid down in the Bill as well as on specific decisions (e.g.,
enforcement decisions). Of course, one's duties as a director
oblige one to act in the public interest.
That commitment is strengthened by the possibility
of judicial review. My experience both as a Member of the Board
of the Investors Compensation Scheme and as a member of the Securities
and Investments Board, and subsequently the FSA, taught me that
such a Board takes its decisions impartially on the basis of the
evidence before it. The Board (and its committees) are aware that
the decisions must be taken according to Wednesbury criteria of
"reasonableness", and such "reasonableness",
must be demonstrable.
Both the practitioner panel and the consumer
panel will have a significant role to play in determining FSA
policies and regulations. A strong and well-informed consumer
panel can have a vital role to play in ensuring that regulation
protects the investor. Although I was not a member of the consumer
panel of the PIA, I chaired the ad hoc consumer panel which
was set up to assist SIB in the preparation of the Guidance for
the Pensions Review. I was a member of the Board at the time but
other members of the Panel were not. The Panel had full access
to all the papers on the range of issues, which had to be considered
and the views of the Panel were taken into account by the Board
in the final formulation of the Guidance. These are also important
elements in the accountability framework of the FSA and should
not be overlooked.
The Practitioner Forum will have an important
role to play in ensuring accountability in terms of reporting
annually on the FSA's performance and will also have privileged
access to the Board and to the staff. But that is not the only
form practitioner involvement should and will take. Thorough consultation
both formally and informally with practitioners in the development
of regulatory policy is essential. Regulations must be designed
to protect the investor and the integrity of the markets; but
must also be both practicable and feasible, and extensive practitioner
consultation is essential to achieve this.
Most of the debate has focused on the FSA's
enforcement procedures and, in particular, that the FSA will act
as "prosecutor, judge and jury". It is important to
appreciate the nature of the boundaries drawn within the FSA to
ensure that full and proper procedures are in place. The structure
of supervision and enforcement has been designed to ensure there
is separation of function and that the principles of natural justice
are preserved. These have been set out in the FSA's Consultation
paper on Enforcement and subsequently. These safeguards are important;
they separate the operational staff from decision-makers, leaving
the enforcement staff to recommend issuing disciplinary proceedings
to a separate Enforcement Committee, which makes the decision.
The Chair of the Enforcement Committee, once the committee has
reached its conclusions, issues the warning notices, which start
the proceedings and the decision notices, which impose sanctions.
The Chair of the Committee will be a full-time
position, appointed (and removable by the Board) after an open
selection process. The Chair would report directly to the Board
and would have support staff separate from the enforcement directorate.
Practitioners and public interest directors would be involved
in the decision-making process, and the subjects of disciplinary
action would be able to make representations and have an oral
hearing. In the light of pressures from certain quarters, it is
tempting to create ever more elaborate structures with increasingly
opaque Chinese walls. But there must be a balance between avoiding
conflicts of interests, and demonstrating that they have been
avoided and an effective means of enforcement, which will both
protect the individual or company in the sense that decisions
are reached in a reasonable period of time, and protecting investors,
who also need to know that the problems within a firm are going
to be put right within a reasonable period of time.
The FSA can draw on the considerable experience
of the SROs and the SIB in enforcement action. I was a member
of the SIB enforcement committee for three years. That Committee
was responsible for overseeing the enforcement actions of the
SROs and, on occasion, for enforcement actions against companies
directly regulated by SIB; as well as for banning individuals
from the industry in certain circumstances. As regards investor
protection, SIB's hands were tied in that the current Act does
not generally allow the regulators to name the individual, who
had been banned from the industry. (If the case went to the Financial
Services Tribunal and the tribunal upheld the decision to ban
that individual from the industry, then the SIB could publish
The Committee was chaired by a lawyer, a non-executive
director of the Board. The manner of its deliberations (bearing
in mind the possibility of judicial review and other legal challenges
such as the failure of the case to stand up in court) are important
factors to take into account, when considering whether the proposed
system has adequate safeguards built into it.
The SIB committee was able to question and test
our staff recommendations, modify them, insist that charges or
an enforcement case in its entirety was dropped, guide policy
and consider issues of costs and benefits of pursuing enforcement
actions in certain cases. Open and frank discussion between staff
and non-executive members of the committee were the order of the
day. It was a question of weighing the evidence as a committee
and coming to conclusions, which could and did lead to the rejection
or modification of staff recommendations. All of these safeguards
are implicit or explicit in the new legislation.
It is also important to bear in mind the purpose
of enforcement actions. The overriding aim is to ensure that the
company recognises its failings and to put them right. Those failures
are not always some relatively minor breach of the rules, but
can, for example, in the case of a direct sales force, involve
far-reaching management failures, leading to a poorly trained
and poorly supervised sales force engaged in selling inappropriate
products to customers. It is vital both to secure the company's
co-operation in developing an appropriate strategy for putting
the management and training of its sales force in order, and through
the fine and public reprimand, making sure that they take the
obligation to carry out remedial work seriously. A formal judicial
process will not achieve those aims.
Of course, the process of enforcement must conform
to the requirements of Article 6 of ECHR. Those requirements are
(i) A fair and public hearing within a reasonable
(ii) An independent and impartial tribunal
established by law.
(iii) The right to be present.
(iv) Balanced procedures (equality of arms).
(vi) Permitted to examine and cross-examine
Sometimes, those who argue that the FSA's enforcement
procedures do not conform to Article 6, seem to suggest that Article
6 implies that the procedures must be judicial procedures. The
Article does not define a "tribunal" and the Court has
"The Contracting States enjoy a wide discretion
as regards the choice of means calculated to ensure that their
legal systems are in compliance with the requirements of Article
6(1) in this field. The Court's task is not to indicate those
means to the States, but to determine whether the result called
for by the Convention has been achieved". (Colozza v. Italy,
1985, 7, E H H R 516). It would seem that the Court is much more
concerned with the fairness of the procedures, not with the particular
form that they take. The emphasis in the debate over conformity
to ECHR should be on achieving the objectives of "fairness".
The Court recognises that an offence may be
designated as a disciplinary offence by a contracting state. This
will not necessarily be accepted by the Court. In coming to its
decision, the Court will consider whether the provisions defining
the so-called "disciplinary offence" belong to the legal
system of the respondent state, to criminal law, disciplinary
law or both. It will also consider the nature of the offence,
and that will be the most important consideration. The Court will
also consider the severity of the penalty, which the person concerned
faces. This suggests that there is considerable scope for the
enforcement actions of the FSA to be regarded as disciplinary
The other criteria for a fair hearing are much
more straightforward: "equality of arms" and a "reasonable"
length of time both for the initial hearing and for any appeal.
The first criterion refers to the requirement that each party
has to be given a reasonable opportunity to present his case,
including the presentation of evidence, in conditions, which do
not place him at a substantial disadvantage. Obviously, the FSA
must always take care that its procedures are designed to give
the individual, or the company a proper chance to present relevant
There is, of course, one clear advantage, which
the use of the FSA's proposed enforcement procedures has. One
of the Court's judgments indicated that the length of time from
charge to appeal is an important consideration in "fairness".
Three and a half years was considered to be too long for that
process to be completed under Article 6 (Zimmermann and Steiner
v Switzerland, 1979). The latest average figures for judicial
procedures in England and Wales are better than that. The average
length of time from charge to completion in indictable cases in
magistrates courts is approximately three months, and, if committed,
the average waiting time in the Crown Court is about four months.
The waiting time for appeals at the Court of Appeal is approximately
11 months. The defendant can, if there is reason to suspect a
miscarriage of justice, take his case to the recently established
Criminal Cases Review Commission but would no doubt face further
delays, since the Commission currently has over 2,000 cases pending.
The Bill also establishes an independent tribunal,
a tribunal of first instance to which all enforcement decisions
may be referred. It will be able to consider the full merits of
cases referred to it. It is important to have such safeguards,
but it is also vital that the regulators and the regulated do
not lose sight of the purpose of disciplinary action. Its purpose
is to begin the process within the firm of putting the training
and management procedures into place to ensure that investors
are protected in the future.
The FSA, including its constituent bodies, has
consistently sought to achieve the agreement of the firms concerned.
For example, in 1997-98, 97 SAO "cases" were concluded;
that is, a warning notice has been issued to a firm with some
disciplinary action to follow. Of the 97 cases, 57 were settled
between the regulator and the firm, 36 were decided by a disciplinary
committee and four were decided by the tribunal.
The process of enforcement must, inter alia,
be efficient and speedy if it is to be effective. The FSA supports
that. It must be able to provide an efficient and cost-effective
service. The public perception must be that the firm or individual
has been disciplined and that the appropriate actions have been
taken to prevent the recurrence of the problem. That has by no
means always been the case when the procedures involved have been
entirely judicial. The trail of Roger Levitt is a case in point.
He was charged with 62 counts of fraud after this financial empire
collapsed with debts of £34 million, but was finally convicted
(which caused some controversy at the time) on a single lesser
charge and sentenced to 180 hours community service in 1993. The
case cost over £2 million in legal aid.
Whatever the reasons for the outcome of that
particular trial, the fact remains that many in the industry feel
that their honour and their attempts to provide a proper service
have been impugned by the failure to punish fraud. Of course,
whilst the public perception of a judgment of that kind will affect
the industry, it does little or nothing to protect investors as
it suggests that such activities can be undertaken with impunity.
3 March 1999