Memorandum by the Securities Institute
The Securities Institute is the major examining
body for the securities and derivatives industry and provides
a wide range of industry qualifications which attract over 30,000
entries each year. The Institute is also a substantial provider
of training courses and of relevant publications. Unlike the regulatory
bodies and trade associations, it is focused on individuals not
corporations. Its prime purpose is to set and maintain professional
standards and promote excellence in matters of integrity, skill
and competence. With 12,000 members in 1,800 firms, the Institute's
additional purposes are to promote, for the public benefit, the
advancement of knowledge in the field of securities and investments
and to consult and research in matters of public interest concerning
investment in securities. As such, it is deeply interested in
regulatory and other issues which touch on public investment in
As noted above, the Securities Institute is
an association of individuals. The draft Bill puts emphasis on
individual responsibility and will recognise individuals who will
have to be "fit and proper" to carry out their designated
responsibilities. These individuals include senior executive officers
and we welcome this emphasis on individual responsibility. People
not companies are ultimately responsible for conducting the affairs
of a firm and having clear and defined personal responsibility
for the way in which it is run strengthens the commitment of individuals
to run a compliant business.
This submission addresses the issues raised
by the Scrutiny Committee and is presented in the order requested.
As a preamble, however, the Institute emphasises
that its most important issues are the training and competence
of individuals, consumer education and the recognition of specific
individuals in regulated firms. In particular, we draw the Committee's
attention to the dual role played by Compliance Officers and the
need for this to be recognised.
The Securities Institute acknowledges the additional
accountability which has now been introduced into the new FSA
regime since the publication of the draft Bill and we welcome
the changes. The additional arrangements outlined in the Progress
Report have clearly taken account of the comments made after the
Bill was first published.
We note recent comments from Howard Davies and
that the FSA is regarded as being subject to judicial review and
welcome this clarification.
However the Securities Institute continues to
recommend 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 this proposal,
we note that various component organisations of FSA including
the Friendly Societies Commission and the Building Societies Commission
are themselves currently subject to audit by the Office.
Consumer education and consumer protection go
hand in hand. The Securities Institute therefore warmly welcomes
the inclusion of consumer education in the objectives of the FSA.
We firmly believe that a financially literate consumer is an essential
building block for effective financial services regulation. The
FSA itself can do a number of things directly including:
providing easy to absorb information
on the basics of regulated activities;
providing general information on
the suitability of particular products for different groups of
Given the finite nature of its resources the
FSA's priority should be to identify organisations and material
which meet the needs of consumers, to sponsor approved courses,
to encourage and stimulate the development of such material where
gaps exist and to orchestrate the provision of information, not
attempt to provide it all. FSA's direct resources should be used
only to fill gaps which are not being adequately filled by others.
We believe that the FSA might consider "badging"
approved products and services in the education field and encouraging
companies to work with the Plain English Campaign. In this way,
the regulator could stimulate a wide range of material from many
suppliers, catering for individual needs and providing a wide
range of choice for users. In this context, the Securities Institute
stands ready to play its part in achieving this important goal.
Given the FSA's regulatory objective of promoting
public awareness of financial products, the Securities Institute
also suggests that the FSA should report at least annually to
the Secretary of State for Education and Employment on the progress
it is making so as to co-ordinate its initiatives with those of
the DfEE in this area. This report to the Secretary of State should
also be published as part of the FSA's Annual Report.
Recognition of Individuals
The Securities Institute supports the FSA in
its proposals that principles as well as detailed rules should
guide regulated firms in the conduct of their affairs. Among the
principles outlined by the FSA are requirements that firms must
conduct their businesses with integrity and that they must organise
and control their affairs effectively.
In supporting these aims, the Securities Institute
places great emphasis on individual responsibility being taken
by those who run and control firms. While a firm's directors have
collective responsibility for the actions of the firm, individual
responsibilities should be clearly defined so that individuals
know what they are and take those responsibilities seriously in
the course of their work.
The purpose of the Securities Institute is to
help individuals acquire the knowledge and skills to discharge
those responsibilities effectively. We also emphasise the importance
of integrity to our membership as something beyond mere compliance.
"Is it right?" is a more powerful question than "Is
it allowed by the Rule Book?".
Keeping advisers up to date
At present there is no clear requirement either
in the Bill or in the FSA's proposals for advisers to demonstrate
continuing professional development in terms of keeping up to
date with changes in products and market practice.
Professor Jim Gower, one of the leading influences
on modern financial regulatory thinking, said in his Report
"the investor is entitled to some protection from ignorant
fools as well as from convicted crooks". We agree. As an
investor what I need to know above all is: Can I be sure that
this adviser has the information I need? Is that information up
to date? Is it relevant to me? Are there better alternatives?
Can I rely on his skill and judgment? These are questions that
uninformed savers cannot judge easily for themselves but on which
they need to be reassured.
The use of computer-based methods of carrying
out transactions will continue to develop, bringing cheaper and
more efficient dealing services for those who are confident in
their own judgments and do not require advice. For many, the provision
of good, customer-focused advice on financial products will become
an even more critical element in delivering the right financial
services to them.
The Institute also emphasises its continuing
support for individual regulation. A qualification to demonstrate
basic competence is an essential part of a benchmark to ensure
that individuals justify being approved to engage in investment
business. The draft Bill refers to the holding of a qualification
or undergoing training as evidence of being "fit and proper".
The Institute is pleased to note that the FSA, in "Meeting
our responsibilities" recognises that individual qualification,
in terms of knowledge and skills, as well as awareness of regulatory
requirements and obligations, will form the basis of individuals
being allowed to fill key roles in the industry. In our view this
regime should extend to all those who advise customers on the
choice of investments.
This element of the regulatory regime is of
particular interest to the Securities Institute. We shall seek
to work closely with the FSA in building on the existing training
and competence framework. We shall play our full part, using our
past experience of developing successful and widely used examinations
and training, to help develop and deliver the necessary qualifications
and the means of attaining them, both in attaining basic competencies
and in developing professional expertise, whether in the front
office or in operations. We support the FSA view that demonstration
of competence is no less than consumers have a right to expect
and that it will help maintain confidence in the system and provide
effective protection. Knowledge and skills are necessary building
blocks; an ethical approach to putting the customer's interest
first is a further essential element.
The position of Compliance Officers
The Compliance Officer of a regulated firm is
in the position of being recognised as the regulatory point of
contact by the regulator and has to comply with requests for information
from the regulator. Compliance Officers can thus face a major
conflict of interest between their duty to the regulator and that
to their own firm. Yet Compliance Officers have no legal standing
within the regulatory framework as to their particular duties
when complying with regulatory demands. The Securities Institute
urges that Compliance Officers and their dual responsibility both
to the regulator and to the firm be recognised in the legislation.
As an example, recent Jersey law defines the duties of a Compliance
Officer as being responsible for:
(a) ensuring that the registered person,
i.e., the company, has robust arrangements for compliance with
law, any orders made under it and the Jersey Codes (of practice);
(b) securing appropriate monitoring of operational
performance and promptly instigating action to remedy any deficiencies;
(c) being the principal point of contact
on regulatory matters.
This provides a suitable framework for his duties.
An extract from the Jersey law is attached in
The Bill sets the overall agenda for the reform
of financial services regulation and basic standards and includes
the duty on FSA to have regard to innovation. But competition
in the market place will better serve the interests of savers
and investors than regulatory control of products. FSA should
concentrate on being the market regulator, not the designer of
products. We support the Treasury's views, expressed in the recent
Progress Report, that product design should not be a primary objective
of the FSA.
Enforcement and discipline
To work effectively in protecting investors,
an enforcement system must command the respect of the regulated
community. To do this, it must be fair, seen to be fair, transparent
and consistent. A regulatory regime in which time, money and effort
are spent by regulated firms fighting the regulator will ultimately
harm the consumer's interests.
Differentiating retail and wholesale markets
Howard Davies in his evidence to the Committee,
outlined a three-way approach:
(1) market professional to market professional;
(2) market professionals to expert investors
(e.g., Corporate Treasurers);
The intention is that elements of the regulatory
burden would be disapplied in the cases of 1 and 2. However, one
important area appears to be missing from this analysis: that
is market professional dealing with an expert counter-party who
in turn has responsibilities to the retail market, e.g., a fund
manager. It remains unclear where such a transaction would fit.
We appreciate that both the legislation and
the FSA seek to uphold the London market's competitive position,
but definitions of different types of customer and the extent
of the protection offered must be clarified as quickly as possible.
Over-regulation will drive business from London.
The enforcement process
There appears to be no right of redress
if the FSA takes action which is subsequently found to be wrong.
The impact of regulatory action should
be proportionate to the concerns being addressed. Greater safeguards
from punitive action for small transgressions are needed.
Co-operation with overseas regulators
should be subject to reciprocity.
Intervention and enforcement activities
should be carried out without publicity until the matter has been
resolved. This is acknowledged by the FSA in its enforcement paper
and the Securities Institute strongly supports this stance.
We welcome the FSA's attempts to
clarify the uncertainty surrounding criminal and civil remedies.
In particular we welcome the proposal not to pursue a civil case
if a criminal one fails. However, the criterion still appears
to be almost exclusively whether the regulator has enough evidence
for a criminal conviction rather than the seriousness of the case.
The fining policy should be fair
and consistent. FSA should carry out an annual review of the year
to make sure that consistency is being followed. It is proposed
to allow FSA to levy unlimited fines on a civil law standard of
probabilities. This open-ended regime is potentially subject to
The public interest and practitioner
members of the Enforcement Committee should have full voting rights.
We applaud the intention to introduce
legislation to curb market abuse which will be more effective
and flexible than its predecessors.
The Securities Institute welcomes
the introduction of a proposed Code intended to be more effective
than earlier legislation in tackling abuse and in building confidence
in the market process.
We accept the points made by FSA
that the level of proof in a serious civil case will be very close
to the criminal measure and that no civil action will be pursued
once a criminal charge has failed. However there remains no clear
view on what is a civil offence and what is a criminal one.
The proposed regime appears draconian.
A course of conduct might be subject to a 7-fold jeopardy if it
breached the Code of Market Conduct.
Notwithstanding the comment in paragraph
13.5 of the Progress Report, the Securities Institute believes
that the concept of "intent" should be introduced into
the legislation. In general, the law deems a person to intend
the consequences of an action. At the moment, however the Precepts
and Code can be breached where conduct has an effect of breaching
the Code even if there is no intention to do so. To introduce
the concept of intent would not destroy the enforceability of
the Code, but would offer a measure of protection to practitioners
who seek to devise legitimate new and untested market strategies.
We welcome Howard Davies's comment
in evidence to the Scrutiny Committee that the FSA may be prepared
to look at innovatory developments in advance.
With the prospect of draconian action
being taken against them and with the possibility of unlimited
fines (FS Bill Clause 58), it is important that practitioners
should have the assurance that they can discuss in advance proposed
courses of market action with the FSA to obtain a clearance or
otherwise. Alternatively, there should be a number of well defined
"safe harbours" from the operation of the Rule.
13 Review of Investor Protection: 1982. Back