Supplementary Memorandum by the Association
of British Insurers
ACCOUNTABILITY TO THE REGULATED COMMUNITY
1.1 The Association, jointly with the British
Bankers' Association, has already made a written submission to
the Committee. We recognise that improvements to the Bill have
been made in response to earlier consultation, but, for the reasons
given in the answers to questions below, we do not yet consider
that all our concerns on accountability have been fully met. Parliament
is delegating a unique set of powers to lay rules which will have
the force of law and to enforce the regulatory regime. There needs
to be a proper balance in the accountability of FSA for the exercise
of these powers.
2. ANSWERS TO
2.1 The Government has made several proposals
for enhancing the accountability of the FSA. Are you now happy
with the FSA's proposed level of accountability?
We recognise that changes have been proposed
to the Bill in response to concerns expressed during the earlier
consultation. Treasury, in its Progress Report considered questions
of accountability under three main headings; accountability to
Ministers and Parliament; ensuring the regulator takes account
of the views of practitioners and consumers and discipline and
The regulated community will look to the Government
and Parliament to ensure that the FSA is operating in an open
and fair manner. We set out below ways in which the accountability
of FSA under the first two headings could be addressed. In particular:
As well as consulting on proposed
rule changes and publishing a statement of alterations we consider
that where the FSA rejects positions widely argued by practitioners
and/or consumers it should be obliged to make clear in full why
it has done so.
The Bill already provides that the
FSA should give Treasury copies of any rules or standing guidance
that it makes. In addition, Treasury should have the right to
state whether or not they agree that any changes or additions
are in line with the FSA's statutory objectives. In doing this,
they would clearly take into account any statements made by the
FSA on the results of its consultation.
We further consider that there needs
to be a government power of direction on specific policy issues.
As a last resort, this could be used by Treasury in instances
where they consider that rule or policy changes are not in line
with the FSA's statutory objectives.
We welcome the proposal that the
FSA will be required to provide an annual report to Parliament
through Treasury Ministers and that the content of the report
will be agreed between Treasury and FSA. The report should be
debated by Parliament or by a Committee.
Changes to the fees are to be treated
as rule changes. However, this may mean that only the mechanism
by which these are set and not the actual level will be subject
to consultation. Consultation on the actual level of fees would
be desirable. To date, this has not existed in the setting of
insurance fees but in the initial years of FSA it may be more
important in order to ensure that FSA takes account of the costs
of its proposals.
The joint BBA/ABI submission to the
Committee suggested that there should be an additional statutory
objective, in addition to the general duty set out in Clause 2(3)(e)(f)
requiring the FSA to have regard to the impact on the competitive
position of the industry of any proposed rule changes. This may
become more important if the requirements for FSA to report on
the impact of its proposals on its statutory objectives are strengthened.
2.2 Do you think making the establishment of the
Enforcement Committee a statutory requirement would improve accountability?
We see no reason why the establishment of the
Enforcement Committee should not be a statutory requirement. However,
we consider that the role played by the Enforcement Committee
in the enforcement process is more important than whether or not
its existence is enshrined in statute. The Enforcement Committee
should be in a position to make robust and well informed decisions.
We consider that, as a point of principle, enforcement
decisions should be made at the lowest competent level possible
within FSA. We are concerned that the procedure currently set
out will not result in a hearing by the Enforcement Committee
of the case presented which is perceived to be impartial and may
thus result in more cases than necessary being referred to the
This is because the Warning Notice (the notice
to the regulated entity that FSA considers there may be a case
for disciplinary action) will be issued after the Enforcement
Committee has reached a view on whether there is a case to answer.
The person under review has no opportunity to put his case before
that decision is reached. We would suggest that the Warning Notice
should give notice that an alleged breach is to be referred to
the Enforcement Committee. The Enforcement Committee would then
consider the case presented both by the regulated entity and by
FSA before issuing a "Decision Notice", rather than
satisfying itself that a possible breach has occurred on the basis
of evidence presented by the operational divisions only.
2.3 The Bill requires only that the FSA should
have a Chairman. What do you see as the advantages and disadvantages
of combining this role with that of Chief Executive? Do you think
it will enhance the FSA's accountability?
The Hampel Committee devised principles of good
governance. Among these are that there are two key tasks at the
top of every public companythe running of the Board and
the executive responsibility for the running of the company's
business. There should be a clear division of responsibilities
at the head of the company which will ensure a balance of power
and authority, such that no one individual has unfettered powers
of decision. This predicates against the combination of the role
of Chairman and Chief Executive.
We recognise that there is not an exact parallel
between the FSA and public company models but consider that FSA
should be able to justify the structure adopted. We welcome the
suggestion that other models may be examined in future.
2.4 It has been suggested that appointments to
the FSA Board should be subject to confirmation by Parliament?
What is your view?
We do not consider it essential that all appointments
to the Board should be subject to confirmation by Parliament.
2.5 It has also been suggested that some seats
on the Board should be reserved for dedicated consumer experts.
What do you think of that suggestion? Do you agree with the Government's
view that the Board will be most effective if appointments are
made on the basis of people's experience and qualities as individuals?
We consider that appointments should be made
on the basis of experience and qualities as individuals and also
that consideration should also be given to the balance of backgrounds,
views and experience on the Board as a whole.
2.6 What do you see as the main role of the Consumer/Practitioner
Panels? Should there be an explicit requirement on the FSA to
consult the Panels when making rules and broad policy statements?
The Consumer and Practitioner Panels will have
the role of providing independent input from the consumer and
practitioner point of view, and in assessing FSA's performance
against its statutory objectives.
We consider that the FSA should consult the
Panels when making rules and broad policy statements. However,
we do not consider that the FSA's obligation to consult is met
by consulting with the Consumer and Practitioner Panels alone.
They are not substitutes for effective consultation with the areas
of industry particularly affected by proposals and with their
trade associations. The FSA should be able to demonstrate that
it has specifically sought the views of market sectors affected
by proposals as part of its consultation process.
2.7 Should the Bill require the Treasury to maintain
an appropriate balance between consumer and practitioner representatives?
If so, what would you regard as an appropriate balance?
Given that the Consumer and Practioner Panels
are intended to be composed of consumers or practioners, we assume
that this question relates to the Board as a whole. Our views
are set out above.
2.8 The Chairman of the Panels are appointed by
the FSA. What do you see as the advantages and disadvantages of
this? Do you think it would be more appropriate for the Chairman
to be appointed by some other body, for example the Treasury,
or the non-executive committee, or for the FSA's nominations to
require the approval of the Treasury?
We consider that a mechanism should exist whereby
there can be independent review of appointments made. Thus, if
appointments are made by FSA, they should be subject to approval
2.9 The budget for the Consumer Panel has been
set by the FSA at £420,000. The FSA has committed itself
to an early review of the budget. Are you concerned that the budget
will prove inadequate? Are you content with the way in which the
budgets of the Panels are set?
We have no strong views on this issue. We note
that the FSA needs to be adequately resourced to do the work it
has to do, but at the same time should have due regard to considerations
of economy and efficiency. Review of the budget will doubtless
be necessary in the light of experience.
2.10 How do you consider the independence of the
Panels can be best safeguarded?
Mechanisms such as rotation of membership, independence
of chairmen and scrutiny of the functions of the Panels, possibly
via the FSA annual report, are important.
2.11 Howard Davies said that the Practitioners
Panel in particular was likely to launch quickly some surveys
of industry opinion which would provide a sort of benchmark about
regulatory sensitivity and regulatory intensity against which
they could measure the FSA in the future. Will the Panels be carrying
out any such surveys and, if so, when will the first survey be
We welcome Howard Davies' proposal. The timing
and running of such surveys is in the hands of the FSA.
2.12 How do you regard the role of the non-executive
committee? Are there any other responsibilities which you would
like the committee to fulfil?
The role of the Non-Executive Committee is set
out as being to keep a watch on value for money aspects of FSA's
performance. The Committee will also be required to determine
the remuneration of the Chairman and executive members of the
Board and will be required to report within FSA's annual report.
The Chairman of the Board is to be appointed by Treasury.
We do not at the moment see any further role
for this committee, but we recognise that it should have an important
role in monitoring the cost effectiveness of FSA's operation.
2.13 Some concern has been expressed at the proposal
that income from fines should be returned to the industry as a
discount against fees. Do you share this concern? What do you
think should happen to the income from fines?
The key point is that there should be transparency
in the use of the income from fines. The income from fines should
not be used to offset current years running costs, as we fear
that could prejudice the independence of the fine setting process.
2.14 What type of arrangements for independent
investigation of complaints made against the FSA do you think
would be most effective?
We consider it crucial that there should be
a robust independent investigation of complaints, particularly
given that the Bill proposes that the FSA should have statutory
immunity. The independent complaints body should have the power
to publish findings, and to order redress, and we look forward
to commenting on the FSA's detailed proposals.
Our submission on the Financial Services and
Markets Bill recognised that the FSA will need to be robust in
its decision making but that there are natural concerns in authorised
firms that its immunity is too wide and that appeal procedures
are expensive and time consuming and too late in the process to
reflect the necessary balance of interests between the regulator
and regulated. If there is a gap it is in respect of negligence
in the exercise of FSA powers.
2.15 It is not intended that the FSA should be
subject to the jurisdiction of the Parliamentary Commissioner
for Administration. Do you think it would be useful if the FSA
were brought within the PCA's remit? Do you think such a move
would be of benefit to aggrieved "consumers"/investors?
We understand that, if an individual's complaint
related to the operation of Treasury oversight of the FSA, this
would come within the PCA's existing remit.
We recognise that there would be benefits in
bringing the FSA within the PCA's remit. Of particular importance
are the PCA's wide powers to investigate, and its power to order
administrative changes. The PCA's normal procedures mean that
complaints could only be made to the PCA via an MP and after FSA's
internal complaints procedures have been used.
2.16 The draft Bill requires the FSA to carry
out public consultation, whenever it proposed to change its rules.
The Association of Unit Trusts and Investment Funds (AUTIF) has
suggested that the FSA should also be required to consult on all
policy initiatives affecting one or more sections of the regulated
community. Do you think there is a need to require the FSA to
consult on matters going beyond proposed rule changes?
We consider that the FSA should consult on policy
initiatives affecting one or more sections of the regulated community.
At the very least, this should smooth-out the process of rule
change by allowing a dialogue on the policy behind the rule change
before any detailed drafting is undertaken.
2.17 The AUTIF has also suggested that the FSA
should hold public hearings on important policy proposals. Do
you think that would be a useful step towards increasing the FSA's
We consider that public hearings on important
policy proposals could be useful, and that FSA should use all
appropriate routes of consultation.
2.18 Are you satisfied that the rule making procedures
fully accord with the Better Regulation Unit's principles of good
The Better Regulation Task Force commented in
October 1998 on the consultation draft of the Bill, using as a
template its "Principles of Good Regulation" and expressed
a number of concerns about the Bill. Some of their concerns, notably
on the penalty regime and accountability, have not yet fully been
addressed. The Task Force will no doubt be commenting on further
drafts of the Bill.
2.19 Several bodies have suggested that the FSA
should be subject to periodic efficiency audit by the NAO. What
is your view?
We consider it essential that the efficiency
and cost effectiveness of the FSA should be subject to periodic
assessment. The NAO, with extensive experience of public sector
bodies, may be well-equipped to do this.
2.20 Several submissions have suggested that the
Treasury should retain in reserve powers of direction over the
FSA. Do you agree?
As mentioned above, we are strongly of the view
that Treasury should retain reserve powers of direction over the
FSA, although they would only be used in extreme circumstances.
The existence of such powers is an important factor in ensuring
that the FSA remains fully accountable to Treasury and through
them to Parliament. This is a necessary balance to the sweeping
powers of rule making with the force of law which are being delegated
by Parliament to FSA.
15 April 1999