Memorandum by the Association of Independent
Financial Advisers (AIFA)
AIFA is the trade association representing nearly
eighteen thousand independent financial advisers (IFAs). Its members
are all regulated by the Financial Services Authority and this
paper draws some general lessons about the accountabilty of regulators,
based on our experiences with that body. The question of accountability
of the regulatory system is absolutely crucial to its successful
development and we congratulate the Committee on selecting this
topic for investigation.
We believe that our views offer a different
perspective on regulatory relationships because IFAs are, atypically
for financial institutions, primarily small businesses and the
regulator has particular challenges to develop a relationship
with such businesses.
2. WHAT IS
A regulator will have a direct line of accountability
to a Minister or to Parliament. It will be for them to judge whether
the regulator is achieving the right overall balance between the
various groups affected directly or indirectly by that regulator.
In an increasing number of cases, the regulator will also be judged
against statutory objectives. But the regulator also needs to
feel in some way accountable to those affected by its decisions.
These will include consumers as well as the businesses which it
regulates. Whilst this memorandum is written from the perspective
of the regulated business, we believe that our comments could
be applicable to other stakeholders as well.
This memorandum is intended to look at systemic
problems of accountability. It is not a generalised moan about
regulation or the regulator. We should acknowledge that there
are many instances where the FSA has shown a willingness to engage
with the concerns of small businesses; to listen and change its
mind in the light of reasoned representations; and to show commitment
to its consultation processes. The FSA has also been good at working
through trade bodies.
4. HOW IS
Parliament was, of course, mindful of the need
to demonstrate that statutory regulators are accountable. During
passage of the Financial Services and Markets Act which set up
the Financial Services Authority, a series of processes were built
into statute to ensure checks and balances between a very powerful
regulator, those it regulated and other groups.
These checks and balances include:
(i) An Independent Complaints Commissioner.
(ii) Requirements upon the Authority to produce
cost benefit analysis and to consult before any rules are changed.
(iii) A system of appeals against regulatory
decisions affecting one firm.
(iv) Statutory bodies to reflect the interests
of consumers and practitioners to the Authority; and a Small Business
Practitioner Panel which is extra-statutory but has an important
role to play in reporting the concerns of the smaller businesses
to the FSA.
But all these checks and balances are to do
with process. Process of its own does not deliver accountability.
Indeed, however well intentioned it might be, it can inadvertently
be biased against the smaller business.
Statutory processes are inevitably formal and
complex. For larger institutions, this can justify the development
of in-house expertise, specifically dedicated to steering the
company through the process. There will be sufficient instances
where this expertise is needed to justify the cost. The smaller
firm will encounter the processes rarely, and will require "buying
in" of expensive external assistance to penetrate them. There
will be no in-house legal resources to offer interpretation. So
the proportionate costs of keeping pace with the regulator are
There is a similar concern over the consultation
process. Most IFA firms cannot keep pace with the flow of consultation,
never mind play a constructive part in responding to it. They
feel detached from the process and at the mercy of whatever the
regulatory machine churns out. This has a demoralising effect
on business as the firm does not consider itself empowered or
in control of its destiny. The accountabilty mechanisms are felt
to be of little value in such circumstances.
But these mechanisms matter. The key is to make
sure that they are seen to empower not overwhelm.
There is no single, snappy solution to this
intractable issue. But there may be steps which can be taken to
improve the position and give a better sense that accountability
is being achieved.
6. WAY FORWARD
It should most of all be recognised that these
mechanisms work best if they are not put under too much strain.
Take the consultation process. Over the last 12 months 45 consultation
papers have been issued by the FSA. Various government departments
and independent reviewers such as Ron Sandler, answerable to the
Chanceller, have added to this flow of paper and recommendations
for change. Fewer consultation documents would enable those affected
to stay abreast of the process and feel better able to influence
Of course, the FSA has relatively recently been
set up and it was inevitable that there would be extensive consultation
in its early stages. But the industry needs to feel that this
process has run its course and that there is hope of a less demanding
schedule in the future. There are three ways in which this can
First, the FSA must relentlessly prioritise
its initiatives, in conjunction with other official bodies, so
that only essential change is pursued and so that the process
is staged. We should not be in the present position of there being
eighteen relevant consultation processes going on at once. Agencies
could exercise a self-charging ordinance! There needs to be better
co-ordination between the various instigators of reviews so that
their timings are better planned. This is especially important
as lengthy consultation and consideration of the outcomes can
introduce planning blight into a sector whose commercial future
is put on hold whilst external authorities consider the way forward.
The present situation has come about because initiatives arising
in different parts of the official machine have come to the point
of consultation and subsequent decision simultaneously. The solution
is better planning at the stage of inception, not further delay
Second, regulators in general should be more
alert to the possibility that collaborative initiatives with industry
may discharge regulatory objectives more effectively and cheaply.
In other words, they should ask themselves what is the most efficient
and cost-effective mechanism for delivering a desirable outcome.
Of course, industry is not the only stakeholder in these exercises
and any initiative of this nature would have to be transparent
and open to influence by other interested parties. But we still
believe that collaboration has important advantages to bring,
not least speed of action and reduction of planning blight.
Third, the length and complexity of some consultation
documents could be reduced. A recent paper from the FSA took over
250 pages to set out the theme "Less is More". Documents
on this scale may indicate that the objectives of the regulator
are too ambitious. Regulators may be becoming too involved in
the operational detail of the businesses which they regulate and
their proposals can impose considerable cost in return for benefits
which are far less tangible. There are times when regulators in
effect start to map out in considerable detail how a firm will
undertake its business. Yet, if their detailed rules fail to deliver
the desired outcome or if the costs turn out in fact to be disproportionate
to the benefits they deliver, then the regulator is not accountable
for the wasted effort or resources on the part of regulated businesses.
Better accountability of both regulator and those who are regulated
will be achieved if the regulator requires less and keeps its
requirements at a higher level. This leaves the business to adapt
its own business model (and be held accountable as to whether
the desired outcomes are achieved).
We have some concerns over the accountability
mechanisms of other parts of the regulatory structure, in particular
the ombudsman. The ombudsman service is rightly independent of
the regulator and has a fair degree of discretion in judging particular
cases. But this does mean that there are occasions where a firm
which complies with the rule book may still be found against by
the ombudsman service which only has to take account of, rather
than follow, the provisions of that rule book.
In addition, decisions in individual cases can
have very wide ramifications for the entire financial services
sector. Accountability for these decisions needs to be a transparent
for the ombudsman as for the regulator. The implicationsincluding
cost benefits implicationsof particular decisions have
to be properly analysed. This process is not adequately delivered
by the legislation. The advantages of a cheap and relatively informal
complaints handling system are apparent but the powers of the
FOS need to be exercised with proper accountability.
8. IS ACCOUNTABILITY
Accountability is something that is created
by a state of mind as much as formal processes. The culture of
a regulator will determine quite how accountable it behaves in
practice to any of its stakeholder groups. An external party can
do little to engender that culture beyond raising awareness of
9. THE EUROPEAN
Issues of accountability are about to become
even more complex. Many more regulatory initiatives are originating
in Brussels. Their mechanisms for consultation and representation
are opaque and random. We believe that the European Commission
actively welcomes input from those affected by its decisions but
it is often very difficult to ensure that these go to the right
person in a timely fashion. We suggest that one of the biggest
challenges in the next few years will be attempting to ensure
that the European institutions and regulatory colleges deliver
better and more consistent accountability to parliamentary institutions
and to those affected by their decisions. If this does not happen,
the impression of disillusion and dislocation will increase, to
the detriment of good regulation.
Association of Independent Financial Advisers