Double immunity - the PRA and FCA will remain untouchable
On reading reports recently about criticism of the FSA's handling of an unauthorised investment scheme which left 800 investors £11.5 million out of pocket
I was reminded that even if the FSA did not have statutory immunity it would require a change in the common law for such a regulator to be found liable to investors. Although the future regulators' 'accountability' may be up for discussion during the passage of the new Financial Services Bill, I do not expect any change in the immunity the regulator currently enjoys from civil liabilities.
In the reported case, the regulator apparently could have shut down the unauthorised foreign exchange investment scheme sooner. There was a 39-month gap between the FSA's first enquiries and its application for a freezing order and search warrants on the firm. Investors would be entitled to argue that losses arising during those 39 months were, at least in part, caused by the FSA's failure to intervene sooner.
As I noted in July about the FCA's 'approach' document, the FSA currently enjoys statutory immunity against civil claims (under schedule 1 of FSMA) and, if anything, the regulators are likely to become more untouchable. In any event, at common law a claimant investor would be unlikely to establish that the regulator owed a duty of care to all (potential) investors.
In the case of Yuen Kun Yeu & Ots v The Attorney General for the Commissioner of Deposit-taking Companies (Hong Kong) the Privy Council held that the Hong Kong equivalent of the FSA had no power to control the day-to-day activities of the offending firm that caused the losses and the knowledge or suspicion of unauthorised conduct was not enough to create a 'special relationship' between the regulator and the class of (potential) investors and, as such, did not give rise to a duty of care owed by the regulator to investors at large.
If the new FSMA included express provision for the new regulators to be held liable in damages, the common law hurdle would fall away. If the statutory immunity was simply removed, the common law would have to be revisited before liability could be established. However, neither is likely; the current draft grants both the FCA (para 25, schedule 1ZA) and the PRA (para 33, schedule 1ZB) the same immunity that the FSA currently enjoys. This will therefore remain an issue of academic interest only!
The FCA and PRA's 'accountability' will probably be political rather than legal. Recent experience suggests that even their political accountability will likely fall short of what regulated firms might like. By comparison to other state agencies under fire (for example the Met Police), no heads rolled at the FSA despite open criticism of its failure to prevent the credit crunch.