'Tentacles across the system':  Joint Committee believes in monsters too…

05 January 2012

The report published in December by the Joint Committee on the Draft Financial Services Bill offered no festive cheer:

The New Year and new regulatory structure look set to involve even greater regulatory burdens for those trying to do regulated business.

At the height of the financial crisis Goldman Sachs was famously described by Rolling Stone's Matt Taibbi as a 'great vampire squid wrapped around the face of humanity'.  It appears from some of the language in its recent report that the Joint Committee of the two Houses of Parliament thinks that the same could be said of the financial services sector as a whole.  The statement that some financial firms have 'tentacles across the system' (at page 50) sets the tone for a report that will concern regulated firms and individuals.

The Joint Committee has been consulting on the wording of the draft Financial Services Bill which will implement the new 'twin-peaks' model for UK financial regulation. On December 19, the Committee published a report containing its recommendations for amendments to the Bill before it is presented to the Commons and the Lords.

The Bill grants some significant increases to the regulators' powers. Perhaps the most draconian will be the FCA's proposed new power to publish the fact that it has issued a warning notice, without consulting the concerned party about the language to be used (see page 60; and Steven Francis' previous posting on the problems of publication).  Those presenting evidence to the Joint Committee were rightly concerned that publication prior to the determination of a case would tarnish innocent firms and individuals as well as the guilty and would run counter to the sacrosanct principle of 'innocent until proven guilty' in English law.  However, the Joint Committee rejected the need for consultation and stated simply that as this system was used by regulators of other industries there was no reason for not granting the power to the FCA (page 61).

Of similar concern is the Joint Committee's exhortation to the Government and Parliament to change the wording of s.348 FSMA (at page 77).  This section incorporates EU law protecting the confidential information of firms from disclosure by the FSA.  The Joint Committee believes that s.348 goes beyond the strict requirements of EU law and will prevent the FCA and PRA from disclosing board minutes and information about their work. However, as I have previously noted, most firms will be uncomfortable about changes that lessen their control over information they provide to their regulators.

Also disappointing is the Joint Committee's acceptance of the Bank of England's evidence that it is undesirable to maintain the FSA's practitioner panels for fear of 'regulatory capture' (i.e. where firms are able to gain influence over their regulator to make regulation serve the industry and not its consumers or claim that their conduct has been pre-approved; see page 77).  These panels have provided the regulator with consistent input so it remained aware of industry's point of view on important matters.  Claims about the possibility of regulatory capture are somewhat undermined by the Bank's willingness to continue with ad hoc panels.  All that will be lost will be the efficiency and consistency of having panellists familiar with the type of input that the regulator desires.

Aficionados of the Regulatory Blog will know that RPC submitted evidence to the Committee criticising the FSA's suggestion that the general law of causation should be changed for regulated firms and individuals breaching FSA rules such that they would effectively become strictly liable for any customer losses.  The Joint Committee has elected not to discuss this important matter in its report.  Instead, in a single paragraph, the Joint Committee introduces an astonishing demand for a 'concept of ‘strict liability' of executives and Board members for the adverse consequences of poor decisions' (at page 54).  In effect, as was pointed out to the committee, such a policy would allow the regulator to 'rip up' senior employees' employment contracts.  Again, it must be reiterated that such changes represent a significant shift away from the normal principles of English law in the regulated sector.

In one of the few encouraging sections for firms, the Joint Committee quotes approvingly from Hector Sants' evidence where he suggests that the FCA and PRA will maintain the current FSA Handbook and simply highlight which rules are relevant to which regulator.  Firms will be keen to avoid the turmoil which would inevitably ensue from the publication of two separate interim handbooks (page 68).

Pleasingly, the Joint Committee also rejected incredible demands for regulated firms to be subject to fiduciary duties towards their customers (page 88).  Finally, it is encouraging that the Joint Committee has rejected the Bank of England's assertion that it does not need a fully independent complaints body.  Instead, very sensibly, the Joint Committee has suggested the implementation of a fully independent joint complaints service for both the FCA and PRA on similar lines to the Office of the Complaints Commissioner (OCC) (page 80).  Most firms will feel, however, that this silver lining has been somewhat tarnished by the rest of the report.

The financial crisis and ensuing recession have led to justifiable public anger.  However, both were caused by specific firms buying and selling specific types of financial products.  In resolving these problems lawmakers should focus on capital ratios, liquidity and transparent reporting by large, systemically important firms - i.e. mainly banks.  The proposed remedy will expose the entire regulated sector to draconian new enforcement powers and liabilities, including double regulation for insurers.

As such, it is disappointing that the Joint Committee has gone hunting for monsters where there are none to be found.

Stay connected and subscribe to our latest insights and views 

Subscribe Here