“A single regulator presents opportunities for developing a rational and coherent regulatory system… Thus, in anticipation of the reforming legislation, the FSA is establishing, under a unified management structure, a single regulatory regime covering the full range of its regulatory functions including: “one-stop” authorisation for the full range of financial businesses, one rule book and one system of monitoring, investigation and discipline. Single complaints handling and Ombudsman system is also being set up as well as a single Financial Services Compensation Scheme. In this way duplications and inconsistencies can be avoided and regulatory gaps filled.
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This gives rise to a number of benefits.” Lomnicka, E, ‘Reforming UK Financial Services Regulation. The Creation of a Single Regulator’ (1999) JBL, Sep pp 480-489 .In light of the above statement, critically assess the impact of the Financial Services and Markets Act 2000 upon the financial services industry. Introduction This paper will assess the impact of the Financial Services and Markets Act 2000 (FSMA). The following relevant factors will be discussed. First, the situation before the FSMA 2000 was introduced will be investigated, namely the Financial Services Act 1986 which the new legislation has replaced. This paper will look at the problems associated with the act to determine whether the FSMA has effectively addressed the criticisms levelled at the previous system. Secondly, the creation of a single regulatory body the FSA, a simplified authorisation process, the compensation scheme and ombudsman mechanisms under the FSMA will be examined. Thirdly, the FSMA 2000 will be critically debated. This paper concludes the new legislation has ushered in much needed reform in the sector. It is to be welcomed for the protective consumer stance it has taken, in creating a financial regulatory framework. The 1986 Financial Services Act The FSMA was passed by parliament to address the maligned 1986 FSA, which had regulated the UK investment business sector. The fundamental problem with FSA ’86, was the aim to give effect to ‘self regulation within a statutory framework.’ The FSA ’86 led to what has been characterised as a ‘two-tier’ system of regulatory control. This caused problems concerning enforcement of rules under the FSA ’86 act. The act supported self regulation, through the ‘sole top tier regulator ‘ SIB (Securities Investment Board) and second tier entities such as SROs (Self Regulating Bodies), Recognised Investment Exchanges (RIEs), and the Recognised Professional Bodies (RPB). SIB set the ‘overall framework for detailed standards of regulation and initiated policy objectives.’ This led to confusion and uncertainty, as MacNeil, argues the structural complexity of the system created an environment where ‘financial institutions can be subject to the jurisdiction of a number of different regulators and different approaches to regulation.’ Criticisms of the two -tier system were voiced in the Gower report, arguing firms involved in different forms of investment business would need authorisation and be subject to both boards. This was shared by the industry, believing the need to address two regulating bodies, issuing different rules, would increase costs in attaining statutory compliance for business activity. The varied investment activity, coupled with multiple regulatory bodies operating within the FSA framework, was not an efficient way to monitor the industry. Thus, the structural complexity of the regulatory legislation was an important reason behind the introduction of the FSMA 2000. Complexity of Rule-Making under FSA 1986 Secondly, FSA ’86 resulted in intricate rule making. For example, there were separate rule books maintained by SROs and SIB respectively. SRO’s rules were described as ‘unduly legalistic and lacking in coherence.’ The ‘New Settlement’ was an attempt to rectify the problem by implementing new measures under the Companies Act 1989 to ‘restructure the rules’ and establish consistency. The shifts  in the rule making process under FSA ’86, serves to illustrate the uncertainty created by inefficient rule making by the financial regulatory bodies. Thus, the legislative two -tier structure of the FSA ’86 gave rise to, unclear rules and guidelines, issued by the different bodies, hindering the efficiency of financial regulation in the UK. The problem of Enforcement under FSA 86 combined with high profile financial scandals Thirdly, enforcement of breaches under the old act was criticised. This was exacerbated within the context of a number of public financial scandals, which severely dented public confidence in the financial services industry and the regulation of it. The collapse of BCCI, Barings Bank, the misselling of pensions and the Maxwell pension scandal resulted in the role of regulation carried out under FSA ’86 being brought into question. Confusion was created by overlapping regulatory jurisdictions of SIB and SROs, leading to difficulty identifying separate roles for the two bodies enforcing rules under the FSA. For example, the Large report investigated the role of the regulatory body SIB, after the theft of customer assets from the Maxwell Pension Fund. The report identified a number of problems with the FSA regime, such as a lack of clarity of the legislation, self regulation which served the interests of those employed within the industry to the detriment of customers, and the need for better leadership and transparency in the regulatory system. Furthermore, the example of Barings bank highlighted the ‘problems with inadequate co-ordination between regulators.’ MacNeil argues the collapse of Barings represented the lack of co operation between the Bank of England and the SFA in exercising regulatory control. Critics argued this demonstrated the ‘inexperience’ of regulators failing to get to grips with a system where the regulatory rules were constantly being developed by the competing regulating bodies. Such events severely weakened the effectiveness of the regulatory model under the FSA ’86 and prompted calls for legislative reform to ensure the prevention of similar situations. The impact of FSMA 2000 – the Financial Service Authority as a single regulator The FSMA 2000 was brought in to reform the expensive two tier system of the FSA ’86. It has made a number of substantial changes for the protection of the consumer, involved in investment activities. The act, perhaps most importantly, establishes a single regulator, the Financial Services Authority (FSA) to monitor the UK financial services industry. This is significant, as the move towards a single regulator is an explicit attempt to create a coherent, simplified framework for rule making and regulation. SROs are abolished in order to eradicate the complex and inefficient two tier system, helping to avoid unclear overlaps of different regulatory jurisdictions concerning authorised activity. Rules and guidance formulation under FSMA 2000 The move to a single regulatory body has lead to a considerable simplification of rules and guidance accompanying the new legislation. MacNeil claims the changes in rule making represent a ‘new phase’ under the act. The handbook of rules and guidance is a restructuring and ‘rationalisation’ of the previous cumbersome rules under FSA ’86. Most of the proceeding rules will be transferred from the old act. A ‘separation of elements’ will be applied to the formulation of rules under FSMA, to make the process understandable and manageable. Thus the reform represents a ‘complete system of financial regulation’. This argues MacNeil will separate the substantive regulatory standards from regulatory processes, via the new ‘building block’ structured  guidelines formulated by the FSA. Six general categories of standards have been created, dealing with high level standards, business standards, regulatory processes such as authorisation and rules governing redress, which will guide the complaints procedures. The change is having a positive impact on the industry, allowing for a coherent framework as the rules, principles and codes of conduct are visible and accessible. The FSA is legally obliged to formulate rules on authorisation ‘for the purpose of protecting the interests of persons who use or derive rights from regulated services.’ It can be suggested, the rule making powers, are wider in scope than in section 48 FSA ’86. The new rules are applicable to any authorised activity and person. It is not simply limited to the ‘conduct of business rules’ argues MacNeil. For example, SRO and RPB members were responsible for producing their own unique rules for members, which gave rise to uncertainty in a complex system of regulation. The impact on the financial services industry is to consciously minimise the disorder generated by the structural weakness of the FSA 86. MacNeil believes the 2000 act has made ‘a real attempt to overcome some of the failings of the FSA regime.’ This can be seen in the reform of authorisation procedures and the introduction of consumer orientated measures such as the Ombudsman and Compensation scheme. Accountability of the FSA regulatory authority to parliament The FSA has been given a wide range powers under the legislation. The issue of the FSA’s accountability to parliament has been questioned by Mistry. The author raises concerns for the impact of FSMA on the industry, with an extremely powerful regulator at the helm: ‘certain parts of the FSMA have destroyed the direct lines of parliamentary control’ moving away from the delegation model of regulation. However it is countered, that this point is insubstantial, as appropriate measures are in place to ensure the FSA is still held accountable under legislation. The new system of accountability is restructured into five areas, parliamentary control, and corporate governance, statutory objectives of FSMA, grievances and judicial review. In regard to parliamentary control, the FSA may have ‘greater powers’, but there is a clear distinction of duties and responsibility between the treasury and FSA. For example, the power of patronage in Schedule 1 para 2 (3) ensures parliamentary scrutiny of the corporate structure of the FSA will continue. The treasury still retains important qualifying powers, such as launching a statutory investigation into the FSA ‘in the aftermath of a serious financial sector failure.’ Under corporate governance rules, the FSA must be advised by a Practitioner and Consumer Panel, and hold an annual general meeting, suggesting the regulating body will be subject to ‘internal checks and balances’ within the system. This will benefit the public and protect their interests ‘as institutions involved cannot pass the buck’ unlike in the previous regime. The reform of the Authorisation process under the FSMA 2000 The act simplifies the processes of authorising regulated activity in section 31 FSMA. Ryder argues the new act provides a ‘single route’ to gain authorisation from the FSA to operate within the investment industry. Authorisation can be gained through four methods. First, via notification in conjunction with the relevant single market directive in an EEA member state (known as Passport Rights in schedule 3 FSMA.) Second, authorisation can be granted in accordance with schedule 4 of the FSMA, with EU Treaty Rights. Thirdly, via the exercise of rights under EC directives relating to investment undertakings to the market, including ‘collected investment schemes or product authorisation of certain open ended investment companies.’ Finally a person may be ‘grand fathered’ under section 426-7 FSMA, where authorisation is granted to a range of persons in different sectors with previous permission under FSA 86. Section 19 (1) clarifies the regulatory scope in the context of granting authorisation, ‘everyone is prohibited from carrying out a regulated activity in the UK unless authorised.’ Mistry claims this demonstrates a ‘higher degree’ of regulatory control of those involved in a regulated financial activity, and must conform to the conditions in s. 31 (1). Thus, anyone who fails this requirement and still engages in regulated activity will be prohibited and subject to liabilities under section 24 (1). This suggests tighter control in regulating the services industry to ensure the minimisation of risk facing consumers soliciting advice about investment from authorised firms. The Financial Services Compensation Scheme and the role of the Ombudsman The creation of a single compensation scheme under Part XV section 213 states that (1) ‘ The Authority must by rules establish a scheme for compensating persons in cases where relevant persons are unable, to satisfy claims against them.’ It can be suggested the creation of the scheme is in recognition of previous financial scandals where customers have been ill advised, suffering substantially with the investment of their money. Mistry argues, the compensation will be made available to those who have suffered a loss due to the ‘inability of an authorised person to meet it’s liabilities’ which will renew public confidence in the regulatory framework under FSMA. In addition, an Ombudsman is created under Part XV, as a compulsory scheme aiming to rectify disagreements between financial firms and clients. Section 226 (3) states “compulsory jurisdiction rules” will apply. The body can award ‘fair compensation’ and order the respondent to rectify the matter taking the necessary steps.’ It can be claimed the measures do have a beneficial impact on the financial services industry in the UK. It demonstrates a regulatory system with clearly stated standards to supervise responsibly, a complex range of financial investment activity and disputes. In its statutory role to protect the consumer, the FSA will be obliged to ensure greater co- operation between government and law agencies for handling complaints. Such a ‘unified’ structure ‘will offer greater simplicity and ease of access to the consumer’ in response to dealing with the harm of financial loss. The significance of the FSMA statutory objectives It is argued the importance of these measures must be seen within the context of the FSMA statutory objectives. Steward, argues they underlie ‘the radical new form of regulation untried in a comparable financial industry.’ The ‘innovative aspect of the act was the imposition’ of statutory objectives clearly legislating for the role of the FSA as a regulating body under Part I. The four main objectives are to (1) maintain market confidence, (2) promote public awareness of financial services, (3) reduce financial crime and (4) protect consumers. It is stated under section 5. (1) The protection of consumers objective is: securing the appropriate degree of protection for consumers. 2) In considering what degree of protection may be appropriate, the Authority must regard (a) the differing degrees of risk involved in different kinds of investment or other transaction; (b) the differing degrees of experience and expertise that different consumers may have in relation to different kinds of regulated activity; (c) the needs that consumers may have for advice and accurate information; and (d) the general principle that consumers should take responsibility for their decisions.’ The four factors sets out the degree of protection the FSA considers appropriate attempting to strike a balance between the expectation consumers have, and the level of responsibility they must accept for their own actions. It can be claimed the requirement is a proactive step to empower the regulator, to protect the consumer in risky financial investment business. Thus, the compensation scheme and Ombudsman are tools to help create a consumer orientated regulatory environment, addressing financial harm arising from disputed authorised activity. The schemes fulfil other objectives outlined in Part I, to secure market confidence, ensuring a stable economy and raising public awareness of the financial services industry. Finally, the statutory objective to raise public awareness is an important development which has had a key affect on the financial industry. For the ‘first time’ argues Steward, the financial regulator is legally obliged to educate the public in matters of financial services. Raising the level of public information will increase public confidence, with the knowledge that they have legal options for redress, in light of potential financial risk occurring. This legislative safety net will ensure public confidence in financial services will be retained, a necessary factor in sustaining a healthy competitive market economy, encouraging new customers to invest in financial products. Conclusion The reform of the FMSA brings about much needed change to the financial regulation in the UK. In this papers view it is a simplification to argue Steward’s line that the Financial Services and Markets Act 2000 is a radical piece of legislation. Mistry and MacNeil are more cautious about the act, recognising it as significant, but ultimately still implementing previous substantive rules of the FSA ’86 which have been ‘consolidated’ in the new regime. MacNeil questions whether the ‘elegant design in itself can make a significant contribution to the quality of regulation.’ The simplification of procedural rules, such as authorisation, provide an efficient route for managing the wide range of regulated financial activity and those involved with it. A real substantial change is the move to a single financial regulator with the statutory objectives to protect and educate the consumer in a complex finance industry. This has created an open, transparent structure, with access to remedies such as the restructured complaints scheme and Ombudsman. This represents an indisputable reform of the FSA ‘86, which systematically failed in its regulatory duty to prevent financial criminal activity and maintain consumer confidence. Bibliography Financial Services Authority (2000), In or Out ? Financial Exclusion: a literature and research review, London: Financial Services Authority. FSA The FSA’s approach to the regulation of e-commerce, FSA (2001), Financial Services Regulation: Making the Two Tier System Work (SIB, May 1993) The Financial Service and Markets Act – What happens next? FSA/PN/080/2000, 19 June 2000. Vaas, J. (1998). A guide to the provision of financial service education for consumers. FSA, London: FSA. Broome, N and Evans R, 2005 The FSA: whose tune is it dancing to and how is the FSA accountable to the financial services industry ? Journal of Business Law August/September 26(8/9) 199-204. Lomnicka. E., 2000. “Making the Financial Services Authority Accountable”. The Journal of Business Law January p65-81. MacNeil, I. (1999), “The Future for Financial Regulation: The Financial Services and Markets Bill”, MLR, 62(5), 725-743. McGuinness, K and Rogers. P,. “The Financial Services and Markets Bill”, Business Law Review February 1999. Mistry H, 2001, The Loss of Direct Parliamentary Control. Does that mean a Financial Services Regulator Without Accountability, The Company Lawyer 22 (8) pp246-248. Ryder, N. (1999), “Fear Strikes Again”, Bus. L.R., 20 (8/9), 206-210 Ryder, N. (2000), “The Financial Services and Markets Act”, Bus, L.R., 21 (11), 253-256 Steward, E. (2001), “The Four Horsemen of the Apocalypse – the Financial Services Authority and its Stautory Objectives” Bus. L.R. 2001 22(11), 258-261 https://www.sharingpensions.co.uk/fsma.htm – Blair. C, Research Paper 99/68, 24th June 1999, Financial Services and Markets Bill, https://www.parliament.uk 1
p. 726, MacNeil, I. (1999), “The Future for Financial Regulation: The Financial Services and Markets Bill”, MLR, 62(5), 725-743. Financial Services Regulation: Making the Two Tier System Work (SIB, May 1993) p.8 , Blair. C, Research Paper 99/68, 24th June 1999, Financial Services and Markets Bill, https://www.parliament.uk p.728 Ibid  p.731 Ibid  Ibid p. 728 Ibid  p. 739, MacNeil, I. (1999), “The Future for Financial Regulation: The Financial Services and Markets Bill”, MLR, 62(5), 725-743.  p. 732, MacNeil, I. (1999), “The Future for Financial Regulation: The Financial Services and Markets Bill”, MLR, 62(5), 725-743. P.735 Ibid Ibid p.732 Ibid p. 246, Mistry H, 2001, The Loss of Direct Parliamentary Control. Does that mean a Financial Services Regulator Without Accountability, The Company Lawyer 22 (8) pp246-248. Ibid Ryder, N. (2000), “The Financial Services and Markets Act”, Bus, L.R., 21 (11), 253-256 p.255, Ibid p. 246, Mistry H, 2001, The Loss of Direct Parliamentary Control. Does that mean a Financial Services Regulator Without Accountability, The Company Lawyer 22 (8) pp246-248. https://www.opsi.gov.uk/acts/acts2000/00008–r.htm#213  p. 255, Ryder, N. (2000), “The Financial Services and Markets Act”, Bus, L.R., 21 (11), 253-256 https://www.opsi.gov.uk/acts/acts2000/00008–s.htm p. 255, Ryder, N. (2000), “The Financial Services and Markets Act”, Bus, L.R., 21 (11), 253-256 p. 254,Mistry H, 2001, The Loss of Direct Parliamentary Control. Does that mean a Financial Services Regulator Without Accountability, The Company Lawyer 22 (8) pp246-248. Steward, E. (2001), “The Four Horsemen of the Apocalypse – the Financial Services Authority and its Statutory Objectives” Bus. L.R. 2001 22(11), 258-261 p. 260, Ibid p.735
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