19th October 2011
No blame but pay the claim!
The FSA made a submission to the Joint Committee on the Draft Financial Services bill dated the 5th September and although it seems somewhat ‘dry’ in it’s content, style and delivery, there is a lot that is buried in it that should cause concern.
In particular all in the industry should reflect upon the following:
32. However, it is important for Parliament and society to recognise how even these enhanced powers will operate in practice. Our experience is that members of the public and Parliamentarians have been of the view that - as a matter of public policy – the breach of the FSA’s rules should in all cases entail the consumer receiving 100% redress. However, the FCA’s ability to ensure that consumers receive redress is constrained by the general law, in particular by questions of causation. If the breach of rules either did not cause the loss, or was merely a contributory factor, the FCA will not be able to require firms to pay full redress.
33. If society expects as a matter of public policy that the regulator should be in a position to require greater levels of redress to be paid then the FCA needs to be given a clear mandate and powers to do so in the new legislation. This is a difficult issue that gives rise to real questions as to how far the regulator’s powers should extend and we would very much welcome the Committee debating this matter, in particular to achieve further clarity as to the FCA’s mandate in this area.
The FSA seem to place great store in statements such as “Our experience is that members of the public and Parliamentarians have been of the view that” and “as a matter of public policy”. But where does the research come from to make such statements that have been placed in a very serious submission to Parliament for its consideration?
If this is taken seriously Financial Services will no longer be a sustainable industry, it will in fact be hog tied, unable to innovate or operate cost effectively for fear of paying compensation for something it has not actually done wrong. Financial Services would become an arm of Government as an unintended consequence of bad bill drafting under a Department for Financial Services and Planning holding statutory powers to compel the public.
In the same document the FSA addresses the delicate subject of Accountability.
It says:
46. Finally, although we agree that the regulators should be accountable to Parliament, we would welcome further debate in Parliament as to where it wishes to draw the line between ensuring adequate accountability and allowing the regulators to make judgements, both in rule making and in relation to individual firm decisions. Historically, allowing the regulator a space in which to make its regulatory judgements has been seen as a good model in terms of independence of decision-making, including by the IMF in their Financial Services Action Plan, and more widely.
47. Furthermore, it needs to be recognised that in a judgment-based approach to regulation, which requires regulators to base their assessments of risk on their view of the future, there will be inevitably be occasions where the supervisor’s judgment turns out in the light of events not to be the best option chosen. It is important, however, that the accountability process does not prevent such judgments being made, for if it were to, the future concept of supervision which parliament envisages would be undermined. The accountability and appeals process should focus on ensuring that the regulator has acted within its authority and done so in a reasonable manner.
If you actually digest this section- “there will inevitably be occasions where the supervisor’s judgment turns out in the light of events not to be the best option chosen”, I would say welcome to the real world because that is what those responsible in businesses across the world do every day and if they fail they pay the price. Regulatory failure can and has been catastrophic but those on whose watch the failures occurred very rarely take or accept any degree of responsibility and suffer no sanction.
At the moment we have a regulator that carries very little accountability, failures are not met with an acceptance, apology and a ‘falling on swords’.
This submission is in fact saying we should be seen to take responsibility in some quasi existential way but please do not allow anyone to actually carry the can as we would not be able to get anyone to do the job, and after all, who would pay?
In the real world, failure is met with penalties, sometimes very harsh ones. In the FSA regulated world, failure by regulated firms- no matter if only with the benefit of hindsight it could have been prevented, can carry harsh penalties and often the payment of considerable levels of compensation even resulting in the loss of one’s business or at worst livelihood and possessions.
I think that regulators should ask themselves some serious questions if they wish to see suggestions implemented as above.
Would the public and Parliamentarians see it is reasonable that when regulators weald such considerable power to deal with failure to act according to rules and principles that they should also, personally, carry responsibility for doing in the words of Andrew Tyrie “something really stupid, knowing it is really stupid” that could result in the loss of a job, livelihood and possessions?
Comments (4)
Quite right - you should only have to redress the consequences of your own wrongdoing.
But then so should regulators be required to redress the consequences of their wrongdoing.
Peter Turner 20/10/2011 09:57
But even more evilly the Failed FSA is seeking to bypass democratic control of its, and its successors, actions. This is at the very least authoritarian and at the worst simply fascist/communist, that is totalitarian. These people are our servants not our masters. There is no circumstance when they can justify immunity from their failure. It is an assault on liberty. And the destruction of liberty for one class of people - financial services people - is a destruction of liberty for all of us.
The Failed FSA has been reading '1984'. Trouble is it thinks it is a manual, not a caution.
Steven Farrall 20/10/2011 11:55
This is a case dealt with in the House of Lords in the 1990s and dealt with the issue of causation.
In paragraph 18 he says, "Rules which make the wrongdoer liable for all the consequences of his wrongful conduct are exceptional and need to be justified by some special policy. Normally the law limits liability to those consequences which are attributable to that which made the act wrongful. In the case of liability in negligence for providing inaccurate information, this would mean liability for the consequences of the information being inaccurate."
He uses an example in paragraph 19: "A mountaineer about to undertake a difficult climb is concerned about the fitness of his knee. He goes to a doctor who negligently makes a superficial examination and pronounces the knee fit. The climber goes on the expedition, which he would not have undertaken if the doctor had told him the true state of his knee. He suffers an injury which is an entirely foreseeable consequence of mountaineering but has nothing to do with his knee."
In paragraph 20, he says, "20. On the Court of Appeal"s principle, the doctor is responsible for the injury suffered by the mountaineer because it is damage which would not have occurred if he had been given correct information about his knee. He would not have gone on the expedition and would have suffered no injury. On what I have suggested is the more usual principle, the doctor is not liable. The injury has not been caused by the doctor"s bad advice because it would have occurred even if the advice had been correct."
This point is important because what Lord Hoffman is saying is that redress should be based on only on those losses attributable to the negligence. If it is caused by something that could not reasonably have been anticipated (for example the failure of Lehman Brothers or that a crook would run off with Keydata customers' money) that is NOT something which a professional should be liable to redress.
In paragraph 22, Lord Hoffmon goes to say
"I would suggest, think that there was something wrong with a principle which, in the example which I have given, produced the result that the doctor was liable. What is the reason for this feeling? I think that the Court of Appeal"s principle offends common sense because it makes the doctor responsible for consequences which, though in general terms foreseeable, do not appear to have a sufficient causal connection with the subject matter of the duty. The doctor was asked for information on only one of the considerations which might affect the safety of the mountaineer on the expedition. There seems no reason of policy which requires that the negligence of the doctor should require the transfer to him of all the foreseeable risks of the expedition. "
I like the expression "offends common sense". It seems to sum up the FSA's position!
Peter Turner 26/10/2011 15:16
What an excellent article and usefiul insight from Peter Turner. I am due to meet with my MP shortly and will be bringing this article to her attention when discussing the longstop. I last discussed ity before she was elected, unseating the resident Nulibor MP. We will see if she is all talk or whether she will stand up for democracy and put the FSA back on track. Note I say the FSA as I see little point in renaming the FSA the FCA with all teh ingerent costs involved.
Phil Castle 31/10/2011 09:05
You need to be logged in to comment on this article