27th November 2009

Is the FSA acting ultra vires - beyond its powers?

"The Financial Services and Markets Act does not permit the FSA to cancel an authorisation simply because the FSA has changed its views on what the appropriate qualifications should be….It is one thing to impose new rules for new entrants to the IFA profession, it is quite another thing to disqualify someone who is already qualified.

William Shakespeare said, "When the sea was calm, all ships alike showed mastership in floating." The IFA community is drifting towards an abyss and now as a storm approaches it is time to take the helm or be swept away! It may be that Peter Hamilton QC is wrong, but on the other hand it may be that he is right. If the latter then your rights are at grave risk.

WHY THIS IS IMPORTANT:

The rule of law is defined as that which allows the rights of individuals to be determined by law and not the arbitrary actions of authority. It incorporates the right to a trial by jury, the presumption of innocence, the right of appeal, the freedom of association, a free press and free speech, the presumption that actions should not be judged retrospectively.

Money Marketing - FSA acts unfairly and so disregards rule of law

The FSA needs to treat those it regulates fairly and equally if it is to gain and retain the trust and cooperation of regulated firms. It needs that trust and cooperation for it to do its job effectively. But in at least two important areas, the FSA has acted or is proposing to act unfairly to IFAs: namely in relation to the no long-stop rule and the new professional qualifications for IFAs.

The rule of law has an important bearing here. The rule of law is not an abstract conceptof interest only to academic constitutional lawyers. It is of vital importance to all of us all of the time: it underpins our essential values and freedom. The courts will take action to uphold it. The distinguished law lord, Lord Bingham, said recently that the "core of the existing principle [of the rule of law] is... that all persons and authorities within the state, whether public or private, should be bound by and entitled to the benefit of the laws publicly and prospectively promulgated and publicly administered in the courts". It follows that everyone is equal before the law. But as we know, IFAs are not in the same position as other professionals when it comes to the rules of limitation and the 15 yearlong-stop. Last month, I illustrated the inequality and unfairness of an IFA's positioncompared to that of other professions with the following example: a client has beenadvised by his solicitor, his accountant and his IFA who all agree on the course of actionwhich the client should take. Assume that that advice was negligent and that the client did not know for, say, 20 years when the loss first emerged. The client would not beable to sue the solicitor or the accountant because of the long-stop in the ordinary law. But the IFA could still be exposed to an adverse finding by FOS of up to �£100,000 because of the lack of a long-stop in the FOS rules made by the FSA.

In practice and in reality, the IFA is not equal before the law because of that rule. In other words, the lack of a long-stop discriminates unfairly against IFAs. In answering its critics, the FSA has not tried to defend its rule by addressing the unfairness points. It has ignored the basic point that in all other aspects of their lives, the clients of IFAs aresubject to the long-stop provisions of the Limitation Act 1980. The FSA appears to believe that Parliament has got the balance wrong in the Limitation Act between the competing interests of prospective claimants and prospective defendants. Why? The burden of the argument is on the FSA: it is for the FSA to explain and justify its decision to abolish the long-stop for FOS complaints.

Another way of looking at this issue is through the lens of human rights. It is notsurprising that the rule of law naturally supports and protects human rights and freedoms. Many of the rights and freedoms codified in the Human Rights Act 1998 have their origin in the rule of law. Two articles enshrined in that Act are particularly relevant: the first is that every person is entitled to the peaceful enjoyment of his possessions. In other words, we are all entitled to keep and enjoy what we have and no one may take anything from us except in accordance with the law. Thus a disgruntled client cannot recover compensation from an IFA except by legal process such as complaining to FOS. But the second relevant article provides that no one should be discriminated the rights and freedoms secured by the Act. It is therefore appropriate for the Parliamentary Joint Committee on Human Rights to take up the issue of the discriminatory unfairness of the lack of a long-stop in the rules made by the FSA. As reported in Money Marketing, the chairman of that committee, Andrew Dismore MP, recently wrote to Lord Myners who is one of the Treasury ministers, asking him to explain and justify the FSA rule. Lord Myners' reply merely repeats the FSA stance and provides neither explanation nor justification.

Another aspect of the rule of law is that no one should be subject to a change in the law which has retrospective effect. When deciding on a course of action, we should know what the relevant law is (or, more probably, be able to find it out by taking advice). We should then be able to get on with our lives, secure in the knowledge that the legal basis for our decision would not be changed so as to affect us. Of course, the law can be changed for the future - but not retrospectively.

Here again, the FSA has lost sight of the rule of law. Following the RDR, the FSA is intending to raise professional standards and to introduce new rules for the qualifications for IFAs. So far so good: no one would complain about the raising of standards if there is reasonable room for improvement. But the FSA is saying that it will not permit IFAs who are currently qualified and authorised under Financial Services and Markets Act to continue to practice under the future new rules unless they requalify. To put it in the jargon: there will be no grandfathering. There are good arguments for saying that that is not lawful. The FSMA does not permit the FSA to cancel an authorisation simply because the FSA has changed its views on what the appropriate qualifications should be.

To give current IFAs time in which to requalify is to mitigate the situation but it does not make lawful that which is unlawful. It is one thing to impose new rules on new entrants to the IFA profession. It is quite another thing to disqualify someone who is currently qualified. In other professions, the initial qualifications for admission to the profession may well be raised for new entrants, but it is standard practice for existing members to be permitted to continue to practice without having to requalify. To take one example, the examinations for those seeking to become barristers have become much more demanding over the last 40 years, but no barrister who qualified under the earlier rules has been required to requalify under the later requirements or face expulsion. Every professional needs to keep up to date with relevant developments. Formal requirements imposed on existing members of a profession to undertake courses designed to keep members up to date are acceptable and are part of a profession's seeking to maintain standards. But that is not the same as requiring an individual to requalify for membership of the profession because new entry requirements have been introduced.

The FSA needs to understand that part of the implicit bargain it has with those it regulates is that it will carry out its job fairly. It should treat its customers, the regulated community, as fairly as it expects the latter to treat their customers. Before imposing a rule, it should think carefully about the inherent fairness of what it is doing and its duty as regulator to act in a way that upholds the rule of law.

This article was written by Peter Hamilton a Barrister who practices from 4 Pump Court  and is a founder member of their Financial Services Team. His experience in the field of Financial Services can be reviewed in the attached CV.  Further Details of 4 Pump Court’s experience in Financial Services work is available on request from clerks@4pumpcourt.com

This article first appeared in the 25^th June 2009 edition of Money Marketing under the headline FSA needs to treat its own customers fairly and seems to have escaped attention until now. It has been reproduced by kind permission. Click here to read the full article.

Email the bulletin including this article to a friend/colleague.

Adviser Letter of the Week