Are regulators fit for purpose?

A recent letter to the FCA by the Work and Pensions Select Committee suggested they were not. Was it fair?

What the judges say No 1

We are all, even men, free to change our minds when it is sensible to do so. Consistency, said Emerson, is the hobgoblin of little minds. So in the Supreme Court in one of the cases looking at whether Covid was covered by business interruption insurance policies, two law lords said:

In reaching a different conclusion now to that which we both reached over ten years ago we would refer to what Justice Jackson said in McGrath v Kristensen, 340 US 162, 177-8 (1950), concurring in a decision which contradicted an opinion he had given when Attorney General:

“Precedent, however, is not lacking for ways by which a judge may recede from a prior opinion that has proven untenable and perhaps misled others. See Chief Justice Taney, License Cases, 5 How 504, recanting views he had pressed upon the Court as Attorney General of Maryland in Brown v Maryland, 12 Wheat 419. Baron Bramwell extricated himself from a somewhat similar embarrassment by saying, ‘The matter does not appear to me now as it appears to have appeared to me then.' Andrew v Styrap, 26 LTR (NS) 704, 706. And Mr Justice Story, accounting for his contradiction of his own former opinion, quite properly put the matter: ‘My own error, however, can furnish no ground for its being adopted by this Court. ...' United States v Gooding, 12 Wheat 460, 25 US 478. Perhaps Dr Johnson really went to the heart of the matter when he explained a blunder in his dictionary - ‘Ignorance, sir, ignorance.' But an escape less self-depreciating was taken by Lord Westbury, who, it is said, rebuffed a barrister's reliance upon an earlier opinion of his Lordship: ‘I can only say that I am amazed that a man of my intelligence should have been guilty of giving such an opinion.' If there are other ways of gracefully and good naturedly surrendering former views to a better considered position, I invoke them all.”

We likewise invoke whatever ways by which we may “gracefully and good naturedly” surrender “former views to a better considered position.”

The Financial Conduct Authority v Arch Insurance (UK) Ltd, 15 January 2021, Lord Hamblen and Lord Leggatt [2021] UKSC 1. at 311/312

It raises the issue of whether the FCA should in turn criticise IFAs for giving advice some years ago which they now find inappropriate.

 What the judges say No 2

 A SIPP management company went bust when it accepted business (around 1% of its turnover) from a fraudulent unregistered introducer, and the FOS/FCA insisted it pay out customer losses. The FCA then sought disqualification of the directors. This seems a bit tough on the directors who had not been accused of being involved in the fraud. Anyway the judge dismissed the FCA application. And in his final paragraph he said this:

 ‘ . . . In the 1980’s Staughton J pleaded with lawyers and judges to abandon the old fashioned and obscure language of the law and to write in plain English, as most judges now at least try to do. That trend has been met by a countervailing trend in the world of administration and regulation to write in an increasingly obscure style, often using superfluous words or words of uncertain meaning. The word ‘thematic’ used for a review or assessment, for example, seems to add nothing to the noun ‘review’, just as describing a summary as an ‘executive summary’ rarely implies more than is conveyed by the simple noun the word ‘executive’ recedes. The expression ‘high level’ used by the FCA gave rise to a lively debate about what it might mean. I thought it meant ‘of a high standard’ or ‘thorough’ or something like that, but that meaning did not work in the context in which it was used. Ms Jones thought it might refer to something carried out by a senior member of staff. Legal cases often involve going over the meaning of words (and in this case even punctuation. The more straightforward the language the better, is the general rule in my view. If regulators do in fact read this judgment I would ask them to note and act on my plea for them to use ordinary plain English wherever possible.’,

Baister DJ, The Secretary of State for Business Energy and Industrial Strategy v Evans [2020] EWHC 3519 (Ch).

Is the regulator fair?

Finally the Financial Ombudsman Service held against a SIPP manager for failing to stop a woman being defrauded (Imogen Tew, Adviser to pay out after fraudster raids client’s pension, FT Adviser, 12 January 2021). There were two steps in the fraud. First, the fraudster impersonated the client and managed to kid them into transferring money from her SIPP into her bank account. Then the fraudster impersonated the SIPP provider and persuaded the client to transfer funds back, but this time to a fraudulent account. It was this fraud the SIPP manager had to reimburse. Seems unfair.

So: is it time to replace/abolish the FCA?

Just some recent reports . . .

1            It has been noted that the FCA cannot force its team to give evidence to investigators into its behaviour (see Rachel Addison, FCA staff will not be forced to cooperate with review, Financial Adviser, July 25 2020).. . .

2            . . . Nick Smith MP has written to the Chief Executive of the FCA saying: ‘. . . we are deeply concerned that the FCA in its current form is not fit for purpose.’ Given that the FCA replaced the FSA which itself replaced a group of earlier regulator, maybe we need to rethink what a regulator can and cannot do. (Nick Smith MP, Chairman Work and Pensions Select Committee, Letter to FCA, 21 January 2021 and see Oral evidence to Work and Pensions Select Committee by TPR, FCA, City Police and NECC, 6 January 2021, HC 648).

3            . . . the Complaints Commissioner criticised the FCA for wrongly noting that an adviser had refused to cooperate with its requests. Ms Somal said: ‘I find the FCA were wrong to question your honesty and integrity. It is also concerning that the FCA complaints team did not challenge this and investigate further when I would have expected them to do so.’ She recommended that the regulator increase its payment for the inconvenience and trouble and upset from ￡50 to ￡75. And she said that the FCA should remove the supervision case file record – which the FCA refused to do. Something is wrong somewhere. (Amy Austin, FCA criticised for falsely black-marking adviser, FT Adviser, 20 January 2021).

4            The FCA banned some IFAs for having paedophile images on their computers. The question is twofold. Did the offences involve breach of the FCA’s ambitions: ‘The FCA expects high standards of character, probity and fitness and properness from those who operate in the financial services industry and will take action to ensure those standards are maintained.’ ? Of course the offences were nothing to do with financial probity or even ‘properness’, a quality which seems undefined. And secondly would disqualification extend to other areas of misbehaviour, for example adultery, not a crime but an activity which usually involves some form of dishonesty. These are complex issues and it is only fair to those that are being supervised that they understand in advance what is and is not acceptable, rather than in hindsight. And whether it is a regulator's role to enforce morality generally, ie where it has no impact on consumers, is a tricky area. It is usually better to accept the principle that less is more (see FCA bans three individuals from working in the financial services industry for non-financial misconduct, FCA, Press release, 5 November 2020).

5            The FCA announced that the compensation fund next year will need to exceed ￡1B. Does this show the system is working or not working? Sir Robert Peel said in 1829 ‘The test of police efficiency is the absence of crime and disorder, not the visible evidence of police action in dealing with them.’