Jun 11 2007 Peter Elstob
The Financial Services Authority will not use the enforcement of its principles to make new law, and will not force firms to follow its guidance. Jamie Symington, the FSA's head of wholesale enforcement, told regulatory lawyers that FSA guidance was a tool which firms could decide whether or not they wished to employ. Guidance was not a weapon to enable the regulator to create enforcement cases and make retrospective law, Symington told the inaugural meeting of the Financial Services Lawyers Association.
Opening a panel discussion of whether "principles-based regulation is an affront to the principle of legal certainty", Symington doubted that the FSA would act against individuals unless they were real outliers from industry standards. "It's much more likely that where there was a general issue, rather than going straight for an enforcement action, we would seek to raise standards by other means, either as part of the supervisory process or through guidance."
Symington said while the move to more principles-based regulation had generally been warmly received by the industry, lawyers had always been more circumspect, with enforcement the focus of most of their concerns. Enforcement tended to put all parts of the regulatory process under scrutiny, he acknowledged. He identified two issues that seemed to be causing particular concern:
- What is the role of the FSA's guidance in the enforcement of principles? In particular, how will guidance be relevant to the way in which FSA enforces its principles, without affronting the principle of legal certainty?
- Will the FSA start creating retrospective law, through its interpretation of the enforcement of principles?
Symington made a distinction between the FSA's statutory guidance, which it informally calls "guidance with a capital G", and "small g guidance". "Capital G guidance", he said, was generally contained in the FSA Handbook, related to its rules and was subject to consultation. "Small g guidance" — "Dear CEO" letters, the Market Watch newsletter, and so on – had no statutory status. "All guidance, whether capital or little g,
may be factors which are taken into account, both for the purposes of deciding whether to take enforcement action, and in determining the appropriate level of financial penalties," he said.
Soft guidance
The FSA quite often heard concerns about what the industry saw as a proliferation of its "soft", non-statutory guidance. Issues raised included how accessible it was, and whether such informal guidance amounted to policy making by the back door. Some saw it as inappropriate that the FSA should take this sort of guidance into account in its enforcement decisions.
“ It's not our intention to 'enforce' guidance, as such, in that way. ”
— Jamie Symington, Financial Services Authority
"What we say to that is that there are two very important objectives at the heart of more principles-based regulation, which may sometimes be competing with each other. On the one hand, we are trying to influence firms and change their behaviour, and our published guidance is one of the ways we do that. On the other hand, we try to encourage firms to exercise their own judgement, and make their own decisions about what is needed to comply with an FSA rule or principle."
The FSA fully appreciated that if firms failed to follow FSA guidance it would not, of itself, give rise to a breach of an FSA rule or principle. "It's not our intention to 'enforce' guidance, as such, in that way," Symington stressed.
Nevertheless, the FSA thought it was right to take soft guidance into account when making enforcement decisions. This was because "Dear CEO" letters and other supplementary guidance could:
- illuminate the FSA's view of the circumstances and environment in which an established breach had occurred;
- explain the "regulatory backdrop" to a case;
- inform the regulator's view of the seriousness of the breach;
- assist in an expert assessment of the relevant standards at the time.
Guidance did not set minimum standards, nor did it prescribe the only means for firms to comply with rules or principles. "Firms needn't regard guidance as the only means of complying; there are always going to be other ways of doing so," Symington told the lawyers. Full consideration and due weight would be given to firms' arguments as to how they had tried to comply, even where the FSA considered that they had not succeeded.
Enforcement cases
The FSA was aware of concerns that it would decide the meaning of "vague and soft" principles when deciding on individual enforcement cases; effectively making up retrospectively applicable law as it went along. "A point I would like to remind you all of is that there's nothing in principle objectionable about having high-level rules and principles, or softer concepts such as the duty to take reasonable care, or to act with integrity," Symington said. Such concepts and negligence and honesty were very well known to the legal system, and they were applied in the courts every day. An obvious example was the statutory offence of careless driving, which sat alongside the proliferation of much more detailed rules and codes applying to road users.
"What the FSA says, very clearly, is that we won't apply hindsight when we seek to establish a breach, and we're not going to take retrospective action," Symington said. For a breach of principle to have disciplinary consequences, the firm must have been able reasonably to predict, at the time of the action concerned, whether or not it would be a breach of principle. Among other things, guidance and also previous regulatory and enforcement decisions published at the time of the firm's action might inform the FSA's decision.
"Some people have picked up on this and sought clarification of what we mean by predictability. To be clear, we don't intend that the idea of predictability should sit on top of the rule breach, as an additional test that we need to satisfy in order to justify taking action," Symington said.
It was not, for example, analogous to the test of "reasonable foreseeability of damage" in negligence cases. The FSA was, he stressed, making its statements about predictability precisely in order to reassure firms that it would not take retrospective action.
The views and the opinions expressed in 'hot topics' are that of the individual authors and not necessarily those of the Securities & Investment Institute.
