The FSA has published a discussion paper entitled Transparency as a Regulatory Tool, which sets out the FSA’s plans to change the way in which it discloses information about itself and the firms, products and markets that it regulates. In this briefing we look at the FSA’s proposals and their broader context, as well as the specific issues arising from the proposals.
The FSA has published a discussion paper entitled Transparency as a Regulatory Tool. It has invited comments by 29 August. The discussion paper sets out the FSA’s plans to change the way in which it discloses information about itself and the firms, products and markets that it regulates. Provided certain conditions are met, the FSA proposes to operate a presumption in favour of regulatory transparency, which will operate in the retail and wholesale markets.
The paper raises a number of important policy issues, in particular the extent to which the FSA can publish a firm’s confidential information, otherwise protected under section 348 of the Financial Services and Markets Act 2000 (FSMA).
In this briefing we look briefly at the FSA’s proposals and their broader context. We also look at specific issues arising from the proposals such as the FSA’s treatment of confidential information, the rules on public censure and the potential effect of the FSA’s proposals on requests made to it under the Freedom of Information Act (FOIA).
The FSA has created a draft code of practice on regulatory transparency, which is comprised of three elements. First, a statement of intent: ‘The FSA is committed to being an open and transparent regulator. We have a presumption in favour of using transparency as a regulatory tool to help us achieve our objectives where each of the following principles are met.’ Second, three principles:
- the FSA will not publicly disclose information that it believes would infringe any statutory restrictions on it, including those set by FSMA;
- the FSA will proactively disclose information that it believes on balance serves, rather than harms, the public interest; and
- disclosure should meet the FSA’s standards of economy, efficiency and effectiveness.
The third element of the code sets out at high level the practical applications where the FSA envisages that regulatory transparency will apply (for example, in guidance to firms and/or consumers).
What does this mean for the regulated community?
The FSA justifies an increased level of disclosure on three main grounds. First, on the basis that it may assist consumers in their purchasing decisions and increase consumer confidence, which may, in turn, stimulate competition between firms.
Second, the FSA states that increased transparency might also improve firms’ understanding of FSA regulatory requirements, by providing information that allows them to benchmark their own and peers’ performance against those requirements. The transparency would, according to the FSA, act both as a deterrent and as a stimulant of behaviour that increases firms’ quality of compliance.
Third, the FSA suggests that greater transparency could give rise to more (and more informed) scrutiny, leading to greater confidence in the FSA. It may also increase market confidence, encouraging engagement with financial services and leading to deeper and more liquid markets.
To the extent that such benefits are delivered (and it is by no means clear that they will be), we consider that these must be balanced against the potential effect of the proposals on the FSA’s relationship with the regulated community. Of particular concern will be the extent to which the regulated community feels that its confidential information provided to the FSA will be protected and that it has confidence that due process is not sacrificed in the interests of transparency.
How confidential is your confidential information?
Under section 348 FSMA, the FSA is prohibited from disclosing confidential information provided to it by firms. However, section 349 contains an exception to this prohibition such that the FSA can disclose confidential information to enable or assist it to perform its functions (this has become known as the ‘self-help gateway’) − such disclosure is permitted by the Gateway Regulations1. Relying on section 157 FSMA, the FSA, in the discussion paper, concludes that its ‘functions’ include providing information or advice in order to meet its regulatory objectives, or if the FSA believes it to be otherwise desirable to provide such information or advice. The FSA therefore claims that it is able to disclose information, which was until now thought to be confidential, because doing so is part of its function as a regulator.
The FSA’s line of argument is interesting. However, there must be real questions as to whether it is in fact permissible. As the FSA recognises in the discussion paper, the information that can be disclosed under the gateway provisions is circumscribed by the confidentiality requirements in the EU financial services directives. These directives apply a requirement of professional secrecy on those receiving information. The FSA appears to consider that article 54(5) of MiFID2
provides an exception to that general duty. It is by no means clear that it does. Even if that is the case, the transparency proposals could only apply to the investment business as defined by MiFID when conducted by firms other than banks and insurers, as the FSA would also need to demonstrate that the transparency proposals would not breach the obligations of professional secrecy contained in the many other financial services directives. It would be unfair and impractical to have different disclosure regimes applying to different regulated businesses.
It is also not clear how the FSA’s proposals would work in practice. Not all confidential information provided to the FSA will be disclosed by it. Under its proposals the FSA must first satisfy itself that disclosure of the confidential information would make a material contribution to the discharge of its functions and that disclosure would be in the public interest. However, these are subjective tests that will be applied by the FSA at the time of proposed disclosure, effectively transforming a statutory prohibition into a regulatory discretion.
Firms simply will not know, when they provide confidential information to the FSA, whether the FSA will subsequently decide that the principles of good regulation and the public interest weigh in favour of disclosure or how such decisions will be made. Such uncertainty will be of real concern to firms.
The FSA has indicated that it will notify firms in circumstances in which it intends to disclose confidential information, although it is not clear what remedies will be available to firms to prevent such disclosure taking place (absent seeking an injunction). The discussion paper is silent as to the steps to be taken should a firm object to disclosure.
The FSMA requires the FSA to follow due process before it can publish any statement that amounts to a public censure. The FSA recognises this as a bar to publishing information adverse to a firm or individual concerning disciplinary proceedings or otherwise concerning a firm’s compliance record. However, the FSA has proposed two different routes by which it might more readily be able to make public statements about its enforcement work.
The FSA is considering using the self-help gateway to develop a fast-track enforcement procedure for cases where it deems that public censure, rather than a fine, is the most likely and appropriate outcome. The FSA has stated in the discussion paper that the new procedure would follow due process and would not differ from the current process for public censure, but would allow for a more limited, streamlined and faster investigation.
It is not clear how the FSA’s proposals will interact with, or differ from, the existing enforcement provisions. There must also be concern as to whether it is appropriate for the FSA to devise an alternative means of censure to that explicitly granted by parliament, simply to enable the FSA more quickly to make public statements about its enforcement work.
The FSA is also considering whether to make more use of non-fundamental Own Initiative Variations of Permission (OIVoPs), which would be published by the FSA, as a supplement to enforcement action. The FSA is concerned that the outcomes of its thematic work are not always immediately visible to the public and that progress by firms on addressing thematic issues is sometimes too slow. The FSA would therefore use OIVoPs to require that a firm carry out certain actions, such as: alerting customers to risks that were not adequately described at an earlier stage; withdrawing a specific financial promotion; or making changes to its management or risk management structures or procedures.
The FSA already has the power to require firms to carry out remedial actions, often simply by asking the firm to do so. If a firm is prepared to comply with FSA requests to co-operate, there are real questions as to whether it is appropriate (or conducive to a good supervisory relationship) for the FSA effectively to impose those requests in public.
Freedom of information?
As a public authority, the FSA is subject to obligations to disclose information under FOIA. Under the FOIA regime, anyone can make a request for information
held by a public authority (such as the FSA) and the authority has to disclose the information. There are, however, various exemptions that public authorities can invoke to avoid releasing the information. An exemption that the FSA has invoked before the Information Commissioner and the Information Tribunal is that it is prohibited from releasing information under section 348 FSMA and/or that release of the information would breach the prohibition on public censure3. In light of its presumption in favour of transparency, it is unclear how the FSA will deal with requests made under FOIA and how the Information Commissioner will adjudicate such cases. Will the FSA disclose confidential information following a FOIA request now that it has stated it can publish such information in certain cases? If the FSA refuses to provide the information will the Information Commissioner step in and, in particular, will the Information Commissioner second guess the FSA’s determination as to what disclosure is necessary for the purposes of good regulation or in the public interest? Is it qualified to do so? At the moment none of this is clear. What is clear is that, if introduced, the FSA’s presumption in favour of transparency is likely to lead to more requests under FOIA and the FSA may find itself less able to defend any refusal to provide the information sought.
It is not clear how the FSA intends to make the proposals work in practice but they risk introducing real uncertainty for firms as to how the FSA will treat their confidential information and deal with statements amounting to public censure.
The FSA has invited comments on its proposals, to be received by 29 August 2008.