A rag bag

“The Financial Services Bill is a real rag bag of measures, some very much chiming with international regulatory themes arising from the Credit Crisis, others more focused on consumer protection or the FSA’s desire for more and stronger enforcement powers.

So, for example, there are provisions on the one hand for ‘recovery and resolution plans’ (the so-called ‘living wills’ of popular parlance) and for FSA regulation of executive remuneration, and on the other hand for forms of class action (referred to as ‘collective proceedings’) and other arrangements for obtaining redress from financial services firms and a new ban on unsolicited credit card cheques.

(Why doesn’t the Government roll consumer credit regulation into the FSA? This Bill is another reminder of this nonsensical division of responsibility between the FSA and the OFT. This is even more anomalous since (a) the Payment Services Regulations and the FSA’s regulation of banking conduct of business (under BCOBS) became effective on 1 November, and (b) HM Treasury’s confirmation last week that it intends to bring secondcharge and buy-to-let mortgages within FSA’s scope, so as to benefit from FSA prudential and conduct supervision and to reduce confusion).

The Bill also includes a miscellany of provisions to enhance existing rules which recent experience has shown to be wanting. For example, last September when Lehman collapsed in September 2008, the FSA published ‘rules’ on short selling but many lawyers doubted the soundness of the basis on which the FSA sought to impose them. The Bill would also allow HM Treasury to issue regulations forcing banks to disclose in bands the number of staff earning more than £1 million, as recommended in last month’s final report from Sir David Walker’s review on corporate governance in UK banks and other financial industry entities (published on 26 November). However, whilst the FSA and FRC may manage to implement many of the recommendations, it is difficult to believe that remuneration disclosure will be the only one requiring legislation: the Government’s commitment to ‘take steps to implement the recommendations as soon as possible’ may yet lead to changes to the Bill.

Will the Bill become law?

Like many of the measures announced in the Queen’s Speech on 18 November, this Bill may not actually be passed into law before the election. Many doubt that it will, particularly given the Conservative Opposition’s proposals for radical change in the UK’s financial regulatory framework.

But that might be a mistake. Most of the Bill is about new powers which fill in gaps, strengthen the regulator (and the hand of the financial services consumer) and implement G20 commitments. Most of the new powers will be helpful to whichever regulator is in due course responsible for prudential supervision. The provisions which establish the new, tripartite Council for Financial Stability or give the FSA a financial stability objective could be easily adapted post-election.

Draconian powers

FSA-authorised firms, approved persons and others (not least overseas parent companies and their executives) will be concerned about the breadth of the new powers proposed for the FSA. Such concerns arise not only in respect of the rule-making powers (for example, being able to provide that remuneration provisions may be void and payment and benefits recoverable from the employee, and being able to require living wills of all firms not just those which are systemically important). Concerns arise also in respect of disciplinary powers (particularly FSA’s power to fine someone who performs a ‘controlled function’ without FSA approval, especially coming on top of last August’s extension of the scope of the director and NED controlled functions to various overseas individuals who influence the decisions of an authorised firm).

An innocent looking provision entitled ‘Information relating to financial stability’ conceals a very broad power to the FSA to require information and documents from various classes of person. The categories include, for example, anyone who provides any service to an authorised person, anyone with an interest in the assets of an investment fund, and a wide range of persons connected with those who are in these categories. This is a far cry from the calls by the G20 and regulators for information from hedge funds, structured investment vehicles and quasi-banks.


The Bill gives muscle to the new assertiveness (even aggression) of the FSA. Whilst the FSA will still prefer to achieve its objectives through supervision, and in most cases its new powers will enhance its ability to achieve that, the future will also see more financial regulatory issues being played out in the courts. The FSA is already flexing its enforcement muscles more. The rules on bonuses and salaries are bound to lead to some high-profile employment and enforcement cases.

And the introduction of collective proceedings is part of a wider European trend towards class actions which are supported by the European Commission (see, for example, its November 2008 Green Paper on the issue) and increasingly manifest in Member States. The Bill’s provisions reflect the Government’s rejection of the idea of a generic right of collective redress in favour of sector-specific approaches. Even if collective proceedings lead to a fairer deal for consumers, they risk also encouraging the very ‘ambulance chasing’ by claims management firms that the FSA has been keen to discourage.


It may be difficult to characterise any single provision of the Bill as likely to damage the UK’s financial sector. Arguably, the proposed EU Directive on Alternative Investment Fund Managers and other measures that may emanate from the Commission’s Internal Market and Services Directorate (which, worryingly for many, will be under new leadership from 1 January, when former centre-right French agriculture minister, Michel Barnier, takes the helm).

However, the combination of FSA rules, actions and plans, the Bill and other proposals such as the Walker recommendations may well discourage future investment in London as a financial centre. The City of London will not lose significant business to another European centre, but regulation here may accelerate the development of centres in Asia. The industry figures who are crying out that the regulatory pendulum has swung too far, and that business may move elsewhere, are not the usual wolves but some of those who have brought large financial business through the crisis in very good shape.”

Robert Finney, head of Financial Markets and Regulation, Denton Wilde Sapte LLP, spoke to PLC Financial Services about the Financial Services Bill. His comments were published by PLC on 23 December 2009.