Summary

In May 2008 the FSA published Discussion Paper 08/3: Transparency as a regulatory tool. In DP08/3 the FSA explored the creation of a framework for determining what further information it might publish about firms and industry sectors. In this briefing we look at the key concepts the FSA set out in DP08/3 including the draft Code of Practice on Regulatory Transparency.

Introduction

In this briefing we look at some of the key concepts that appeared in FSA Discussion Paper 08/3: Transparency as a regulatory tool (DP08/3) which was published on 27 May 2008. The closing date for comments on DP08/3 is 29 August 2008.

No middle ground

Many people have a view as to whether a public authority like the FSA should be more open and transparent. When it comes to disclosure most people fall within one of two camps which are:

  • We should disclose all information unless there is a compelling reason not to.
  • We should only disclose information if there is a statutory requirement or other compelling reason to do so.

Balancing obligations

There is often quite some confusion as to what the FSA can and cannot disclose and this may be one of the reasons for the polarised attitudes. When considering disclosure the FSA currently has to consider the following:

  • The Freedom of Information Act 2000 (FoIA).
  • The Financial Services and Markets Act 2000 (FSMA). 
  • Government Better Regulation Task Force Recommendations.

The FoIA gives the public a general right of access to all types of recorded information held by public authorities (including the FSA), sets out exemptions from the right of access and places a number of obligations on such authorities.

There are two areas in FSMA that the FSA has to be mindful of. Firstly, disclosure of information which is “confidential information” is restricted under section 348 FSMA. Secondly, sections 207 and 208 FSMA requires the FSA to follow due process before it can publish a statement which amounts to a “public censure” of a firm (ie, where the FSA considers that a firm has contravened a requirement imposed on it by or under FSMA).

In 1997 the Government’s Better Regulation Task Force set out five principles of good regulation. These were:

  • Accountability: regulators must be able to justify decisions and be subject to public scrutiny.
  • Transparency: regulators should be open and keep regulations simple and user friendly.
  • Proportionality: regulators should only intervene when necessary.
  • Consistency: government rules and standards must be joined up and implemented fairly.
  • Targeting: regulation should be focussed on the problem, and minimise side effects.

Transparency – legitimate regulatory tool?

The FSA states that their view on whether transparency is a legitimate regulatory tool is very simple:

“If we have been given statutory powers that allow us to publish specific information, and if by publishing that information we can better achieve our objectives, then it is legitimate for us to do so.”

The FSA notes a variety of concerns which underpin the view that transparency is not a legitimate regulatory tool. Much of this relates to whether or not the FSA can disclose something. The FSA believes that there is much uncertainty as to what it can and cannot publish. Part of this is due what the FSA must disclose under the FoIA.

The FSA believes that it needs to be clear, on a case by case basis, as to what outcomes it wants its transparency regime to achieve and how these outcomes fit in with its wider objectives. To the FSA this is the distinguishing feature between providing information as a result of a request under the FoIA and it choosing to publish the information. Under the FoIA there is a presumption of disclosure irrespective of the value or usefulness of that information, unless there is a reason under the FoIA not to. In DP08/3 the FSA sets out a more qualified presumption of transparency, by which the information being disclosed should assist its statutory objectives and/or accountability. The key point for the FSA is not simply making more information available (which it acknowledges can make things less clear) but rather disclosing information which improves understanding.

Code of Practice on Regulatory Transparency

The uncertainty surrounding what the FSA can and cannot publish has led it to put forward a framework which is in the form of a Code of Practice. The purpose of the draft Code of Practice on Regulatory Transparency (the Code) is to give some structure and better certainty to the factors that the FSA will take into account in individual cases.

The Code starts with a Statement of Intent. This reaffirms the FSA’s commitment to be an open and transparent regulator. The Statement of Intent also refers to transparency as a regulatory tool. The FSA’s belief here is that transparency should be viewed and assessed, alongside its other regulatory tools, on the extent to which it helps the FSA achieve its objectives.

The Statement of Intent then sets out the following high level 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.
  • Disclosure should meet the FSA's standards of economy, efficiency and effectiveness.

The next part of the Code provides further information on each of the above principles. It is worth noting that each of the principles is absolute. The FSA will not publish information that would breach any one of the principles.

In the final part of the Code the FSA has set out high level practical applications which demonstrate its commitment to be an open and transparent regulator. This includes public consultation on material changes in regulatory requirements, policy or procedure.

Application

Perhaps the most interesting part of DP08/3 is chapter 6. In this chapter the FSA considers a number of examples as to whether transparency, as a regulatory tool, can help it achieve its objectives. The examples are wide ranging and include complaints, financial promotions and treating customers fairly (TCF).

In relation to complaints the FSA proposes to publish information from the returns that firms provide to it. This would include information about overall trends in complaints handling on an industry-wide level and, more importantly, the FSA proposes publishing information about the performance of individual firms. The data would be published in a table on the FSA’s website. The FSA only proposes to publish the details for those firms handling the largest numbers of complaints. The FSA will not be formally consulting on these changes in a Consultation Paper. Following DP08/3 and by the end of this year the FSA intends to publish its first report showing aggregated data on complaints trends across the industry. In early 2009 the FSA intends to publish firm-specific data which will cover returns received from firms in the second half of 2008.

In relation to financial promotions one of the things the FSA is considering is whether to develop a fast track enforcement procedure for cases where public censure, rather than a fine, is the most likely and appropriate outcome. The procedure would follow due process and not differ from the current process for public censure. However, it would allow for a more limited, streamlined and faster investigation. It could be used in cases where there is a clear breach of the FSA’s financial promotion rules. Like the proposals in relation to complaints the FSA is not planning a formal consultation.

In relation to TCF the FSA states that it is too early to assess the extent to which firms have met the March 2008 management information deadline. Overall the FSA states that:

  • Some firms have expressed confusion about what the FSA wants.
  • Senior management in firms have found it hard to turn commitment for change into coalface improvements.

Whilst the FSA will give firms an opportunity to clarify what is expected of them it has no plans to substantially expand the material already on its website.

The FSA does intend to publish more information regarding the progress being made by firms. Some of this information will be at an aggregated level, and some firm-specific. The FSA intends to publish aggregate data on the proportion of firms that have met the March and December 2008 TCF deadlines and the number and type of regulatory actions it has taken. This will include: the number of skilled persons reports it has required firms to undertake; the types of actions it has required firms to do (for example in their Risk Mitigation Plans); and the number of referrals made to enforcement. Also, subject to consultation on Consultation Paper 08/10 the FSA will publicise instances where it has required individual firms to take action through the formal use of an Own Initiative Variation of Permission.

Conclusion

Many of the proposals in DP08/3 are significant and merit public consultation in the usual formal manner. Publishing more information might damage the FSA’s relationships with firms. It might be counter productive in that firms might not be as willing to disclose information to the FSA on the basis that they are worried about the data remaining confidential.

The proposal to publish more complaints data is concerning and may lead to more litigation from claimants against firms. The fast track enforcement procedure for financial promotions may have problems in that the FSA may believe that there is a clear breach but the firm may not. Perhaps firms should be able to choose as to whether the fast track procedure should be used? Also, there has recently been a lot of hard work to try and improve the reputation of the financial services industry. Should the FSA be wary of tarring the whole industry with the same brush?

There is also the problem regarding the interpretation of data. Those reading the data published by the FSA will form impressions that may not be justified. What would the FSA then do? How would they deal with misimpressions?