The UK's Financial Services Bill — Proposed Amendments Towards Enhanced Accountability For Financial Regulators

These comprise the result of extensive work and consultation among a diverse set of stakeholders, including leading barristers, regulated firms and advocacy groups, led by Shearman & Sterling. The changes aim to enhance the accountability of financial regulators, with a view to making the U.K.’s financial markets the best regulated in the world. Market participants have previously voiced concerns that the U.K. Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have supervisory powers that can at times be overbearing and are not subject to effective or sufficient controls or balances. These concerns have been heightened by proposals under the FSMB to transfer rule-making powers previously held by EU institutions to the U.K.’s regulators, without granting Parliament an effective check and balance on those powers. It was originally proposed that these new powers would be counterbalanced by new “call-in powers” of HM Treasury to hold regulators to account. However, that proposal has been abandoned. Lord Lilley’s amendments aim to fill that void.

The proposals now before the House of Lords would moderate the autonomy of the FCA and PRA by reforming statutory provisions around regulatory rulemaking and enforcement and enhancing the role of relevant statutory tribunals, the judiciary and the Financial Regulators Complaints Commissioner (FRCC). Certainty and predictability in “horizontal” disputes between customers and firms would also be enhanced through reforms to the Financial Ombudsman Service (FOS) and the introduction of a new financial services tribunal, each of which would publish reasoned decisions by building a reliable body of case law whilst maintaining the existing protections for consumers.

Further details of the amendments are set out below. Our mark-ups of the Financial Services and Markets Act 2000, the Financial Services Act 2012, the First Tier Tribunal and Upper Tribunal (Chambers) Order 2010 and the Qualifications for Appointment of Members to the First Tier Tribunal and Upper Tribunal Order 2008 show the suggested changes to the legislation affected by the proposals and the explanatory note provides further detail on the amendments. It is hoped that, together, these changes would improve the competitiveness of the U.K. financial markets by providing clarity and additional legal certainty to the U.K.’s regulatory framework.

The proposals

Rulemaking and approach of regulators

Under the proposed amendments, a new statutory obligation would be introduced, that the FCA and PRA make rules that are clear, certain and predictable. They would, as a secondary objective, be required to apply those rules predictably and consistently so far as reasonably possible, after considering their primary statutory objectives (e.g., protecting consumers, enhancing market integrity and promoting competitiveness and financial stability). Restrictions would be placed on the use of the high-level regulatory Principles (e.g., those found in the PRIN section of the FCA Handbook) as the standalone basis for enforcement or redress. Principles could only be relied upon for enforcement (in the absence of breach of a specific rule) if the breach could be logically derived from the Principles, or if case law or formal guidance provides a basis for enforcement.

Challenges could be brought in the Upper Tribunal against a regulator who failed to comply with its statutory objectives and obligations, including the new ones, although safeguards would be introduced—for instance, where regulators’ rules are struck down, they would have the power to introduce emergency new rules. Regulators would also be encouraged to defer to firms’ good-faith interpretations of rulemaking; it is proposed that a new provision would allow firms to seek a declaration that they have exercised their judgement reasonably and in good faith. Firms that have such protection could not be the subject of enforcement action in respect of the relevant matter.

Regulatory committees

The FCA’s Regulatory Decisions Committee (RDC) and the PRA’s Enforcement Decision Making Committee (EDMC) are responsible for, amongst other things, making decisions on contested regulatory enforcement cases. The proposed changes would ensure that these Committees operate on a proper statutory basis and are fully independent from the regulators, so that their decisions are reliably fair and impartial. They would be able to make rules and publish policy statements regarding their own functions, but those should be first submitted to the Treasury and subject to a formal consultation.

The RDC and EDMC would need to take account of the regulators’ compliance with their statutory objectives and obligations, including the proposed predictability and consistency objective, when making their decisions. They would also have to include reasoned accounts of their published decisions so that a reliable body of precedent can be built. The Committees would themselves be subject to the same respective objectives as the regulators whose decisions they review.

Regulatory accountability

Under the proposed amendments, the judiciary would have an enhanced role in reviewing actions between market participants and against the regulators.

Customer-firm disputes

A new Financial Services Chamber of the First Tier Tribunal (FTT) would be introduced to oversee “horizontal” customer-firm disputes. It would work in conjunction with a renamed Financial Adjudication Service (FAS), replacing the existing FOS. The FAS would be competent to apply expert determination to horizontal disputes, being made up of market experts. Crucially, the FAS would be required to give reasoned decisions. The proposals would aim to continue the efficiency of the FOS process, with disputes ruled upon within a short period of time (currently proposed to be eight weeks). The FAS would focus on applying the law, as opposed to the FOS’s less clearly defined principle of “fairness.” The FAS would issue an interim-binding decision that could be appealed by either party to the FTT. Those seeking damages for firm failures to comply with regulatory obligations could instead choose to bring their claims directly to the FTT. As with the FAS, the FTT should issue reasoned decisions to contribute to a body of case law which could be relied on in interpreting regulatory rules. The Upper Tribunal would have appellate jurisdiction over the FTT’s judgements.

Challenges to regulators

Under the proposed amendments, the Upper Tribunal would also consider “vertical” challenges to regulators’ decisions, including whether the regulators have acted in accordance with the predictability and consistency objective. Discounts for early settlement on regulatory enforcement actions would be reduced from 30% to 10%, to encourage firms to challenge the regulators where they have a strong case. The Upper Tribunal would have a new power to review FCA and PRA rules upon application by authorized persons and would be entitled to quash those rules where appropriate.

Complaints against regulators

Finally, the FRCC is already tasked with reviewing complaints against the U.K. regulators. This process is more often used by individuals and consumers, but its powers are broader, and can include complaints by firms and assessments of whether or not the regulators complied with their statutory objectives or duties. The remit of the complaints scheme would be expressly stated to cover complaints by firms and senior managers against regulators, including complaints that the regulators have failed to exercise their ‘general functions’ (e.g., their rule-making powers) in line with their statutory objectives.

With the foisting of new rulemaking powers on the FCA and PRA, the role of the FRCC needs to be enhanced. This was illustrated by the recent finding by the FRCC that certain FCA rulemaking (under its Remedies Statement dated 19 June 2020²) was unlawful.³ The FCA ignored the FRCC’s findings that its rulemaking was unlawful and had not been introduced under the applicable statutory process; the FCA Remedies Statement still stands published today despite having been found to be inconsistent with the Financial Services Act 2012 and unlawfully introduced. This is because the FCA is currently entitled not to follow the FRCC’s findings. It would be strange to confer broad new rulemaking powers on the FCA, when its response to a finding that it had introduced a rule unlawfully was to ignore the FRCC’s decision and maintain the rule in question. The present proposals under the FSMB are therefore unsustainable without this and other changes.

Under the proposed amendments, the FRCC would be empowered to make legally binding decisions on the action to be taken by a regulator in response to an upheld complaint, addressing a clear failure of the current regime. The FRCC’s monetary compensation decisions would however remain recommendations under an ex gratia scheme, since the FCA lacks its own resources to fund such claims. To address issues arising in the present controversy with CP20/11⁴ and the Remedies Statement case, the regulators would be prohibited from themselves introducing rulemaking governing their own liability under the FRCC scheme. However, when recommending any compensation, the FRCC would be required to consider whether the regulators are a primary or secondary cause of losses, and would only have the power to recommend, not impose, compensation pay-outs.

Senior manager accountability

Another significant area of concern for firms and financial services professionals is the near-strict liability imposed by the U.K.’s senior managers regime, which far exceeds that found in any other credible financial centre. Under the amendments, the liability test for senior managers would be amended so that the focus is principally on wrongdoing by the firm and those responsible for it. Senior managers would be able to obtain declarations from the Upper Tribunal that they have acted reasonably and in good faith as a defence against liability for misconduct. The test would also include a new limb assessing whether or not the behaviour of the senior manager was unreasonable, essentially applying a judicial review test to the exercise of judgment by senior firm personnel.

These proposals are separate to those reportedly raised with the U.K. government by banks in recent weeks, which seek a relaxation of parts of the senior managers regime in the interests of boosting the City of London’s appeal post-Brexit.⁵

Conclusion

The amendments have now been laid before the House of Lords. We believe that they would address many concerns that market participants, consumers and politicians have with the U.K.’s financial regulatory structure. It remains to be seen whether and to what extent they will have political support during the legislative process.