Legal & General challenges FSA’s enforcement formula
24 January 2005
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Legal & General (L&G) is considering whether to press the Financial Services and Markets Tribunal to force the Financial Services Authority (FSA) to overhaul its enforcement procedures.
The FSA was last week criticised by the tribunal over its handling of the mis-selling case against L&G in its judgment of the landmark case.
It came just a week after the shock resignation of the FSA’s director of enforcement Andrew Procter, who quit the regulator to join Deutsche Bank, leaving his temporary replacement David Mayhew to pick up the pieces.
The tribunal, an independent body that hears appeals against FSA decisions, cleared L&G of wide mis-selling (although it did uphold its finding that L&G had deficiencies in its procedures in selling endowments between 1997 and 1999) and said the FSA had erred in its approach to the mis-selling case and reached conclusions not justified by the material put before it.
It said the FSA’s claims about the gravity of the mis-sales was not adequately supported, because the sample size was too small to be valid statistically.
The tribunal, led by former Allen & Overy partner Mr Justice David Mackie CBE, also found that the FSA’s regulatory decisions committee (RDC) relied too heavily on a report prepared by PricewaterhouseCoopers, even though the accountancy firm admitted that the report did not establish guilt. This has prompted L&G to consider pressing the tribunal to force the FSA to overhaul its enforcement procedures.
David Scott, the Freshfields Bruckhaus Deringer partner advising L&G, said the current plan is to seek a substantial reduction in the £1.1m fine and to get the FSA to pay the company’s £2m costs. He also said L&G is considering whether to ask the tribunal to make recommendations to the FSA.
The RDC is a semi-independent body that hands out the penalties and acts as a check on the FSA executive. But because the RDC is staffed by City practitioners who work part time, it relies heavily on FSA staff for support with cases. It has also transpired that the RDC has been leaderless for seven months, with new chairman Tim Herrington not expected to join for another month.
Herbert Smith partner Martyn Hopper, a former member of the FSA’s enforcement team, described the RDC as a halfway house between a body that encompasses all the elements of a court and a purely administrative entity.
Meanwhile, Scott noted that although the RDC is quicker and cheaper than a judicial process, there is a need for greater transparency, or failing that for the current system to be overhauled.
“Transparency may go a long way to dispel fears and concerns people have about how they both work together,” explained Scott. “But better than that would be a structure in which the RDC was not just separate from the enforcement staff that investigate, but was also able to properly consider all the relevant materials and the arguments advanced by both sides fairly and objectively to reach an appropriate decision on behalf of the FSA.”
However, Scott argued that Mayhew, as acting head of enforcement, may not regard it as his responsibility to embark on a review of the RDC if a permanent successor is identified quickly. Also, prior to Procter’s resignation, the FSA completed an end-to-end review of its enforcement procedure.
One source said the principal driver for the end-to-end review was to speed up the enforcement process, but he argued that it is impossible to conclude a case in a matter of months and to deliver a thorough investigation.
An FSA spokesman admitted that the end-to-end review was to see whether the regulator’s enforcement process could be speeded up. But he denied the suggestion that the quality of the FSA’s investigations were compromised for the sake of expediency.
“We’re trying to see if there are areas in the process that can be done faster, but we’ll still be delivering the level of quality in our services,” said the spokesman, who declined to comment on transparency.
The FSA needs to move quickly to find a permanent successor to Procter so that it can respond to any recommendations that the tribunal may make. Only then can it draw a line under the recent upheaval at Canary Wharf.
“It’s in everyone’s interest to ensure that the financial services industry has confidence in the FSA’s internal process. Unless City institutions feel that the process is fair, there’ll be more cases going to the tribunal,” concluded Scott.