When the PIA flexes its muscles

Just as there are signs that the Personal Investment Authority (PIA) is about to establish itself as a regulator with teeth, once again there is a proposal for a shake-up in the regulation of the financial services industry.

The PIA will undoubtedly continue with its enforcement of the Pensions Review by bringing charges against pension providers and independent financial advisors for regulatory breaches or unreasonable delays during the course of the review.

Disciplinary proceedings are prevalent as a result of a severe decline in public confidence in the industry and because the regulators have been criticised by Parliament and the press for apparently ineffective action.

The PIA's objective is to secure investor protection, while allowing for free trade in financial services. The discipline of its members is a vital factor in preserving public confidence.

The PIA's Approach to Discipline – Statement of Policy was published in 1995. Its objectives are punishment, deterrence, investor protection and fairness and reasonableness.

Punishment and deterrence are designed to discourage any hope of financial gain from non-compliant sales of financial services products. The aim of investor protection is directly served by the PIA's power to order a guilty member to take remedial action to bring about regulatory compliance.

Fairness and reasonableness relate to the disciplinary procedures themselves.

Disciplinary proceedings are primarily brought before the Membership and Disciplinary Tribunal by the PIA Disciplinary Committee. These may initially take the form of a provisional order, on which members are invited to comment.

Or the committee may, in the case of serious rule breaches, decide to commence formal proceedings at the outset before the tribunal. In this case, the proceedings will begin with charges which are supported by a Statement of Case. This must set out the facts in sufficient detail to enable the member to formulate a defence.

On service of the charges, the member is told a defence (if any) must be served within 15 business days. Then a Preliminary Hearing is usually fixed.

Thereafter, procedures are dependent on agreement between the parties, the final decision resting with the tribunal chairman. Although Schedule 2 of the Financial Services Act 1986 requires the PIA to have fair and reasonable rules and practices, the PIA's response to this requirement (Chapter 10 of the PIA rules) specifically provides that the tribunal may dispense with any requirements of its rules of procedure and that it is not bound by any enactment or rule of law relating to the admissibility of evidence before a court of law.

The Rules of Procedure (Discipline) 1995 merely state the tribunal “shall conduct a hearing of the case in such a manner as it considers most suitable for the clarification of the issues and a just and expeditious resolution of the proceedings”.

The member must disclose all documentation and other evidence in its possession as a direct result of its membership of the PIA. Meetings of the tribunal are chaired by an experienced lawyer who will appoint the requisite quorum of three to preside over the Full Hearing.

The tribunal should comprise practitioners and public interest representatives. The tribunal may at any stage of the proceedings amend the charges brought against a member, provided this does not prejudice the member in the preparation or presentation of its case.

This flexibility is rescued from arbitrariness by an obligation to respect broad principles of natural justice. Any departure will expose the tribunal's decision to a risk of quashing by the Divisional Court in an application for judicial review.

The following broad requirements of natural justice are important. First, a member is entitled as a matter of law to full particulars of any allegation of misconduct against the subject of proposed disciplinary action. This is catered for by the provision of the Statement of Case given in support of the charges.

The trial of multiple charges may be considered by the tribunal. If more than one charge is brought alleging serious misconduct it may be unfair to a member to have such issues tried together.

Where this approach would cause real prejudice to the possibility of each allegation being fairly and properly considered, an application for separate hearings should be requested.

Second, the member is entitled to adequate time and facilities for the preparation of a defence. This must include access to documentary materials.

While, in practice, the tribunal will direct disclosure of such material to the member, it may not readily require production of all documents which lead to the institution of charges.

This may be a serious deficiency since access to such material may give rise to a line of defence to a charge which would not otherwise be apparent or provide information on which to undermine the cogency of the case. A failure to give full disclosure in a non-selective manner may infringe the requirements of natural justice.

Third, a member would probably be entitled to refuse to answer any question during an investigative monitoring visit, or in proceedings before the tribunal, that would cause exposure to a serious risk of prosecution for a criminal offence or of incurring a liability to a penalty. Given the PIA could require the attendance of any witness to be secured by an application to the Crown Office for the issue of a subpoena, this privilege is important. The right does not provide any sufficient reason, however, for a member not answering enquiries from his regulator where the reply could lead to disciplinary action.

One final area of concern turns on whether the tribunal would be entitled to find a charge against a member substantiated if satisfied that the allegation was more likely than not to be correct, or if a member should only be “convicted” where the charge is proved beyond reasonable doubt.

The PIA has not determined its policy on this. It seems at least where a serious penalty is to be exacted, such as a substantial fine, any charge ought only to be found to be made out if the burden of proof applicable in a criminal court of law is satisfied – namely, that the tribunal is persuaded beyond a reasonable doubt of the member's guilt.

If the charges are proved, the tribunal has a choice of sanctions, including expulsion from the PIA, fines, remedial action, private and/or public reprimands, reimbursement of costs, conditions or restrictions on membership, public notices or a combination of these.

Public reprimands are increasingly likely to be used as a sanction, since they have a deterrent effect and raise the profile of self-regulatory control. Recently, the PIA has fined a major network of independent financial advisers to the value of £70,000 plus £15,000 costs.

The prospect of such heavy fines is becoming real and there are no published tariffs or bands. The PIA adopts criteria that include the nature and seriousness of the breach, the firm's response once the breach is identified and the firm's regulatory history.

The member's ability to pay is relevant. These criteria are not exhaustive and it is difficult to predict the level of sanction that might be imposed.

The PIA disciplinary proceedings are a step into the unknown. The loose framework of the procedure, the quasi-criminal approach in investigation and the unclear onus of proof present legal advisers with difficulties in evaluating the strengths and weaknesses of a prosecution and the extent to which a it can be successfully defended.

The prosecution will inevitably rely on the member's obligation to release all relevant documentation. In effect, a member, once charged, could be handing over to the committee all the evidence necessary to find the charge proved.

A member may appeal to the Appeal Commissioner if it is dissatisfied. Given the width of the tribunal's discretionary powers, however, it is thought unlikely any appeal could be sustained unless the decision was one that no reasonable tribunal could have reached.

The monitoring visits by the PIA are likely to become the focal point for the decision on disciplinary proceedings. The PIA has emphasised it will use all its powers to ensure a satisfactory outcome to the Pensions Review.

While it is in the interests of the life industry and investors that the Pensions Review is carried out with haste, it is important there is a clear and realistic timetable available to members. It would be unfair for certain members to become scapegoats of an impractical timetable.