SUMMARY OF: FSA Discussion Paper 06/05. FSA Confirmation of Industry Guidance

Transcription

1 SUMMARY OF: FSA Discussion Paper 06/05 FSA Confirmation of Industry Guidance February 2007

2 Page 2 Summary of: FSA Discussion Paper 06/05 FSA Confirmation of Industry Guidance Introduction The move towards a more principles-based approach to regulation will bring fewer rules and greater uncertainty for firms that the approaches they adopt will meet their regulatory obligations. The FSA therefore anticipates that increasingly industry may wish to create guidance to assist firms in meeting their regulatory obligations; Industry Guidance is defined by the FSA as: Information created, developed and freely issued by a person or body, other than the FSA, which is intended to provide guidance from the body concerned to the industry about provisions of our Handbook. Discussion Paper 06/05 outlines a framework for the industry to gain recognition from the FSA for such guidance. The FSA sought feedback on whether: the demand for FSA confirmation from providers of Industry Guidance is likely to be significant; there is agreement with the proposed parameters for considering whether the FSA should grant confirmation; and there is agreement with the proposed approach to facilitate the use of Industry Guidance. The consultation period has now closed. The purpose of this note is to provide a high level summary of the key themes in the proposal, pending the FSA publishing a Policy Statement during the second half of The legal implications of recognising Industry Guidance The FSA has identified three conceptual ways in which it could recognise Industry Guidance, codes or standards. These are described as: safe harbour, sturdy breakwater and implicit recognition. These different forms of recognition would have different legal effects and varying requirements to follow statutory processes. The three concepts are outlined below: Safe harbour A safe harbour would have an effect on the FSA and potentially third parties. To give Industry Guidance this effect, rules would need to be created in the Handbook and full statutory processes would have to be followed. This level of recognition would be more formal, and stronger, than a sturdy breakwater. Sturdy breakwater A sturdy breakwater would have an effect on the FSA but not on anyone else. It would have the practical effect of preventing the FSA from taking action, but would not affect the rights of third parties (including firms and consumers). To create a sturdy breakwater would require some form of explicit recognition such as a public statement. Whilst the effect created is the same as FSA Guidance, there would remain some key differences between FSA and Industry Guidance:

3 Summary of: FSA Discussion Paper 06/05 FSA Confirmation of Industry Guidance Page 3 the FSA is required to follow statutory processes including undertaking cost benefit analysis and consultation; FSA Guidance does not bind the courts, but in practice they are likely to give it significant weight; and the Financial Ombudsman Service (FOS) is required to consider FSA Guidance when deciding what is fair and reasonable; there is no such explicit requirement to consider Industry Guidance. Implicit recognition Implicit recognition would have no legal effect on the FSA or anyone else and is not subject to any statutory process. FSA recognition would be implicit in the FSA s inaction. The example cited by the FSA of implicit recognition is the Banking Code; this covers matters about which there are no rules, nor has the FSA made any rules, guidance or other statement recognising the Code s provisions. Hence, the FSA s recognition of the Banking Code is implicit in its inaction because the industry had found a solution to address a market failure. FSA Proposal: recognition that results in a sturdy breakwater The FSA has determined that the appropriate approach for most pieces of Industry Guidance, will be giving recognition that results in a sturdy breakwater. The FSA acknowledges that there will be instances when one of the other forms of recognition will be more appropriate, however the discussion paper focuses on how the sturdy breakwater will be achieved rather than on whether this is the correct approach. The paper sets out the key parameters that will be considered before the FSA grants confirmation that results in a sturdy breakwater; these include: Industry Guidance should explain how it relates to a relevant FSA rule and/or principle. This is to prevent regulation creeping into areas where there is no market failure issue, or where the FSA has no current remit, although it is accepted that the guidance may need to bear in mind wider legal implications. The guidance will be required to highlight any suggested practices that go beyond the minimum necessary to meet the FSA requirements to enable those making use of it to decide whether to go beyond the minimum. Industry Guidance that will directly affect consumers must consider consumer interests and views. This may require discussions between the guidance provider and consumer groups, but the appropriate and proportionate level of involvement by consumer groups will be considered by the FSA on a case by case basis. However, for those cases with a significant impact on consumers, the FSA considers that it may be more appropriate for it to make a rule or issue FSA guidance. Industry Guidance must not claim to limit or affect the rights of third parties. Thus the guidance will not bind the courts or the FOS. Industry Guidance must be optional and be one way, not the only way to comply. The underpinning principle is that Industry Guidance should help firms to meet their regulatory obligations, not tell them what they must do.

4 Page 4 Summary of: FSA Discussion Paper 06/05 FSA Confirmation of Industry Guidance Industry Guidance must not claim to be an exhaustive or definitive statement of what FSA rules or guidance are or require. This would go against the FSA s aims of encouraging judgement and flexibility within firms. Additionally, anything that claims to be definitive moves closer to becoming a safe harbour rather then the sturdy breakwater the FSA is trying to achieve. Industry Guidance must be publicly available and free. The FSA is aware that this is likely to be controversial as it may be seen as diminishing the benefits of membership of a trade or professional body. However, members will have the benefit of determining where Industry Guidance is developed and can contribute to its development, tailoring it so that it is most relevant for the membership of the trade or professional body. The FSA will not provide financial assistance to those willing to develop Industry Guidance. Industry Guidance must detail who its intended audience is. For example size or type of firm; this is to help firms decide whether a piece of Industry Guidance is relevant for them. Industry Guidance must not be anti-competitive. The FSA is not expecting bodies developing Industry Guidance to routinely obtain legal advice on competition aspects or necessarily contact the Office of Fair Trading, however they should consider competition issues (and this may result in them needing to obtain legal advice). It should be noted that: before giving FSA confirmation, the FSA will need to be satisfied that the impact on any other sectors or areas of the market has been considered; and it is possible that there may be different pieces of Industry Guidance on the same topic that say different things either due to different intended audiences or just different opinions on how to meet regulatory requirements. As long as pieces of guidance do not contradict each other, the FSA does not consider it an issue if they take different approaches. European legislative context In general, it will not be possible to use Industry Guidance to implement EU Directives unless the FSA makes a rule to require a firm to comply with a piece of Industry Guidance. However, it might be possible to confirm Industry Guidance relating to FSA rules that implement European Directives. Where any Industry Guidance gold plates Directive requirements, this should be highlighted to enable firms to decide how far they wish to go. Who can develop Industry Guidance? It is anticipated that trade associations, professional bodies and other representative organisations are most likely to develop Industry Guidance. The FSA do not think it is appropriate for professional advisory firms to develop Industry Guidance alone, but accept that they may work with others in developing Industry Guidance. In developing Industry Guidance it should be noted that the responsibility for keeping it up to date and relevant, and for responding to queries in relation to it, lies with the body that produced it. If there is a need to make material changes, the body needs to advise the FSA so that it can determine if it needs to reconsider the FSA confirmation.

5 Summary of: FSA Discussion Paper 06/05 FSA Confirmation of Industry Guidance Page 5 It is not intended that the proposals affect existing relationships with industry bodies, including continuing to engage in useful dialogue and taking part in working parties. The normal process will be followed if FSA confirmation is sought in respect of an output from a working party where the FSA have been represented. The FSA will continue to say publicly where work done by industry is good and useful, even where FSA confirmation is not sought. Clearly this is not the same level of recognition or status that FSA confirmation will give. There will be no time limits to FSA confirmation ; it can be withdrawn by the FSA although it is not anticipated that this will be a routine occurrence. What will the confirmation say? The standardised wording recommended by the FSA will cover all forms of Industry Guidance: The FSA has reviewed [this Industry Guidance] and has confirmed that it will take it into account when exercising its regulatory functions. [This Industry Guidance] is not mandatory and is not FSA Guidance. This FSA view cannot affect the rights of third parties. Departures from standard FSA confirmation Whilst the FSA considers that the FSA confirmation can be used in most circumstances, there may be occasions when a more formal effect is required, and the Industry Guidance would be recognised by a rule or guidance in the FSA Handbook. This would require public consultation (and any other due process) on whether to endorse the Industry Guidance (but not necessarily in the guidance itself). This is likely to apply in areas with wide applicability or where the FSA considers that the impact on consumers is such that public consultation by the FSA is necessary. If a market failure occurs and the industry took action to address that failure and consequently the FSA did not need to make rules then implicit recognition could follow. By not making rules the FSA is acknowledging that the industry solution addresses the market failure and firms that follow that solution should meet their regulatory obligations (if any) in that area. The FSA may also give more explicit recognition either by FSA confirmation or by some form of public statement. Implications for the FSA The FSA will continue to focus its supervision on whether a firm poses risks to the FSA s statutory objectives. It will not monitor compliance against individual pieces of Industry Guidance as there is no requirement on firms to follow it. A firm making use of Industry Guidance will only have the comfort of the sturdy breakwater if they follow it correctly and it is appropriate for them to do so. The responsibility will be on the firms and their senior management to determine whether a piece of Industry Guidance is relevant to them and whether to follow it. Firms must be able to demonstrate to supervisors that the guidance is relevant and that they have followed it correctly.

6 Page 6 Summary of: FSA Discussion Paper 06/05 FSA Confirmation of Industry Guidance Use of Industry Guidance will not make a material change to the FSA s enforcement procedures. As Industry Guidance is not mandatory, non-compliance creates no presumption that the FSA s requirements have not been met. Industry Guidance may be a helpful tool in determining what acceptable practices were at a point in time that FSA confirmation was granted; where firms have followed specific confirmed Industry Guidance appropriately and correctly, within the intended circumstances, they can take comfort that they are likely to be meeting the relevant requirements in that area. However, care will need to be taken by firms to ensure they understand the extent of the rules that the Industry Guidance aims to address. Implications for others In the discussion paper the FSA set out its view of the implications for its stakeholders. We summarise below the key issues for consumers; the Financial Ombudsman Service; the Financial Services Compensation Scheme (FSCS) and regulated firms and their people. Consumers Consumers will need to have access to information on Industry Guidance and the FSA intends to create links from its website to Industry Guidance web pages. Consumers will need to be aware that: there is no guarantee that a firm will be following Industry Guidance even if it claims to be doing so; it is voluntary for firms to follow Industry Guidance and there is no independent check that they are following it; and the use of Industry Guidance does not affect consumers rights (eg the ability to refer a complaint to FOS). Where significant pieces of Industry Guidance have a direct bearing on firms dealings with consumers, the Consumer Panel will be invited to provide views as part of the FSA s decision on whether to grant FSA confirmation. The Financial Ombudsman Service The FOS is required by law to decide cases on the basis of what is fair and reasonable in all the circumstances of the case. In doing so, FOS rules require the ombudsman to take into account the relevant law; regulations; rules, guidance and standards issued by regulators; relevant codes of practice; and where appropriate, what he considers to have been good industry practice at the time. The relevance, or otherwise, to the ombudsman of Industry Guidance will depend on the nature of the complaint and of the guidance. It is perceived by the FSA to be unlikely that Industry Guidance will significantly affect the outcome of many cases, and the weight given to Industry Guidance may depend on whether it has been developed publicly and with involvement by all relevant stakeholders.

7 Summary of: FSA Discussion Paper 06/05 FSA Confirmation of Industry Guidance Page 7 The Financial Services Compensation Scheme The FSCS is limited to determining cases based on civil liability; most claims are not determined on the finer points of compliance with rules. An area for firms to consider is that civil liability may arise if a firm chooses to assert that it will be following a specific piece of Industry Guidance in its terms of business or other contracts with customers, and it breaches that contract. Regulated firms and their people A firm making use of Industry Guidance will only have the comfort of the sturdy breakwater if they follow it correctly and it is appropriate for them to do so. Care will need to be taken by firms to ensure they understand the extent of the rules that the Industry Guidance aims to address. The responsibility will be on the firms and their senior management to: determine whether a piece of Industry Guidance is relevant to them and whether to follow it; and demonstrate to supervisors that the guidance is relevant and that they have followed it correctly. As noted above, use of Industry Guidance will not affect consumers rights (eg the ability to refer a complaint to FOS); additionally a civil liability may arise if a firm chooses to assert that it will be following a specific piece of Industry Guidance in its terms of business or other contracts with customers, and it breaches that undertaking.

8 Financial Services Faculty The Institute of Chartered Accountants in England and Wales Chartered Accountants Hall PO Box 433 Moorgate Place London EC2P 2BJ T: +44 (0) F: +44 (0) E: DX 877 London/City