Who will guard the guards was a key question in Plato’s Republic and has regularly resurfaced in politics ever since. Because democracies have to entrust power to agencies acting on behalf of the people, it is vital that these agencies are held to account.
The FSA is exactly the kind of guardian that most people want to exist. It should protect citizens.
In the English constitutional tradition, legislators generally were reluctant to create any agency or authority outside the departments of state which could not be challenged in the courts. Parliament has admitted that it may not always be able to properly hold agencies to account, so it is vital they can be held to account through the courts of law. Otherwise, either the rules they make or the way they enforce them may result in injustices the law would not otherwise permit.
The FSA, under its governing legislation, cannot be held to account in the courts. Only in a few minor aspects, such as referrals to its own tribunals, can the regulator’s decisions be challenged. It is in many respects above the law.
This is at the root of one of the FSA’s biggest failure – the Arch cru debacle. The reason this is so important is the FSA has undermined the system of fund regulation which had provided investors with a reliable assurance of full compensation in any fund that had been properly authorised by the FSA or its predecessors.
An inquiry is needed into the actions of the regulator, the ACD and the depositories. To what extent responsibility for compensation should attach to the FSA itself could only be established by an independent inquiry. Yet the FSMA makes no provision for this, the FSA refuses to account for its actions at all and the FSMA bars referral of such issues to the courts.
The result is an injustice. Inv-estors who cannot prove their adviser misled them receive partial compensation under the FSA-brokered compen-sation deal but still lose up to a third of their money. Worse than this injustice is the FSA has eroded confidence.
Without accountability, (stonewalling a select committee does not count), the FSA is acting as judge, jury and executioner. Only the legislature can change that and it should.
Chris Gilchrist is a director of FiveWays Financial Planning. He edits the IRS Report newsletter and is the author of the Taxbriefs Guide, The Process of Financial Planning