The row between the reg-ulator and Legal & General over a 1.1m fine for misselling has left both sides admitting the error of their ways. Intermediaries and consumers may be used to this with product providers but for the FSA to be chastised publicly is an unprecedented step. International law firm Allen & Overy head of regulatory group Simon Gleeson says he is not surprised that the FSA has chosen to talk tough as a result of its scolding from financial services and markets tribunal judge David Mackie. Gleeson says: “The FSA needed to show that it was still in charge. It wants to set an example. However, I do not think that people at the FSA realise just yet what a dangerous precedent could have been set.” The problem is clear. A regulator should be beyond rep-roach. It should be the uphol-der of values and sound processes, not an organisation slammed for its incompetence. The whole affair has been like watching two schoolboys being told off after a playground fight. Both L&G and the FSA are to blame, both are smarting and both have given grudging apologies to the head teacher and promised to learn from their mistakes. But when they return to the playground, all they can talk about is who has won the fight. L&G group chief executive David Prosser says: “L&G’s board decided to appeal against the regulatory decisions committee decision because we disagreed with the decision and the way it was reached. “The tribunal has agreed with us that the RDC reached conclusions not justified by the material before it.” As a result, the tribunal said the fine against L&G should be reduced. It also noted that L&G had a right to feel aggrieved by the way that the FSA reached its decision. So, L&G won? Not if you ask the FSA. Its statement says: “The tribunal upholds the FSA’s case that L&G’s sales procedures were defective and finds that these procedural defects will have caused or contributed to missales.” PMI IFA director John Stewart sees the result as a win for the FSA. For him, a cut in the initial fine does not lessen the fact that L&G’s processes were not up to scratch. He says: “I do feel sorry for them and they had a very brave attempt. For the sake of the industry, I wish they had won. But it is like trying to sue the Government – you are never going to win. The whole thing has done nothing to inspire the confidence of consumers. All they see is a row. “I do not think that you will see anyone trying to take on the FSA in a hurry. Look at L&G. I do not suppose their shareholders are very happy with the amount of money they have spent.” The FSA was clearly in error when it came to its judgement that L&G had missold mortgage endowments. The tribunal said the FSA was not justified in extrapolating from a sample to reflect a pattern of general misselling. It concluded that L&G’s procedures did not explain the shortfall risk so that customers could understand it. Crucially for L&G, the tribunal decided that, to a limited extent, the misselling case failed. The “limited extent” is that the FSA’s found 60 missales out of 250 cases but the tribunal found that only eight cases were missold. However, L&G did missell and the tribunal came to the conclusion that “common sense suggests that the defects in procedures will have caused missales beyond the eight established”. The FSA meanwhile was rocked by criticism of its enforcement procedures, and the tribunal noted that “if L&G was not co-operating in securing a review which could be used effectively for enforcement, it was for the FSA to impose a suitable exercise”. The FSA says: “We accept this analysis and intend to use our powers in comparable circumstances in the future to avoid such difficulties arising.” Personal Finance Society head of public affairs John Ellis thinks the FSA will have found it helpful to have undergone some kind of scrutiny. He says: “You could see that it is damaging but actually I think they find it quite helpful. It will mean the FSA can go back and look at its processes and make them more rigorous.” This is certainly reflected in the FSA’s statement. It says: “The FSA will give careful consideration to the tribunal’s observations on its handling of this case and look to identify improvements to its own procedures as a result.” Aside from the level of the fine – which some people believe will be decided behind closed doors and will not be announced – there are other issues to be answered. Not the least of them is, what now for key features documents? The tribunal pointed out that L&G’s documents failed to address risk warnings satisfactorily, even though they complied with all regulations. Gleeson says: “Does that mean that, even if a key features document is approved by the FSA, regulators can still turn round and say they are not good enough. What sort of a situation is that?”With a number of firms involved in the split-capital investment trust saga having refused to sign up to the Christmas Eve agreement, the next public spat between financial services firms and the FSA could happen soon. This could be the time for the FSA to reassert its auth-ority. No one needs to like the regulator but they do have to respect it.