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FSA needs to treat its own customers fairly

The Financial Services Authority needs to treat those it regulates fairly and equally if it is to gain and retain the trust and co-operation of regulated firms. It needs that trust and co-operation for it to do its job effectively. But in at least two important areas, the FSA has acted or is proposing to act unfairly to IFAs – namely in relation to the no long-stop rule and the new professional qualifications for IFAs.

The rule of law has an important bearing here. Rather than an abstract concept of interest only to academic constitutional lawyers, the rule of law is of vital importance to all of us all of the time and underpins our essential values and freedom.

The courts will take action to uphold it. The distinguished law lord Lord Bingham said recently: “The core of the existing principle [of the rule of law] is… that all persons and authorities within the state, whether public or private, should be bound by and entitled to the benefit of the laws publicly and prospectively promulgated and publicly administered in the courts.”

It must follow that everyone is equal before the law. But as we know, IFAs are not in the same position as other professionals when it comes to the rules of limitation and the 15-year long stop.

Last month, I illustrated the inequality and unfairness of an IFA’s position compared with that of other professions with the following example – a client has been advised by his solicitor, his accountant and his IFA, who all agree on what course of action the client should take. Assume that advice was negligent and that the client did not know for, say, 20 years when the loss first emerged. The client would not be able to sue the solicitor or the accountant because of the long stop in the ordinary law. But the IFA could still be exposed to an adverse finding by the Financial Ombudsman Service of up to £100,000 because of the lack of a long stop in the Financial Ombudsman Service rules made by the FSA.

In reality, the IFA is not equal before the law because of that rule. In other words, the lack of a long stop discriminates unfairly against IFAs.

In answering its critics, the FSA has not tried to defend its rule by addressing the unfairness points. It has ignored the basic point that in all other aspects of their lives, the clients of IFAs are subject to the long-stop provisions of the Limitation Act, 1980. The FSA appears to believe that Parliament has got the balance wrong in the Limitation Act between the competing interests of prospective claimants and prospective defendants. Why? The burden of the argument is on the FSA – it is for the FSA to explain and justify its decision to abolish the long stop for FOS complaints.

Another way of looking at this issue is through the lens of human rights. It is not surprising that the rule of law naturally supports and protects human rights and freedoms. Many of the rights and freedoms codified in the Human Rights Act 1998 have their origin in the rule of law.

Two articles enshrined in that act are particularly relevant – the first is that every person is entitled to the peaceful enjoyment of his possessions. In other words, we are all entitled to keep and enjoy what we have and no one may take anything from us except in accordance with the law.

So a disgruntled client cannot recover compensation from an IFA except by legal process such as complaining to the FOS.

But the second relevant article provides that no one should be discriminated against in relation to the rights and freedoms secured by the Act. It is therefore appropriate for the Parliamentary joint committee on human rights to take up the issue of the discriminatory unfairness of the lack of a long stop in the rules made by the FSA.

As reported in Money Marketing, the chairman of that committee, Andrew Dismore, MP, recently wrote to Lord Myners, who is one of the Treasury ministers, asking him to explain and justify the FSA rule. Lord Myners’ reply merely repeats the FSA stance and provides neither explanation nor justification.

Another aspect of the rule of law is that no one should be subject to a change in the law which has retrospective effect. When deciding on a course of action, we should know what the relevant law is – or, more probably, be able to find it out by taking advice. We should then be able to get on with our lives, secure in the knowledge that the legal basis for our decision would not be changed so as to affect us. Of course, the law can be changed for the future – but not retrospectively.

Here again, the FSA has lost sight of the rule of law. Following the RDR, the FSA is intending to raise professional standards and to introduce new rules for the qualifications for IFAs. So far so good, no one would complain about the raising of standards if there is reasonable room for improvement.

But the FSA is saying that it will not permit IFAs who are currently qualified and authorised under the Financial Services and Markets Act to continue to practise under the future new rules unless they requalify. To put it in the jargon – there will be no grandfathering.

There are good arguments for saying that is not lawful. The FSMA does not permit the FSA to cancel an authorisation simply because the FSA has changed its views on what the appropriate qualifications should be.

To give current IFAs time in which to requalify is to mitigate the situation but it does not make lawful that which is unlawful. It is one thing to impose new rules on new entrants to the IFA profession, it is quite another thing to disqualify someone who is currently qualified.

In other professions, the initial qualifications for admission to the profession may well be raised for new entrants but it is standard practice for existing members to be permitted to continue to practice without having to requalify.

To take one example, the examinations for those seeking to become barristers have become much more demanding over the last 40 years but no barrister who qualified under the earlier rules has been required to requalify under the later requirements or face expulsion.

Every professional needs to keep up to date with relevant developments. Formal requirements imposed on existing members of a profession to undertake courses designed to keep them up to date are acceptable and are part of a profession’s responsibilities in seeking to maintain standards. But that is no the same as requiring an individual to requalify for membership as new entry requirements have been introduced.

The FSA needs to understand that part of the implicit bargain it has with those it regulates is that it will carry out its job fairly. It should treat its customers, the regulated community, as fairly as it expects the latter to treat its own customers.

Before imposing a rule, it should think carefully about the inherent fairness of what it is doing and its duty as regulator to act in a way that upholds the rule of law.


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