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Locking horns on a dilemma

The FSA has been overruled by the Information Commissioner’s Office in a recent decision compelling it to disclose information obtained while exercising its regulatory duties. What is the significance of the ruling and how could it affect the regulator’s role in the future?

The FSA has always sought to rely on candid and open exchanges of information with businesses it regulates. To preserve this relationship, it has been reluctant to disclose any information obtained. However, with increased emphasis being placed on transparency and freedom of information, it may be that the FSA’s regulatory style needs to adjust to comply with the Freedom of Information Act.

An individual complained to the ICO because the FSA refused in 2005 to disclose information relating to his investment in a company managed by a regulated firm, Oakland Investment Management. The FSA originally refused to confirm or deny whether it held the information requested but following the start of the commissioner’s investigation, the FSA sought to rely on exemptions within the FOIA. On closer examination of the FSA’s defence, the commissioner found that some of the exemptions had been applied incorrectly.

One exemption known as section 31(1)(g) states that information is exempt from disclosure if its disclosure could prejudice a public authority’s ability to exercise its regulatory functions. The FSA did not rely on this exemption in the original reasons given to the individual for refusing his request, despite being required to do so when refusing to make a disclosure. The regulator only referred to this exemption in subsequent correspondence with the commissioner.

The FSA said disclosing the requested information would compromise its role as a regulator as it would discourage firms from open and candid exchanges in the future because of the fear that they would not remain confidential. It believed that this reduction in co-operation would harm its efficiency and effectiveness.

The commissioner refused to accept that there was a real and significant risk that the regulator’s role would be compromised. He found that the information the FSA sought to exclude under s31 was no longer sensitive due to the passage of time and, second, that the FSA could always compel uncooperative firms to give it information through its statutory powers under the Financial Services and Markets Act.

The FSA also claimed exemption of information that it held about Oakland Investment Management on the grounds that its disclosure could prejudice the commercial interests of named individuals. Despite the age of the information, the FSA considered this was a real risk. However, it later revised its view and conceded that due to the historical nature of the information requested, it would not prejudice the commercial interests of the business or senior managers named within it. In hindsight, the FSA considered that just a small balance of the information would prove harmful if disclosed due to it being “unfair comment” which could “affect the firm’s brand reputation”.

The commissioner agreed that this risk existed but concluded that it was outweighed by the public interest of disclosing the information. Again, the commissioner took into account the fact that the information was old and uncontroversial in nature.

This is not the first time that the commissioner and the FSA have locked horns over what they consider to be exempt information.

The commissioner decided in August that the FSA had incorrectly classified some information as exempt to justify its refusal to disclose information relating to a UK bank’s involvement with Columbian drugs money to an individual.

The FSA’s main argument had been that disclosing the information requested would discourage firms from cooperating with it in the future, damaging its effectiveness as a regulator.

Similarly, in April, the commissioner decided that the FSA must disclose information relating to a bank’s managing agent and its syndicates when the FSA had resisted doing so on the grounds that it would compromise its ability to regulate effectively.

These decisions suggest the commissioner will continue to take a firm line against any attempt by the FSA to withhold information on the grounds that its disclosure will discourage firms from giving it information on a voluntary basis, thereby causing them prejudice. The commissioner has clearly taken the view that if firms are unwilling to continue to cooperate on an informal basis, the FSA can use its powers under the FSMA to extract information it needs.

Although the FSA has compulsory powers, it is easy to see why it would prefer not to have to invoke them every time it wants to secure an honest exchange of information with a member of the regulated community. The use of statutory force can be costly and time-consuming and immediately ensures the firm’s lawyers will be involved.

The commissioner was also not impressed that the FSA’s grounds for refusing information changed over time and that the reasons given for refusal to the individual were adjusted and supplemented when later explaining that refusal to the commissioner.

This is something which the FSA will need to address, taking time and care to properly consider all requests for information and ensure that any refusals are based on all grounds that it may ultimately want to rely on.

The regulated community will no doubt have sympathy with the FSA’s stance. It is a difficult balance to strike in deciding where public interest lies – with enhanced freedom of information or unimpeded regulation of the financial sector.


Adviser Fund Index

The global financial turmoil has not surprisingly prompted investors to increase the level of caution in their portfolios. The Investment Management Association’s fund statistics for August show that the most popular sector for the third consecutive month was absolute return. The most popular UK-domiciled Isa sector was guaranteed protected funds.


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