The FSA's enforcement powers are not to be taken lightly, says Harriet Quiney
While GISC sought to uphold high standards among its members and discipline those who failed to meet them, as a voluntary regulator it faced the classic dilemma: if it enforced its standards too harshly, members would simply leave.
As a result, while GISC on occasion took regulatory action against its members, such actions were few and far between. Only 12 findings were shown on its website for 2003. Although some firms were subject to intervention orders and forbidden from accepting further premiums, the largest published fine was £10,000.
The FSA, on the other hand, is an entirely different creature. As a statutory regulator with the power to prosecute, it need not rely on the popularity of its enforcement regime to ensure its own survival.
It allocates about 10% of its budget to enforcement (£20m for 2004/05). This has led to a significant number of complex investigations, the largest being the investigation into the mis-selling of split capital investment trusts (which has yet to be concluded) and some substantial fines and penalties.
The largest published fine was £4m against Credit Suisse First Boston for misleading the Japanese regulatory authorities. The FSA has also prohibited several directors of the Chiyoda Fire and Marine Insurance Company from performing any functions relating to regulated activities. It has also sentenced John Edward Rourke to 120 days' imprisonment for contempt of court for persisting in carrying on regulated activities without authorisation against the terms of an FSA injunction.
The FSA does not anticipate that general insurance brokers are likely to become involved in the sort of widespread mis-selling activities which seem to dog independent financial advisers. But mis-selling and breaches of the insurance conduct of business rules (ICOB) are only one area where the FSA's enforcement powers may be felt. Other areas include carrying on regulated activities outside of a firm's Part IV permissions, failing to maintain adequate systems and controls and failure to keep adequate records.
While the FSA's powers are thus extensive, with these powers come increased scrutiny. All recommendations from the FSA's enforcement teams have to be approved by the regulatory decisions committee, an independent arm of the FSA.
Further, a firm which is subject to FSA enforcement has the right to apply to the Financial Services and Markets Tribunal, a wholly independent quasi-judicial body which requires the FSA to put its case afresh. Unlike ordinary court proceedings, unless the FSA acts unreasonably, costs cannot be recovered by a successful party.
FSA enforcement proceedings are confidential and are usually made public only if the firm under investigation is found liable. The tribunal has heard only seven cases to date. Of these, only one was substantive, where the tribunal overruled a substantial number of the FSA's key conclusions and suggested that the then director of the FSA's investment firms division had unfairly threatened the applicants.
So, while the FSA's regime has sharper regulatory teeth than the GISC, there are occasions when its bark may be worse than its ultimate bite.