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This paper intends to discuss if the Financial Services Authority (FSA) has an ethical approach in relation to investment regulation. First it will explain the recent history of regulation within the Financial Services Industry until the creation of the FSA , an independent and non-governmental body, with statutory rights given by the Financial Services and Markets Act 2000. Then it reflects about the meaning of compliance competent and if FSA had adopted an ethical approach.
In the beginning...
The story of the FSA is quite recent and it started from the need to regulate and control the rapidly changing markets of the 70’s and 80’s. Prior to the FSA, the market regulation was served ad hoc, combining government regulation and a heavy element of self regulation. Changes in the international financial system made the Government to look for new solutions and at that time Professor L.C.B. Gower was asked to review the investor protection within the financial services industry in the UK.
In his report, Professor Gower wrote that ” Logic and tidiness... are important only in so far as they contribute to a legal regime which can be understood, which will be regarded as fair by those which affects and which, as a result, will be generally observed and can be effectively enforced.” (Budd, L., Whimster, S., 1992)
A White Paper in 1984 followed the report and led to the Financial and Services Act (FSA) 1986. This act is mainly concerned with protecting the private investor and is a piece of legislation that brings sole practitioners and firms of the financial industry within one statutory framework.
With the FSA 1986 was created an agency, the Securities and Investment Board (SIB), with regulatory and enforcement powers and where most of the powers under the act were delegated. The SIB was assisted by self-regulating organisations (SROs) such as FIMBRA and LAUTRO and recognised professional bodies (RPBs). The SIB had power to make rules with legislated effect and reported to the Chancellor of the Exchequer. It maintains a list of authorised firms called the central register.
Unlikely its American counterpart SEC, the SIB was totally financed by the city but accountable not to the city but to the government (Budd, L., Whimster, S., 1992).
The Financial and Services Act 1986 was replaced by the Financial Services and Markets Act 2000. The SIB was replaced by the Financial Services Authority (FSA), and all the SRO’s were incorporated into this single regulator.
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The new regulator, FSA, had under the act, four statutory objectives: market confidence, public awareness, consumer protection and the reduction of financial crime. These are supported by principles of good regulation such as efficiency and economy, competition, innovation, proportionality, role of management, innovation, international character.
Compliant competent and sustainable regulation:
In August 1989 Oonagh McDonald, was invited by the SIB to undertake a study about competence among professionals working under the regulation of the recently Financial Services Act, 1986. McDonald emphasises the terms competence and compliance as a criteria for working in this industry. Although the FSA does not directly refer to these terms it said that investment business should be performed by “fit and proper persons”. In his report on investor protection McDonald wrote:
“Regulators and Practitioners alike have increasingly emphasised that 'fit and proper' persons obviously have to be 'competent' and that compliance with rules requiring suitable and 'best advice' has to be based on a thorough knowledge of the investment products available as well as the skill to relate such information to the customer's needs.”(McDonald, O., 1990)
Following the suggestions in this report, was initiated a Training and Competence Scheme (T&C scheme) by the Personal Investment Authority (PIA), a body created from the fusion of two other self-regulatory bodies (LAUTRO & FIMBRA), under the SIB. This program existed in order to make sure that all financial advisers perform their job to the highest standards of proficiency and ethics (PIA, 1995).
In Consultation Paper nº34 (FSA, CP 34, 1999), the FSA draws their approach to competence. This is made of training and evaluating the employee knowledge and skills while performing their role. The assessment is made of examinations and practical application. Additional training, updating programmes, constant supervision of competence is fundamental to maintain a high level of standards, minimise any risk and enable the employee to gain on-the-job experience. Because the constant need for training, refreshing programmes and supervision, the FSA offers aid and states that training and competence programs are a partnership. It’s very important the idea of regulator and regulated joining efforts and working together as partners (Davies,H., 2000). After the Consultation Paper nº 34, the FSA published another consultation paper with feedback over the previous document, where need for training and competence was reinforced in the industry as fundamental for a healthy market and for the realisation of the FSA four main regulatory objectives (FSA, CP 60, 2000).
Competence, compliance, accessing skills and knowledge of employees, regular training procedures, were more than ever part of the FSA documentation and the financial services industry syllabus (Edwards, J., 2005). Competence started progressively to be seen as affecting not only the individual but also having a deep impact on the whole firm mentality and culture (Storer, G. & Rajan, A., 2002). Compliance is more likely to exist within a firm that as it embedded and incorporated in their core values and organisational culture (Edwards, J.,Wolfe, S., 2006).
More and more firms recognised that competent, compliant, honest, integrity and diligent employees would only work within organisations that adopt these principles (Edwards, J., 2003). More recently, senior manager has been required to operate internal systems and controls in order to ensure that employees behave in a compliant and competent way, and to identify and monitor risks. Compliance competent organisations are those fulfilling these requirements.
Based on the works of Jackman and Wood, the FSA proposed a compliance competence partnership approach model. This model is constituted with three key elements intrinsically linked and all of equal importance: good compliance practice, good ethical practice and a positive FSA relationship (Edwards, J.,Wolfe, S., 2006).
Finding their way to an ethical approach:
Ethics, has is origins in the Greek word , and is defined as the science of morals, the department of study concerned with the principles of human duty. A look in the dictionary helps to understand the meaning of this term. Ethical is intrinsically linked to moral, honourable , upright , righteous , good , virtuous , high-minded , decent , principled , honest , just , fair , right , correct , proper , fitting , seemly , decorous(Oxford American Thesaurus of Current English, 2002). All this terms combined give a broader picture of an ethical action and behaviour and also, of an ethical person.
As we saw before, in recent years the idea of fairness and honesty is been pictured as intrinsically associated to high standards of competence and compliance. Many businesses started to understand that a clean sheet is their best publicity, and their long term survival plan. The FSA is aware of the benefits of a new mentality in this area and supports the development of organisational values and culture. As identify by the David Jackman’s paper Why Comply?, going beyond the minimum required standard of compliance would benefit the firm in terms of quality, customer retention, staff retention and the long-term success of the company. This assumption, of an ethical environment which is positive for consumers and investors is also one which is positive for the Financial Services industry and those moving in her.
A mature and proactive compliance and an open relationship with the FSA are the changing ingredients. A read through the Financial Services and Markets Act 2000 and the FSA’s principles and commitments framework of core values clearly identifies ethical values. “Open, honest, responsive and accountable, committed to acting competently, responsibly and reliably, relating to colleagues and customers fairly and with respect” are some attitudes and values that can be directly identified with an ethical behaviour (FSA, 2002, Discussion Paper 18).
The primordial benefit of establishing an ethical approach is using less prescriptive means and more flexible ways to achieve FSA objectives. If companies seriously engaged in a set of values and principles that can effectively push the standards of competence and compliance above the minimum standards, regulation will decrease as a result.
Jackman identified that a value-led regulation is built above four pillars: integrity, honesty, fairness and responsibility (Jackman, D., 2001). This approach cannot exist without cooperation, from both intervenients. In a discussion paper, the FSA presents their view of an ethical framework for financial services. The paper explains that FSA’s regulatory approach is value-based and is in the interest of both regulated and regulator to behave ethically (FSA,DC 18, 2002).
The individual or organisation needs to understand and know the reasons for such regulation. FSA exists to minimise risks and to assist the markets. Measures, specific regulation, indications brought by the FSA are discernible. Mechanical compliance is not effective while preventing problems. Basically, an ethical behaviour is the best solution in order to minimise hazards and problems inside the industry.
Public scrutiny is a constant in the financial sector. With a big and diverse list of stakeholders, the sector suffers different pressures. The pressures can be avoided if the intervenients follow FSA recommendations and behave ethically. The point of view should be positive instead of negative. Before asking if it’s allowed, legal or licit to do something, firms should step ahead and ask how they could improve standards of conduct (FSA, DC 18, 2002). Behaving ethically is a competitive advantage and path to lighter regulation. FSA ethical approach intends to change public perception of the investment market and, at the same time, increase trust and reliance in the services and in the sector.
Treating customers fairly is of key priority to the FSA (FSA, CR 38, 2005). TCF is intrinsically linked to the establishing of an ethical framework. In this context the FSA recognises and welcomes an ethical regulatory approach instead of the use of prescriptive rules. The TCF is about a cultural change and that’s what most of the ethical approach is also about.
Howard Davies, FSA chairman, told in a speech that still many sections of the industry were paying too little attention to the basic principles of treating customers fairly. The enormous amount of compensations paid by the industry (over £11 billion) for the mis-selling and not suitable advice could be avoided if the practices were compliant and ethical (Davies, H., 2003).
As we saw the FSA has obviously an ethical approach to investment regulation. The FSMA 2000 has brought to map a value-led regulation. The FSA had published several documents where it reaffirms the need for organisations to aim for a next level of compliance. Instead of practising a good compliance organisations should incorporate the principles into a solid and coherent ethical culture that compliments it and that in time will avoid problems faced with compliance departments.
Organisations should set a code of ethical values and principles, accepted for all its members, starting with the senior management, and expressed into everyday behaviours. The also FSA stresses the importance of establishing an ethical culture and systems: Staff development training, ethics committees, ethics policy, internal ethical control with reward and punishment systems, ethical practice development are all examples of suggestions proposed by the FSA in order to materialise the idea of ethical companies. Those who achieve this level have a real partnership with the FSA and are considered fully compliant organisations. It’s in relation to these organisations that a “lighter regulatory touch” may be adopted.
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