Laval-Hoban to prove Marx right

April 17, 2012

Mark-Pierre Laval-Hoban is about to prove Marx right: “history repeats itself, first as tragedy, second as farce.”   The planned S404 Consumer Redress Scheme to make IFAs pay for the bungling of Capita mimics the Pension review.  In the process it will make a scion of New Labour a multi-millionaire.     Gareth Fatchett will not reach the standards of Tony Blair, but he certainly won’t do badly.

 

Rumours are flying `around that the FSA is about to launch a S404 Consumer Redress Scheme that will require all IFAs that recommended CF Arch cru products to review their advice and offer compensation.

 

This will force a large number out of business: they will have to add the cost of paying compensation on a generous scale to their company’s liabilities so will inevitably fail the FSA’s capital adequacy tests.

 

This can only benefit the egregious Gareth Fatchett who has signed up hundreds – probably by now over a thousand – Arch cru investors.  They will pay him a tenth of all they get back from FSCS in exchange for his filling in a couple of forms for FSCS – he is telling them that there can be problems in claiming from FSCS.   Nice one, Gareth.

 

By the misery of IFAs Laval-Hoban’s New Labour friends will grow rich.

 

 

How does a S404 Consumer Redress Scheme work?

 

Under S404 of FSMA 2000, the FSA can make every firm:

  • Investigate whether it has caused customers loss – the FSA sets out what it has to do; and we can expect the FSA to say advising CF Arch cru causes loss
  • If it has caused loss – by the FSA criteria – to pay compensation on the basis that the FSA lays down

 

So it is simple.   Every IFA that advised CF Arch cru will be forced to commit suicide.

 

IFAs have some scope to fight back

 

Although Laval-Hoban collaborated with New Labour to introduce these powers in 2010 just as the last Parliament was ending – Laval-Hoban’s office costs at the time were met by a consulting firm that makes large sums dealing with regulators – members of the House of lords made a stand and despite Laval-Hoban’s pledges to Sants to assist the campaign to close down IFAs,  amendments were made to the legislation and the FSA has to show that a Court would find the victims of its malice liable.    And any attempt to set up a S404 Redress Scheme can be challenges before the Upper Tribunal (which has a no costs rule).

 

Before the FSA does this, it has to consult.

 

It will be very interesting to see whether Capita’s infamous lobbyists, led by close friend of Chancellor Osborne, Andrew Bridges, will be able to win round MPs.   Osborne is no longer as popular as he was, and with the imminent threat of having to find large numbers of donors (because a halt is about to be called to the million pound plus bungs on which the parties have relied, including we may recall, from Capita) many MPs may decide that killing IFAs is not quite the best way to obtain their support in fund raising.

 

The consultation promises to be interesting.

 

It will in particular be interesting to see whether the PI insurers are going to lie back and be raped.   They will have to pay out millions.   If they or some large IFAs decide to dig in and fight then Sants may have another embarrassment on his hands.

 

The statutory detail

 

The power to set up a Scheme is in S404 – here.    The requirement that the FSA only impose requirements when a Court would find liability is S404A (2).    The ability to refer to the Upper Tribunal is S404D; and the requirement to consult is S404 (9).

 

Previous experience

 

The only previous experience with a Redress Scheme was the infamous Pensions Review – which nearly caused complete withdrawal of PI cover for the industry.   The Treasury at the time swore that never again would it allow a regulator such powers.

 

When Laval-Hoban was approached during the Committee Stage of the Financial Services Act 2010 which made these changes to FSMA with the offer of briefing (free) on the impact of the review and why these proposals might not be a good idea he responded with a mixture of arrogance and contempt.

 

It will be interesting to see how Conservative MPs with small majorities react to this example of a Coalition Minister implementing a  New Labour policy – especially when they realise that not only was his adviser in the pay of a consultant to a firm in thrall to New labour’s FSA but the main beneficiary of what he has done is a member of a New Labour family.

 

 

 

 

 

 

 

 

Message to PM on Capita Arch cru: “If you get a man by the balls, heart and mind soon follow.”

November 28, 2011

AN OPEN LETTER TO THE PRIME MINISTER FROM JOSEPH EGERTON, CAMPAIGNS DIRECTOR OF JUSTICE IN FINANCIAL SERVICES AND DIRECTOR OF COULL MONEY LIMITED

Dear Prime Minister,

I write both as Campaigns Director of Justice in Financial Services and as Director of Coull Money Ltd., claimant in a Judicial Review challenging the Capita-FSA deal to limit Capita’s liability to compensate investors in Capita Financial Arch cru funds, a deal that you clearly regard as miserably failing to compensate your constituents and other investors.

There will be widespread delight that you said ‘I will look carefully at what the hon. Gentleman (Mr Tom Greatrex) says and see whether we can do more.’ (Official Record, 23 Nov 2011, Col 294, Q9) You have given hope to 20,000 individuals and families who entrusted £420 million of hard earned savings to Capita Financial Managers Limited and have suffered grievously because this firm, a subsidiary of the massive Capita PLC, has refused to make good the losses they have suffered as a result of its failure to comply with FSA rules laying down the duties of a Authorised Corporate Director/Approved Fund Manager.
FSA’s failure under Gordon Brown: IMRO’s success under John Major
The FSA first became aware of problems in October 2008; the Capita Financial Arch cru funds were suspended in March 2009. This problem was not resolved by April 2010 so it was one of the many poisonous legacies left for the Coalition to deal with.
I well remember that when Sir John Major was Prime Minister, another company, Morgan Grenfell Asset Management, allowed a fund manager to breach the IMRO rules and caused the suspension of the funds in which an almost identical sum was invested. The suspension happened on 3 September 1996 and was lifted on 5 September 1996 because the regulator, IMRO, had stamped its foot and demanded that funds be injected at once to restore liquidity and allow savers to withdraw funds. By Christmas a full package had been agreed so that investors’ were compensated on the basis of top quartile fund performance. Every penny came from MGAM and its parent – not one penny came from IFAs or other advisers.
IMRO was an exceptionally well run regulator – and it is significant that its then Head of Enforcement, the robust Dan Waters, has recently left the FSA, and as is well known, after a row with the chief executive. Nobody would accuse the FSA of being well run. But it is inconceivable that John Major and Ken Clarke would have allowed the drift that took place after March 2009 under Gordon Brown and Alistair Darling – John and Ken did speak to one another. It is therefore very encouraging that you personally have intervened.
The present position is unsustainable
Your intervention means that there must be action, and urgent action, to resolve the mess that Capita and the FSA have between them created.
If Capita only pays about a quarter of the losses that its bungling incompetence allowed to occur, then no investor will receive more than 50-60 per cent of what they invested back for years unless FOS and/or FSCS makes awards to investors.
Even if IFAs were indeed responsible for these losses – and if they are not, then such demanding they make good losses caused by another would be unjust and unfair – the FOS/FSCS process is going to take years. Whilst I will of course be responsible for some of these delays unless I withdraw the Application for Judicial Review, most of the delays will be occasioned by the need to review every single claim made by an investor.
Capita, in a letter clearly drafted by their lawyers, the supremely competent if fabulously expensive Herbert Smith, have just told one of your cabinet colleagues (in his capacity as a constituency MP asking questions on behalf of a constituent) ‘No-one would suggest that IFAs who have complied with their own duties should bear a responsibility to compensate investors.’ Capita/Herbert Smith then quite rightly went on to make the point that some IFAs did give unsuitable advice – and followed this with specific examples. But this also clearly implies that many IFAs will have given suitable advice. So every single claim will have to be examined to ascertain the facts of that particular piece of advice.
Experience warns us that this will be a long and difficult task. In the late 1990s, the ICS, the FSCS’s predecessor, spent over two years examining claims by about 1500 investors advised by Knight Williams & Company Limited. The ICS made awards to about half these, totalling around £2million. The ICS then tried to claim back the money it had paid out from the liquidator of KWAC, Mr Martin Fishman of Arthur Andersen, and was brusquely told that its claim would be rejected because there was insufficient evidence to satisfy him that a court would have found for the investor in a single case. The claim was eventually settled for £500K, a quarter of the £2 million that had been put aside in a separate account under regulatory control to meet claims. Shortly afterwards the FSA gave its approval to the Managing Director of KWAC being appointed a director and a chief executive of another IFA. Anybody who lived through the KW saga will agree that the regulators produced a complete shambles and will tell you not to let FSA, FOS and FSCS organise a re-play on a grand scale.
It is going to take years for FOS and FSCS to process claims from even half the Capita Financial Arch cru investors against advisers – and with £150 million at stake in total and tens or hundreds of thousands worth of claims against individual firms, it is inconceivable that claims will not be contested with FOS and FSCS and awards will inevitably be challenged in the Courts. There are also serious problems with enforcing FOS awards against IFAs that have given up trading but still have assets.
Further, the publication of the Provisional Decision and its use by the FSA will almost certainly give rise to claims that the FOS is not independent as required by Article 6 of the ECHR, so the potential for litigation lasting years is obvious.
I simply cannot see how, having said what you did, that you can allow this to happen. Investors will rightly expect the prompt justice that IMRO delivered under John Major, not a continuation of the delay that FSA and Capita contrived under Gordon Brown. Everyone will now look to you to get this mess sorted out.
Ways forward
There are two possible ways of breaking this logjam.
The first is for Capita and the Depositaries to pay a great deal more. If the IMRO formula were applied and the investors paid out on the basis of top quartile cautious fund performance, there would be some losses as the market had fallen by March 2009 and is still down today. Capita would need to pay out cash, but the Depositaries – two massive banks – can arrange that.
This would be a fair and just solution, in accordance with precedence.
It may well be one that only you can bring this about – the FSA has said that if our JR succeeds, Capita will not need to pay anything and cannot be made to pay anything. If – and I have not taken advice as to whether the FSA is correct in law – Capita cannot be forced by the regulator or litigation to pay, it can still be forced by political pressure. The mood of MPs in the Westminster Hall debate suggests strongly that you would have the unanimous support of the House if you were to tell Mr Paul Pindar, the chief executive of Capita, that not only would he have no friends in the House if Capita did not pay up generously and promptly, it would have no friends in the Cabinet either. If Mr Pindar did not understand the message I am sure Capita’s non-executive directors and shareholders would.
The second possibility is that the FSA impose a Consumer Redress Scheme on Advisers under Section 404 of the Financial Services & Markets Act 2000 (as amended by the Financial Services Act 2010). This would require advisers to review all the cases of advice to invest in Capita Financial Arch cru, and if specified criteria were met, to pay compensation. Under Section 404A (2), ‘the only examples that may be set out in the rules as a result of subsection (1)(b) are examples of things done, or omitted to be done, that have been, or would be, held by a court or tribunal to constitute a failure to comply with a requirement.’ This means that IFAs would only have to pay compensation if they had acted negligently or breached FSA rules – specifically those setting out what is and is not suitable advice and requiring risk warnings. Exactly the same principle applies to FSCS in making awards. So there would be uniformity of treatment for all investors.
This would avoid thousands of cases going to FOS. FOS would be bound by the Consumer Redress Scheme.
Clearly there could be some delay as the FSA would have to consult. There might be a challenge to the Scheme which would be heard by the Upper Tribunal. Such a challenge might succeed. A High Court Judge will be given the evidence of false accounting and asked whether losses caused by this and by such heroic exploits as advancing quarter of the fund on the security of Greek rust buckets was really the fault of IFAs rather than the ACD. But we are talking about months, not years.
A more serious objection to this approach is that large numbers of investors will get nothing from it – as the Herbert Smith/Capita letter to your cabinet colleague makes very clear, while some advisers gave bad advice, others gave compliant advice. Just as FOS should reject complaints when the advice was compliant, so also a Consumer Redress Scheme will deliver money only from IFAs that gave bad advice.
That is going to leave investors who have suffered losses because Capita Financial Managers failed in their duty as an ACD and allowed Arch to run riot uncompensated.
My position as director of Coull Money Limited


I have no desire at all to cause any investor any loss. The Judicial Review was launched because advisers believed that the offer by Capita was shabby and inadequate. You give the impression of agreeing with this. The JR would undo the deal and would leave it open to FOS to make awards against Capita. There is of course no reason why Capita should not agree – together with the Depositaries – to make a fair and just offer of redress to avoid this happening and end what is clearly a growing embarrassment to it.
So I totally reject the FSA’s suggestion that the consequence of the JR succeeding is that Capita would walk away without paying a penny. Indeed from the attitude of MPs, it could not afford to do so: if it did, then every time a civil servant proposed any new contract to Capita to a Minister, they would get Iain Macleod’s famous answer: ‘No. I have no desire to be tarred and feathered in New Palace Yard.’ The FSA’s suggestion that a successful JR would make the position of either investors or advisers worse is just plain daft.
Having said that, I recognise that it could in certain circumstances be helpful if we withdrew our JR. I am writing to the FSA and Herbert Smith (representing Capita) asking for talks on the way forward. However if I am to withdraw the Application for Judicial Review I will want an assurance at least from the Financial Secretary to the Treasury that any agreement will be fully backed by the government. Although I think that the FST failed to respond to the mood of the House in replying to the Westminster Hall Debate, and has taken entirely the wrong line for any Tory in dealing with this, he is an honourable and decent man and I know would not countenance any backtracking from a solution he had endorsed.
Conclusion
If you are not persuaded that the obvious and fast solution is for you or a senior colleague to have firm words with Mr Pindar, then this matter cannot be left to the FOS and FSCS simply because it will still be a running sore in the middle of the next Parliament. If the general view of those involved – including the FST – is that this should be the preferred option then I will discuss in good faith what should be done in the interest of investors.
However I do believe that the only way in which this unhappy affair can be brought swiftly and justly to an end is for Capita to accept that it and the Depositaries need to act as MGAM did. As Mr Addenbrooke, the chief executive of Capita Financial Managers Limited has said, investors entrusted their money to his firm. They have been shamefully let down. What is due to them is full and just compensation. As I have argued, a few firm words from you or a senior colleague should persuade Capita that it is expedient to behave properly and justly. Or, to put it in the language that a chief executive of Capita as an alumnus of Goldman Sachs will certainly understand, “if you get a man by the balls, heart and mind soon follow”.

Yours sincerely

Joe Egerton
Director, Coull Money Limited and Justice in Financial Services
joe@justiceinfinance.org

What is a Consumer Redress Scheme?

November 28, 2011

 

Summary

The FSA has hinted that it might impose a Consumer Redress Scheme on IFAs that recommended CF Arch cru.

This is a scheme under S404 of the Financial Services & Markets Act 2000 (‘FSMA’) as amended by the Financial Services Act 2010.

Essentially a S404 Consumer Redress Scheme would require every firm that advised clients to invest in CF Arch cru to review each client’s file and determine whether it met FSA specified requirements.   If it did not, the firms would be required to pay compensation as laid down by the FSA.

But that of course is far too simple for any regulatory system.   The realities are buried in the tortured obscurities of statute and the regulatory rules, which have the huge benefit for the FSA and disadvantage for the rest of the human race of being in a language that is indubitably not English or indeed any other tongue recognisable to members of the human race..

So for those who do not have a degree in Martian, here is an explanation in English of what a Consumer Redress Scheme involves and the problems that the FSA is now grappling with.   But first a bit of background that explains why, after the Prime Minister’s decision to involve himself, the FSA has to make a difficult choice.   We have set this out in an open letter to the Prime Minister – published by THIS IS MONEY, the Mail on Sunday’s financial website.

The conclusion that I draw – and I hope you will do so too – is that the FSA’s folly in seeking to throw all the blame onto IFAs has landed it a hole.   There is no way in which the strategy is going to deliver an outcome acceptable to investors – or the Prime Minister.

Denis Healey memorably set out the First Law of Holes:  ‘When in hole, stop digging’.   The FSA is ignoring that good advice.   This will end in tears.

Background: the Prime Minister has landed FSA with a huge challenge

When the Prime Minister gave a sympathetic answer to Tom Greatrex on Wednesday he put his own credibility on the line.   If the CF Arch cru scandal is not resolved quickly, he will be taunted  week after week.

The FSA has ruled out it making Capita pay more.   Its inept handling of the problem has brought about a situation where most investors will expect their IFAs to pay compensation.  IFAs will not do this: they will reject complaints and investors will go to FOS.

The IFAs can take comfort in this from a sentence in Capita’s recent letter, undoubtedly drafted by the supremely competent Herbert Smith, to a Cabinet Minister in his constituency capacity:  ‘No-one would suggest that IFAs who have complied with their own duties should bear a responsibility to compensate investors.’   Capita/Herbert Smith then quite rightly went on to make the point that some IFAs did give unsuitable advice – and followed this with specific examples.   But this also clearly implies that many IFAs will have given suitable advice.

Capita has a huge interest in endorsing the FSA line – ‘IFAs are guilty’.   It has not done so.   It has taken the opposite line – one quite fatal to any hope the FSA has of ending this scandal quickly.   Every single claim will have to be examined to ascertain the facts of that particular piece of advice.

FOS and FSCS will have to handle between 10,000 and 20,000 claims.   Under the law, each claim has to be evaluated and the facts in each established.   This process will take years.   Back in the mid-‘90s, the FSCS’s predecessor, the ICS, had to evaluate some 1500 – 2000 claims and that process started in 1995 and was not completed until after 2000.     I know – I ran the team that examined each claim for the firm that gave advice and had to tell the ICS what the firm made of each claim.

The Prime Minister will not allow such a fiasco to be repeated, for the simple reason that he will not want his answer last Wednesday played back at frequent intervals with taunts about his ineffectiveness.      This, if nothing else, is now pushing the FSA into considering a Section 404 Consumer Redress Scheme.

Brief history of the powers the FSA has and the Treasury’s giving them up

These powers are new (brought in by the Financial Services Act 2010) and were strongly supported by Mark Hoban in opposition and pushed through in the wash-up in April 2010.

The pre-FSA regulators could and on one occasion did order a Consumer Redress Scheme (the Pensions review).   The result was a hugely expensive shambles.   In 1999 the Treasury rightly swore that never again would a regulator be allowed to implement such a scheme without it being cleared with the Treasury – so the original FSMA Section 404 gave a blanket power to set up a Consumer Redress Scheme if the Treasury agreed.

This has been forgotten and a new generation of officials has grown up.   The great shambles is a footnote to history, not a living fear.  The prospects of a re-run of history are enhanced by so few veterans of the great shambles remaining in the FSA.  The Royal Navy with its long experience has an acronym that applies: SNAFU – ‘situation normal: all ****ed up.’   This is perhaps not the outcome that the Prime Minister had in mind on Wednesday.

The S 404 powers

Section 404 of FSMA now gives the FSA power – subject to some very important conditions I shall come to – to set up a scheme in which:

  1. The FSA sets out what it would expect an IFA to have done before making a personal recommendation to a client to invest in a CF Arch cru product and specifically the criteria by which the suitability of the personal recommendation is to be determined.   The FSA might , for example:
    1. State that CF Arch cru funds should only have been recommended to clients who had had previous experience of investment in unit trusts and similar funds
    2. State that the Adviser should have evidence that the client was willing to run a specified level of risk
    3. The FSA might also set out information that should have been provided in the document that the Adviser was required to give to the client – known as ‘the suitability report’ – as part of the process of advising.    The FSA may well state that the Adviser should have identified certain risks.
    4. Advisers (and this includes formerly authorised firms and individuals) are then required to review each personal recommendation and ascertain whether the Adviser had complied with the detailed requirements the FSA has set out
    5. If the firm finds that it has not complied, then it must offer compensation on the basis determined by the FSA.

    The FSA will monitor this process and can appoint somebody (e.g. a compliance consultant or a firm of accountants) to do the work required if the firm does not do it satisfactorily.   The client can also complain to FOS if the client thinks that the firm should have offered compensation and did not – FOS can then order the firm to make an offer on the basis laid down by the FSA.

    Constraints on the FSA

    Although this sounds encouraging to investors, there are a number of constraints on the FSA that are highly relevant.

    Any Consumer Redress Scheme has to comply with the Law of England. This is a significant difference from a FOS award so the example of a Provisional Decision made by Mr Boorman is not a reliable guide.   FOS does not have to comply with the law of England – FOS can make awards when a court would do so.   The Boorman Provisional Decision almost certainly does not comply with English law but relied on the use of FOS’s power to make an award that is ‘fair and reasonable’.   It certainly depends on FOS continuing to disregard what was promised Parliament in 1999 by the then Economic Secretary to the Treasury – that firms and investors would have a right to a full, fair and open hearing.    Boorman is one of the chief advocates of this casual defiance of a promise to the Commons.  In fact, there are some doubts as to whether the Boorman decision is within the scope of the fair and reasonable jurisdiction as defined by the Court of Appeal: some lawyers suspect not.

    In contrast to FOS, the FSA can only impose a Consumer Redress Scheme if consumers have suffered (or may suffer) loss or damage in respect of which, if they brought legal proceedings, a remedy or relief would be available in the proceedings (S404 (1) (b)).   So the first hurdle the FSA will have to overcome is to demonstrate that a Court would find for an investor and against the Adviser.

    Section 404 (1)(a) poses a further problem for the FSA.   While there almost certainly are examples – Capita/Herbert Smith was quite correct to say that some examples (if correctly cited) given in the Westminster Hall Debate showed Advisers breaking the FSA suitability rules – under S404 (1)(a) the FSA may also have to show that these failings are widespread and not confined to a few advisers.    Clearly the 2010  Act would have benefitted from the tighter scrutiny of detailed wording usually given in the Lords – owing to the election, the Lords did not look at these provisions at all although a number of amendments were tabled.  A badly drafted statute rushed through without proper scrutiny makes the FSA’s position truly unenviable.

    Even if the FSA can get over the hurdle or hurdles in S404(1), it is constrained as to the requirements that it can impose by S404A (2) and (3):

    1. The only examples that may be set out in the rules as a result of subsection (1)(b) are examples of things done, or omitted to be done, that have been, or would be, held by a court or tribunal to constitute a failure to comply with a requirement.
    2. Matters may not be set out in the rules as a result of subsection (1)(c) if they have not been, or would not be, taken into account by a court or tribunal for the purpose mentioned there.

    These provisions mean that the FSA can only require firms to consider whether they have breached a requirement that a Court would hold to be imposed by the law of England.     Section 404D expressly provides that the Upper Tribunal may make a determination on these issues.

    The FSA may also have a difficulty with subsection (4), which reads:

    The Authority must exercise the power conferred as a result of subsection (1)(d) so as to secure that, in relation to any description of case, the only kinds of redress to be made are those which it considers to be just in relation to that description of case.

    The FSA will have to convince the Upper Tribunal that it can reasonably consider holding IFAs responsible for losses caused by the ACD, Capita, is ‘just’.    So even when an IFA had given unsuitable advice, a Court might well hold that it still should not be made to pay compensation because the loss had not been caused by the bad advice but by Capita’s bungling incompetence.

    Implication: a Consumer Redress Scheme will certainly be challenged

    If the FSA attempts to introduce a Consumer Redress Scheme, a challenge is inevitable.  The Application for Judicial Review by Coull Money Limited raises the issues that all too clearly can be taken before the Upper Tribunal.   If by nobody else, then by Coull Money supported by JFS.

    What would the effect of a successful challenge be?

    Investors could still make complaints against advisers and take them to FOS.  However FOS would have to be very careful indeed to comply precisely with the judgement of the Court of Appeal in The Queen on the Application of Heather Moor & Edgecomb and the Financial Ombudsman Service ([2008] EWCA Civ 642.)    Cases would be properly defended and arguments not put or not discussed in Mr Boorman’s Provisional Decision would certainly be raised.   For instance, the fact that the Reports published by Capita and including audited accounts were in fact based on and included false accounts that did not conform to FRS2.    IFAs can scarcely be held responsible for that breach of the COLL rules by Capita.

    It is highly improbable that FSCS would make many payments.  A finding of the Upper Tribunal is not as authoritative as a Judgement of the Appeal Court or Supreme Court – which would be binding on FSCS.   But if the FSCS attempted to go against a decision of the Upper Tribunal, this would almost certainly trigger an application for Judicial Review.  Such an application would have the formidable benefit of citing a considered judgment by the High Court Judge who had taken the case before the Upper Tribunal.   It is far more likely that FSCS would simply treat this judgement as authoritative.

    The inevitable consequence will be the rejection of a great many claims against IFAs.

    First Conclusion: the choices before the FSA

    The FSA has three choices: it is impossible to tell which it will take.   But none will bring a conclusion to the scandal.

    1. The FSA might try to set up a scheme in which the test that an IFA has to satisfy to avoid paying redress is ‘would the personal recommendation have been suitable if instead of CF Arch cru the IFA had recommended a cautious fund managed by L&G or Jupiter or Fidelity or….?’    That scheme might not be challenged but will leave the majority of CF Arch cru investors nursing heavy losses and waiting years for all their money unless Capita is made to pay a great deal more.
    2. The FSA might try to set up a scheme in which it seeks to make IFAs pay even if their advice would have been held to be suitable and warnings adequate for an L&G or Jupiter or…  fund.   That will certainly be challenged and the FSA will have an uphill struggle to win in the Upper Tribunal, Appeal and Supreme Courts
    3. The FSA may decide to risk Prime Ministerial wrath –he has no power over the FSA senior staff.   They will have moved to lucrative new jobs either with the new regulators or in banks before long.   If so  things will stay with FOS and FSCS, i.e. not introduce a Consumer Redress Scheme.  The luckless investors will be forced into fighting the regulatory equivalent of the battle of Verdun.

    None of these are very attractive – and all likely to incur Prime Ministerial wrath when the consequences become apparent.

    Second Conclusion: if the Capita/FSA Payments Scheme stands there will be obvious injustice

    Even if the FSA can find an acceptable way forward, if Capita only contributes £54M and investors are effectively prevented from asking the FOS to award more from Capita, this the most likely outcome:

    1. Those investors given demonstrably unsuitable advice or not given basic risk warnings will get everything back quickly  because their complaint against their IFA will still be upheld by FOS or FSCS
    2. Those investors given suitable advice and risk warnings will only get a fraction of what they invested back, and will wait many years until all the Arch cru investments and liquidated and the proceeds distributed

    But investors who do not get their money back will rightly complain that if Capita had published Reports with true accounts conforming to FRS2 and if Capita had exercised the minimal controls needed to stop a quarter of the fund being handed over on the security of Greek rust buckets then they would have not suffered huge losses.   They will be very angry that other investors are being compensated in full.   The Prime Ministerial sense of humour may be somewhat tested by constituents who had competent advisers asking him to explain why they had been left in the lurch.

    Ultimate conclusion:  FSA should stop digging and Capita must pay

    If the FSA leaves things to FOS and FSCS the only certainty is years of wrangling.   If the FSA tries to make IFAs through FOS and the FSCS pick up £100M – £150M of losses it will be challenged and the odds are that it will be defeated in the Courts.

    FINAL CONCLUSION: CAPITA MUST PAY

    The FSA’s strategy of seeking to make IFAs pay is a disaster for investors.  They are being made to pay for the FSA’s previous bungling progress.   The FSA probably is right to think it can do nothing now to remedy its error in letting Capita off too lightly, but the implication of that is obvious.   The FSA should stop digging.  Carrying on will simply add another disaster to that catalogue which is the history of this misbegotten regulator – and for an obituary notice for the FSA we need only turn to Seneca on Claudius – omnia certe concacavit[1]

    There is no escaping reality.   If we want this ended on a just and fair basis, there is only one solution: Capita will have to pay a great deal more.   It might be generally convenient if this simple fact were explained to the chief executive of Capita without further delay

    Joe Egerton

    joe@justiceinfinance.org

    Director of Justice in Financial Services and of Coull Money Limited

    You can send a message via the website


    [1] From Seneca, APOCOLOCYNTOSIS, or The death of Claudius:     “At once he bubbled up the ghost, and there was an end to that shadow of a life. …. When he had made a great noise with that end of him which talked easiest, he cried out, “Oh dear, oh dear! I think I have made a mess of myself.” Whether he did or no, I cannot say, but certain it is he always did make a mess of everything.  (Emphasised section a bowdlerised translation of omnia certe concacavit)

Hector Sants awarded San Serafino Order of Purity and Truth (4th Class)

December 7, 2010

An examining body pretending it is the University of Oxford and handing out honorary degrees invites ridicule on the organisation and contempt for the recipients.   The great, late George Macdonald Fraser captured the absurdity of such awards when he created the San Serafino Order of Purity and Truth (4th class) for his anti-hero, Flashman.

Compromised Ministers

December 6, 2010

Last week junior ministers twice found themselves at the Despatch Box in the Commons in effect answering for ‘independent’ bodies – on Monday 29th November for the Financial Services Authority (FSA) and on Thursday 2nd December for the Independent Parliamentary Standard Authority (IPSA).   On Monday, the Minister was the only participant in a three hour debate to support the FSA’s proposals for the Retail Distribution Review; on Thursday another Minister included in his speech a report of what Sir Ian Kennedy, the chair of IPSA, had stated in reply to a serious allegation made by a Member.

In both cases, the Minister was behaving as if he were answering on behalf of his department. And this gives rise to a serious problem.  These bodies are meant to be independent of government.   The intention is that they should make decisions that politicians are not to be trusted to take.   The statutes establishing these bodies enable them to take decisions that the government may disagree with but cannot interfere in.

There have been such bodies for over a century – elected local authorities act under statute.   The Scottish and Welsh governments are a more recent example.   But Ministers do not answer for them in the Commons.   They feel quite free to kick local authorities doing things the government dislikes.   These bodies are subject to control by elected assemblies but the FSA and IPSA are not.

What is the position of a Minister answering for the FSA or IPSA?

The Minister will presumably be held responsible for what he or she says to the House.   What if the Minister makes a false statement about some past event?   What if the Minister gives an undertaking that is not honoured?   If the Minister were speaking for his or her own department, MPs rightly feel able to say ‘you should have checked your facts’ or ‘you should have made sure that your officials did what you said?’   If the Minister is a Junior Minister, MPs are likely to put these questions to the Cabinet Minister and if the Cabinet Minister does not satisfy the House then that Minister’s position becomes impossible.

What is the position going to be over IPSA or the FSA?    If the Minister is going to be forced to resign then any Minister will want some assurance from IPSA or the FSA, and at that point IPA or the FSA ceases to be independent of government.   If Sir Ian Kennedy or Lord Turner can be forced to resign if a Minister parrots a false answer, then IPSA and the FSA cease to be independent of Parliament.  And there must be a serious risk of a Minister saying ‘X is the case’, believing that it was, only to have Sir Ian Kennedy or Lord Turner later saying ‘We meant you to think that Y was the case.   You misunderstood us or ignored some qualification when you said that X was the case.’

Sooner or later this problem will have to be confronted.   It is dangerous to leave it until the House and the relevant authority are entirely at odds because at that point the government’s authority will become irretrievably entangled because any vote against the relevant authority will also be a vote against the relevant Minister.     And what would the position be if the House passed a Motion condemning what a Minister had said to it as untrue?     If the Minister said ‘I did not lie to the House because I parroted the FSA or IPSA as I assumed that what they said was correct’ the House might reasonably say ‘You should have checked.’   If IPSA or the FSA had simply lied, is the Minister going to stand at the Despatch Box and say ‘X lied to me’?   And when a Motion demands that X be dismissed is the government going to ask MPs to reject that Motion in the name of the independence of the FSA or IPSA?

This is not a ‘coalition splitter’.   But it might destroy the government.  First, no government has any right to ask MPs to vote for something as contrary to both the divine and the natural law as, for instance, releasing confidential information to smear an MP and then lying by denying that this was done.   Second, there are a large number of MPs who would not accept that because IPSA or the FSA is ‘independent’ the House had not right to pass motions demanding resignations.    Either way, the government would face defeat in circumstances in which its moral authority would be severely dented.

More evidence that Turner and Sants were taking the proverbial when they gave evidence to the Treasury Committee

December 2, 2010

If I were a member of the Treasury Committee, I would be thinking about bringing back impeachment for contempt of Parliament.

On 23rd November Lord Turner and Hector Sants appeared before the Committee.  Although they did refer to Strachan’s departure from the FSA, as I observe below (see Memo to the Treasury Committee: put not your trust in Sands) they conveniently forgot to mention that as soon as he got back to Canary Wharf Sants was going to tell staff Dan Waters had also packed his bags.

Today (2nd December) Financial Adviser reports that the highly respected lawyer Jonathan Davies of leading city firm Reynolds Porter Chamberlain suggests that FSA staff are more concerned about the transition than the FSA has admitted.

And Citywire reveals something else that the FSA might have mentioned to the Committee – a decision NOT to do anything about the truly dreadful RBS board.  Do the FSA principles mean nothing?  Are we no longer to act with due skill, care and diligence?  Or does the FSA think that the Board of RBS acted with skill, care and diligence when it made its bid for ABN AMRO.

The probable reason for the decision is that Sants was an accomplice in this lunatic activity – and Sants has admitted that he had the benefit of knowing what that pillar of integrity and competence, John Varley of Barclay, thought ABN AMRO was worth – or should we say not worth?

God help us all if Sants is confirmed as chair of the PRA.

Memo to the Treasury Committee: put not your trust in Sants

November 29, 2010

Listening to the Treasury Committee taking evidence from the Chief Executive and Chairman on the FSA on 23rd November 2010, I was forcefully struck by just how well prepared the FSA team were with statement that they wished to make regardless of whatever questions were asked.   So, it seems, was the Chair of the Committee, Andrew Tyrie, as he commented on long pauses before FSA witnesses answered.   The pauses were necessary for witnesses to work out an opening bridge from the question to the pre-prepared point.

The FSA also seem to have practiced equivocation.

Equivocation is a means of avoiding answering a question.   It was used at the end of the sixteenth century by people wishing to avoid saying ‘Yes’ to the question ‘Are you a Catholic?’ or ‘Are you a priest?’   We may feel that Catholics had some reason to avoid the straight answer as saying ‘yes’ was all too likely to lead to being dragged on a hurdle to Tyburn, hung until semi-conscious, being cut down, revived and castrated.  The executioner would then disembowel the victim.  This procedure lasted up to 30 minutes and the victim was often still conscious when his still eating heart was torn – the last thing he would see.  ‘Him’ and ‘his’ are correct as women were either burned or crushed to death.

In such circumstances, we might think that giving an answer that carefully avoided an admission was not entirely unreasonable.   However we might have doubts that the FSA is entitled to use equivocation in answering questions put by members of the Treasury Committee.

First Evidence of FSA equivocation

The FSA clearly is using equivocation.   Look at this extract from the uncorrected transcript of evidence taken by the Treasury Committee on 23rd November 2010 in its Financial Regulation inquiry – emphasis added:

Q712 Mr Mudie: …. did the FSA have a view on whether Barclays should have been able to purchase Lehman Brothers?

Mr Sants: Yes, we did. Yes, most definitely, and we had the same view-I had the same view and the FSA had the same view-as the senior management of Barclays, namely that it should not purchase Lehman Brothers if there was any possibility of it putting Barclays at risk, and at no point did Barclays ever suggest to us a deal that was of that sort of nature.

Q713 Mr Mudie: No, but that’s not the question. The report has come through that Bob Diamond had negotiated a bad Lehman Brothers that was left in the Americans’ hands and Barclays were going to buy the good part of Lehman Brothers, and that was what was  turned down. Is that a mistaken report?

Mr Sants: Yes.

Q714 Mr Mudie: So it was always a purchase of bad assets?

Mr Sants: As John Varley has reported a number of times-and my recollection of events is completely in line with that of John Varley’s, and since we were talking and we were the decision makers here that would seem to be where you should look to establish the facts-at no point did Barclays make a clear proposition to us in relation to the acquisition of Lehman Brothers that we then turned down. There was no structure, as I understand it, which John Varley and the board found acceptable and therefore they didn’t put one to us. If they had put one to us we would have evaluated it on the criterion I have just described, but we did not have a definitive proposal put to us.

Note the shift between the first and second answer.   ‘Ever suggest’ is re-defined as ‘a definitive proposal’.  Let us now take up Mr Sants’ suggestion that we sho0uld look at what John Varley said.   John Varley was asked about Lehman’s on 9th February 2010, in the course of an earlier inquiry into the banks (Too Important to Fail’)  We may note that he gave a consistent account, revealing that there had been discussions with the FSA.

Q250 Jim Cousins: Yet, Mr Varley, if you had been successful in taking over ABN AMRO and if you had not been stopped by the regulators from taking over Lehman’s before they went bust, you would be toast.

Mr Varley: There are two contentions of fact behind your question, Mr Cousins, which I would challenge. So, as you ask me, I hope you will allow me to answer. On ABN AMRO (I seem to remember that the Chairman has asked me this question before in this Committee), it was not luck that we did not buy ABN AMRO; we went into the contest for ABN AMRO with a very clear view, formed around the board table, as to how much we would be prepared to pay. We also formed a view about how we would structure what we paid, as between shares and cash, so that if the valuation placed by the markets on banks fell then the value of our bid would fall because a lot of it was made up through bank equity, the shares of Barclays. That was what did happen. Could we have chased? Could we have increased the cash quantity? Could we have fallen in love with the deal? We could have done all of those things. Did we? No, we did not. That was not luck; that was a decision that we took.

Q251 Jim Cousins: But the FSA did God’s work in stopping you rescuing Lehman.

Mr Varley: That was your second contention, which I would disagree with as well, Mr Cousins. The FSA did not stop Barclays from buying Lehman’s. We had, again, around the board table, formed a very clear view about the conditions precedent to our being prepared to go ahead, and in my dialogue with the FSA, particularly with Mr Sants, who is the Chief Executive, I said to him that if those conditions were satisfied – in particular, if the American Government were prepared to support the transaction with economic support – then there were circumstances in which we might be prepared to proceed, and if those conditions were satisfied I would then ask for his consent to proceed. As you know, the American administration was not prepared to give that support and I never asked Mr Sants for his consent to proceed.

Equivocation

Why does the FSA stand convicted of equivocation?  Mr Mudie was clearly probing to ascertain whether there had been proposals – perhaps associated with Bob Diamond – that the FSA would have regarded as so imprudent that it would have intervened.

Mr Varley’s evidence can only imply that there were some ideas that were sufficiently developed for these to have been discussed.   Mr Varley seems to have been completed open with the Committee.

Mr Sants cunningly avoided helping the Committee on the matter that obviously interested one member – namely the nature of earlier proposals and the role of Mr Diamond.  As Mr Diamond is scheduled to take over from Mr Varley – a man to whom not just the Barclays shareholders but the whole country owes a considerable debt for his competence and integrity – it is not unreasonable for the Committee to have been curious on this matter.  It would equally not have been unreasonable for Mr Sants to have told the Committee that he was not prepared to set a precedent for reciting confidential discussions with firms, or to have insisted that such matters only be discussed in private.   But he did not do that – he equivocated.

A second area of equivocation

Towards the end of the hearing, with time very limited, Mr Love raised the question of staff retention.   The exchange repays study, as it demonstrates both how well the FSA prepared itself to make the points it wanted to get across regardless of the questions answered and a degree of skill in spinning things out.

The equivocation in this case lay in something that was not said.   Note at Q745 Lord Turner referred to the departure from the FSA of Mr Strachan.   When Mr Sants got back to Canary Wharf, he notified the staff than Dan Waters, the most senior of the long serving regulators, was leaving.   The terms of the statement make interesting reading and one might suspect disguise a blazing row.

If either he or Lord Turner had told the Committee of Dan Waters’ departure, there might well have been a spot of trouble.   The equivocation lies in referring to the Strachan resignation but failing to mention the imminent announcement of Dan’s demise.

Transcript from evidence

Q743 Mr Love: Mr Sants, we’ve discussed this morning all the complexities of the structural reform that we’re talking about and now that the consultation is finished, that may be tweaked in some way. We’re just about to go on to talk about mismatch in Europe and the challenges that face you regarding that. You have a major programme of activity: we’ve talked about RDR; there’s a mortgage market review. And against that backdrop, you’re having some staff retention problems. Are you going to be able to complete this structural reform by 2012, facing all of those challenges?

Mr Sants: Yes, but it is very difficult, for the reasons you’ve outlined.

Q744 Mr Love: Can I ask you then because, Lord Turner, you said in an article that there are some risks to business as usual from bringing in this structural reform: where do you see the real challenges that you face to bring it in by 2012?

Lord Turner: The challenges, which were extensively discussed by the board two weeks ago on the basis of very detailed presentations from the executive, are essentially these. A process of organisational change will absorb the time of many of our major managers. For instance, they will have to sit down with people and discuss with them where they are going in the new organisation and where they want to go. They will have to design training programmes and some people may challenge where they are going to go. Those processes, those actual personnel processes of selection and decision and challenge, simply take time- anybody will tell you that-and that is taking key resources away from business as usual activity. That’s a fact.

The crucial thing then is to plan that out very clearly, and we were discussing two weeks ago very clear plans to make sure that we have thought through whether there are things that can be temporarily de-emphasised, either on the policy side or on some of the issues to do with frequency of supervision for some of the lower risk authorised firms, which will free up that resource that is required. It varies according to the different bits of the organisation. There are some bits of the organisation where essentially they will, what we call, lift and shift. Pretty much the whole of our prudential policy division we know is going, in its entirety, to that side.

Mr Love: Excuse me for interrupting.

Lord Turner: But there are others where there is a major split, that’s what we have to manage.

Q745 Mr Love: Excuse me for interrupting you, but we are limited in time.

Lord Turner: Yes, sure.

Mr Love: I wanted to focus specifically, since you’re talking about staff retention, on the financial stability division, which has two major problems. First of all, the head has announced that he’s leaving and, secondly, this is the part that will merge with the Bank of England, and therefore there’s a possibility of redundancies; let’s say there’s uncertainty about the future. How are you coping with that and is that a major strain on you?

Lord Turner: It’s not a major strain at the moment. We are sad to lose the head, David Strachan, but there are very good people beneath him. We are continuing to do our work in that area. We are continuing to head towards, for instance, our prudential risk outlook in the spring. The work that they are doing is of very high quality. We will, with that group of people, have to be completely honest about the fact that there may be some overlap with the Bank of England and we will have to manage that through.

But I can assure you at the moment that is not an area where I would be worried about interruption to business as usual. I would be more worried about interruption to business as usual in our core supervisory teams where what we have to do is split them in two and decide who is going which way. That’s where we are more concerned and really focusing to make sure that things don’t slip through the cracks.

Q746 Mr Love: Mr Sants, can I ask you the first question by a roundabout route. Say you complete it by 2012, will there be so many stresses and strains within the organisation that you won’t function to an optimal level in terms of regulation?

Mr Sants: Clearly between now and 2012, as Adair has just laid out in some detail so I won’t go back over that again, we have a finite number of people and they are going to have to do an additional task in that period. The additional task in that period is this reorganisation. Reorganisations are very time consuming. We have to prioritise delivering that reorganisation in order to hit the 2012 deadline, which I believe we can do, but if we prioritise carrying out the reorganisation that involves partly, for the reasons you have just said about staff uncertainty, managers spending a lot of time internally-putting staff at the forefront of their minds-then there will be less time to carry out other functions.

Going forward – a questionmark

The conduct of the FSA before the Treasury Committee on 23rd November 2010 calls into question the ability of any Committee with the current powers of a Select Committee adequately to supervise an institution that uses equivocation.

It may be suggested that Ministers have been known to use equivocation.   Indeed they have.   But the House has means of dealing with this.   If the equivocation is egregious and the House misled, the offending minister may well be required to make an appearance at the Dispatch Box and explain himself or herself.   More minor examples leave the erring minister exposed to trouble on the next appearance at ministerial questions or a minister may simply acquire the reputation of being slippery.

There must now be a serious question mark over the ability of Parliament to control the monstrous progeny of Gordon Brown.

The FSA is an affront to Parliament

November 27, 2010

Introduction

The creation of the FSA as a state within a state is an affront to this country’s Parliamentary constitution.   The FSA can levy taxes, make law and impose punishments.  It has found ways of evading the restraints that the Financial Services & Markets Act 2010 attempted to impose by establishing an independent tribunal.  It has threatened individuals with ruin but denied them an effective right of recourse to their MPs.  Parliament needs to reassert control over this state within a state.

 

The decision of the Backbench Business Committee to arrange a full debate on FSA operations on the afternoon of 29th November 2010 is a long overdue assertion of the rights of the House of Commons over the great Leviathan that lurks in Canary Wharf.   This is not a debate on a technical, regulatory issue: it is ultimately about the most fundamental question raised by the constitutional vandalism of New Labour – can the power and privilege of Parliament be maintained and restored?

New Labour was a deviation from the tradition of the Labour Party. Before the election, many Labour MPs, in common with many Labour voters, had realised that New Labour represented a departure from Labour’s previous unwavering commitment to freedom and personal liberty.   Churchill’s infamous Gestapo gibe proved a boomerang loaded with high explosive when he threw it at Clement Attlee precisely because the country knew that Labour was deeply committed to a Parliamentary constitution.     The FSA was created by gangsters that had hijacked the Labour party.  The departure of the gangsters enables Labour to recover its Parliamentary tradition and a consensus has emerged on the need to strengthen Parliament – building on the work of a former Labour MP, Dr Tony Wright, who was denied office under New Labour despite his evident superiority to many who were advanced.

Under its highly political chairman – one the last survivors of New Labour – the FSA is in effect now running its own economic policy. The FSA is making it far more attractive for banks to finance credit cards and high risk gambling on the markets than lend at low rates to firms seeking to invest and families seeking to acquire a modest home.  This threatens to undermine the policy of the elected government which is to keep interest rates down to make investment attractive.

Unsurprisingly, the FSA has acquired some of the least attractive habits of the old Soviet nomenklatura and on occasion come to resemble nothing so much as the Stasi.   It has a very comfortable relationship with a number of big firms and consulting operations that provide employment to FSA staff.   The latest issue of Private Eye (Slicker – In the City) once again exposes the complete failure of the ‘Fundamentally Supine Authority’ to take action against those whose incompetence in running the banks has cost the country billions.[1] Regulated firms are compelled to give lucrative contracts to consulting firms that employ former FSA staff – and to allow the consultants on contract paid for by the firms to have private discussions with FSA staff as to what reports they are to write.

When the FSA’s chief executive appears before the Treasury Committee, appropriately deferential noises are made.  The reality is different.  The FSA was created by Gordon Brown as a state within a state, a very different animal from anything that had gone before where there was always a minister who could be held responsible.   Under the previous regulatory statute, initially the DTI and later the Treasury was always able to resume control of financial regulation and insurance regulation remained part of the DTI.    The FSA is a constitutional innovation, and the thrust of this paper is that smooth words from a smoothy chairman disguise a monstrous constitutional aberration created by a regime that despised Parliament.

States within states increasingly display the vices we associate with the Soviet nomenklatura in the Brezhnev years and the Stasi – thorough, comprehensive nastiness, feathering of their own nest, declining effectiveness, increasing subordination to powerful outside interests matched by vicious playground bullying.   We are seeing this all of this with the FSA.

The tip of an iceberg

The flood of emails to MPs from irate IFAs is the tip of a singularly ill-concealed iceberg.   As under any regime armed with arbitrary powers, many of the oppressed are silent through fear or expediency.   Unlike many others who fear that protest will cost them their livelihood, many IFAs have decided that they have nothing to lose.  There are many more who feel as the IFAs do but have not yet dared to speak out.

Although as we shall see the priority must be for Parliament is to recover control over a part of the executive state, earning one’s living and pursuing one’s profession is an important freedom in any society.   Denying that opportunity is not a trivial matter, and even on the FSA’s own estimates, the RDR will cause many thousands to lose their livelihood.    The debate  is important because the treatment of IFAs throws a bright light on one unpleasant aspect of the un-Parliamentary creature that has established itself in Canary Wharf.

So the debate should not be seen as one on a technical issue, concerned with financial services.    The FSA is using powers given to it by Parliament, but most unusually there is no Parliamentary control over the FSA’s ability to make law.   The debate on the FSA and IFAs is a debate over whether a part of government should, without specific Parliamentary approval, terminate the livelihood of many thousands of Her Majesty’s subjects.   I use this old fashioned language to make a specific point: in this kingdom the relationship between government and governed is largely based on a convention that we will obey the government provided that it acts with the consent of Parliament.   The FSA violates that convention not just with respect to IFAs but the generality of both providers and users of financial services.

Most of the evils that have been brought about by the FSA are a direct consequence of Parliament agreeing to abdicate its role of scrutiny and supervision over the FSA.   A re-assertion of Parliamentary control is a necessary condition for successful reform.

Part 1 concludes with some comments on the FSA’s use of lobbyists.

Part 2 discusses FSA policy to deny its intended prey the opportunity to raise their treatment with their MPs.

Part 3 is a comment on the RDR (‘Retail Distribution Review’) itself and the IFA sector.

Part 4 sets out some areas where the FSA and FOS have grossly exceeded their brief – in the case of FOS by running the operation in an entirely different way from that described to the Committee of the House that examined the relevant legislation; in the case of the FSA both by misuse of powers and going without any consent of Parliament well beyond anything contemplated when the original legislation was debated.

Part 1: The Constitutional Dimension – the absence of Parliamentary legitimacy

HMRC collects taxes that the Commons have approved.  Most regulators implement rules that a Minister has signed off. Some regulations have been approved by both Houses and there is at least in principle scope for either House to veto others.   Probably not one in 1000 – perhaps not one in 10000 of the electorate – could describe how our Parliamentary constitution works in detail, but everyone understands the principle that in this country law in made by Parliament.   The FSA is very unusual – IPSA is one of the few other examples – of an unelected body that a determined Parliament cannot bring to heel.   In other cases where a large degree of autonomy has been granted – for example to the OFT and Competition Commission – ministers have retained the ultimate right to override the Quango.

Not so many years ago, one could have stopped here.  Case made.   If the FSA’s successor is to command public confidence it must be brought under Parliamentary control.

Today it is necessary to set out the arguments, if only because so many MPs seem to have become frightened of asserting Parliament’s right to legislate and supervise the government in all its manifestations and their own rights as individual members to question and to challenge.   I notice that one MP has said that only the FSA can alter the RDR.  That may be a correct interpretation of the present unconstitutional statute, but it is a depressingly wrong statement of the constitutional position.   It may call for a display of bloody mindedness but at the end of the day if Parliament wants something changed then it ultimately has the power to insist.

The intense lobbying by IFAs is an illustration of how ordinary people in this country still think that Parliament really matters.

In recent years the self-esteem of MPs has been eroded by the media, a government determined to prevent proper Parliamentary scrutiny and most recently by IPSA.  MPs should disregard all of these and focus on the approval of their voters.

The unambiguous evidence of the general election – when the people of this country voted most sitting MPs did much better than their party’s new candidates  – is that voters trust MPs who do their job.

 

An excursion: Parliament really does matter

The expenses scandal shows how highly Parliament is valued

The value that this country attaches to Parliament – although not some of its members – was demonstrated by the expenses scandal.   Although the expenses rules and the conduct of some members were indefensible, internationally this was far from atypical – politicians across the world usually seem to do pretty well for themselves.  At home civil servants have had their perks, generals their gardeners, and so on.   Councillors do not do badly.   Well documented cases of MEPs’ excesses had produced only resigned groans.    Why then the massive detonation when the Telegraph revealed what was being claimed?   Why a row over MPs?   The only credible answer is the immense public respect for the institution of Parliament.   To the charges of greed and peculation that could be made against many others was added the charge of betraying the country by taking advantage of the high honour of being a Member of Parliament.   The anger seemed general – but come the election, large number of incumbent MPs had no problems at all and assiduous sitting Members proved hard to dislodge.   Voters valued their Parliament and   ‘good constituency members’ found that their constituents noticed their service.

In England Parliament has been the guarantor of liberty

England is the only nation than can plausibly claim to trace one of its legislative chambers back a thousand years and the other seven centuries.   For most of that period England has had a Parliamentary constitution.   In The Vindication of the English Constitution Disraeli identified the reign of Henry VI as the point at which England became a fully fledged Parliamentary constitution – the old system of petitioning disappeared and only Parliament could legislate.   The king was presented with Bills that he could accept or reject but only in their entirety (page 89).  Of course a king could have a Bill presented – but both Houses had to give their consent and both could amend.    The power of Parliament declined drastically under the Tudors.  Disraeli suggested that one reason was Henry VIII’s habit of executing any MP who opposed him (page 90/91).   But Henry was more subtle – he reorganised the constitution so that each estate (Lords Temporal, Lords Spiritual and the Commons) was led by his nominee[2].  But even at their most despotic the Tudors did not dare to replace Parliamentary legislation by government by decree.    When at the end of the sixteenth century the Jesuit Robert Parsons set out proposals for the perfect reformation of England, he started with the premise that Parliament was the fount of all laws.  He proposed reform of the Commons by establishing free elections, abolition of rotten boroughs and representation of major towns and giving control of Parliamentary time to a committee headed by the Speaker.   This became in time the accepted agenda – even if it has taken 400 years to create a business committee.    In England, Parliament is the central institution and Cromwell’s brief experiment with military rule died with him.

It was the House of Commons that in May 1940 removed from office a Prime Minister whom it judged inadequate to the task of defeating Hitler and sustained until victory the Prime Minister who won the war.    We have recently gone through a period of decline in the power of Parliament, very similar to that under the Tudors.   An over-mighty executive was allowed to dominate the Commons and fix the rules of procedure, just as the Tudors dominated their Parliaments.   In The Vindication, (pages 102 to 106), Disraeli described the creation of a Parliament by Mehemet Ali, Pasha of Egypt, in 1831.  The upper

What do Mehemet Ali, on time Pasha of Egypt and Harriet Harman have in common?

house comprised the chief officers of the capital; the lower ‘the most respectable of the provincial population’.   ‘To prevent inconvenience’, Mehemet Ali decided to elect them all himself.  The lower house was permitted to propose, but not debate; the upper to debate but not vote.      Mehemet Ali’s ghost must have enjoyed Harriet Harman’s leadership of the House.

Since 2008, the House of Commons has re-asserted its authority.    A new Speaker has repeatedly forced ministers to attend the House and answer questions on policies that they had impertinently pre-announced on the Today Programme.   A large number of questions are again answered every day.     Dr Tony Wright led a Committee that proposed radical change.   The last Parliament agreed to the election of select committees but the government whips prevented a resolution setting up a Backbench Committee to take control of part of the timetable.   In Opposition Sir George Young committed an incoming Conservative government to create the Backbench Business Committee and, to the surprise of those who had only the standards of the outgoing regime to judge by, his promise was promptly implemented once he became Leader of the House.   The Coalition Agreement undertook to build on this reform by creating a full Business Committee.   And the Backbench Business Committee has happily fulfilled the worst fears of Sir Humphrey Appleby.  It is providing time for the Commons to make ministers listen to somebody other than Sir Humphrey.

An important debate

The debate on 29th November will be the first opportunity the House has had to look at the monstrous Leviathan since its creation in 1997.    More importantly, this event demonstrates how the Commons has been regaining control since the election.

The Backbench Business Committee was initially reluctant to arrange this debate because there had been a half hour debate in Westminster Hall on 20th October 2010 on the treatment of IFAs.   The minister who replied had infuriated IFAs with the following immortal words:  “The current minimum financial adviser qualification is at the same level as a Diploma in Shift Management offered by McDonald’s”.   MPs were bombarded with complaints and the Backbench Business Committee accepted that the case for a full debate was made.

What a contrast with the situation when Harriet Harman decided what MPs would be allowed to debate.

On 2 June 2010 Mr James Paice initiated a debate in Westminster Hall.   Colleagues, namely Dr Andrew Murrison, Nick Herbert and Ed Vaizey, were allocated two minutes each, an unusual event.  In addition, Eric Pickles and Sir Paul Beresford intervened.  They had an appalling story to tell of how a senior manager of HBOS had used his position to force small firms to employ his favoured consultant, Quayside.

Mr Paice more than made good his promise: ‘As I shall show, Lynden Scourfield was responsible for making what may or may not have been poor financial positions into impossible ones, and in doing so probably enriched himself and others.’

Mr Paice also had this to say ‘This allegation follows other stories that Mr. Scourfield was benefiting from being, as the bank said, “overly supportive”, including, I am afraid, lurid stories of prostitutes being paid for from the funds of Quayside clients. I am well aware that a number of these allegations cannot be substantiated to any great degree, but to be clear I have not repeated many further allegations for which I could find no evidence at all, but which might still have some substance.’

How did the Minister respond?   ‘The debate has raised issues and allegations that require full examination of the evidence, and I am happy to pass on any evidence that is not already available to the FSA. If appropriate, I am also happy for the FSA to refer matters to the police. ….I shall ensure that the FSA writes to the hon. Gentleman, and we will write to other hon. Members when we have some responses.’

This was the best that Ian Pearson could do – a man who had won a constituency at a by-election and held onto it with comfortable majorities for three general elections, winning golden opinions from constituents for his fight for the local hospital.   No wonder he gave up the fight in 2010, a broken man, having been forced to regurgitate such tripe in defence the then PM’s protégé, Lord Turner.   One can only hope that when Brown and Harman had them cut off, Ian Pearson was allowed anaesthetic.

If a junior minister under Mrs Thatcher had responded to such allegations by merely saying – as Ian Pearson did – that he would get the SIB (Securities and Investment Board, FSA’s predecessor) to write to senior and experienced MPs raising such serious allegations, that junior minister would have been returned to the backbenches.   But under Gordon Brown it was not for ministers to insist that the great Lord Turner should, as our American cousins put it, ‘get his ass into gear.’

There was nothing more that MPs could do under the previous regime – there was no mechanism for moving a specific motion in the Chamber.

After the implementation of the Wright report, MPs who are unhappy with the reply they received from a minister in a Westminster Hall debate have persuaded the Backbench Business Committee to grant a full debate in the Chamber.     This is a horrible experience for the FSA.  But it is very good for Parliament.

The FSA was the first institution Gordon Brown established on the model of the Star Chamber.   IPSA was the last example of a law maker armed with the power to inflict severe sanctions without any Parliamentary process.

 

The FSA – a re-creation of Tudor tyranny

It is a frequently voiced criticism of Mr Blair that he wasted the big majority he won in 1997.   This is not a criticism that can be made of his deputy.   Gordon Brown famously displayed the ruthlessness of Henry VIII to any junior colleague who dared disagree with him.   He was not able to have dissidents executed, but he ruthlessly used the technique of exclusion.   In A Man for All Seasons when More refused to do a Henry wished, he is treated as a pariah by the court and the boatmen refuse to take him back to Chelsea from Hampton Court.   Jonathan Powell must have known just what More suffered when he fell out with Brown.

We now know that Mr Brown’s treatment of those he saw as his enemies in the Labour Party was part of a much deeper psychological problem –dementia dictatoris. This manifested itself not just in treatment of colleagues.  He followed his exemplar Henry VIII in establishing and developing an impressive array of devices to assert his personal control and destroy the constitutional structures that had shown a potential to deliver constitutional government and when restored were actually to do so.   The FSA and IPSA have a precedent in Henry’s Star Chamber.   Henry executed MPs who opposed him – IPSA merely proposed to use the media to humiliate its victims long before they can obtain a court hearing.

The FSA was created by fiat of Gordon Brown in 1997.    It promptly acquired – by agreements of questionable legal validity and log before the Commons had consented to legislation – the powers of exiting regulators.   The legislation that gave it its proper statutory basis, the Financial Services & Markets Act (FSMA), only received the Royal Assent in 2000.   The predecessor regulators had come into operation in 1988, two years after Royal Assent to the Financial Services Act 1986.   Just like Henry VIII Gordon Brown hijacked existing institutions and perverted them to exclude and even undermine Parliament.    This is not to deny that many of the provisions of FSMA were a distinct improvement over the earlier arrangements – just as many of Henry VIII’s acts greatly strengthened England – but the virtues of FSMA are greatly outweighed by the vices of its creation.

The end of political economy?

The FSA has proved to be an economic disaster for the country and its policies now threaten our social cohesion.    One cause is the absence of political and Parliamentary control.

It is unsurprising that the use of such powers has caused deep resentment among those regulated by the FSA.   They are also damaging to the people as a whole, just as the Tudor economic institutions (sales of monopolies etc.) proved to be.   As Adam Smith and Hayek predicted, the use of such powers in the economic sphere has had deleterious consequences.

The lowest central bank lending rate in history should be stimulating a rapid expansion of industry.   In the 1930s, when Neville Chamberlain maintained a 2% rate, the British economy grew by 4% a year as cheap money allowed the growth of what were then new industries – especially electrical goods and cars.   There is no shortage of entrepreneurs who could and would grow new businesses and expand existing ones in what should be an even more favourable monetary conditions (0.5% lending rate and a competitive exchange rate) but growth is lacklustre.  Why? Because the FSA has imposed regulations on lenders that makes it very attractive to operate credit card businesses charging 20% plus per cent but all but impossible to provide finance for industry and commerce at 5%, let alone the 2% to 3% one would expect from a 0.5% central bank lending rate.   The FSA is also blocking loans to young couples wanting to buy their first homes and young families wanting to move to a modest house.   At least to those who are not blessed with parents and grand parents able to hand over the odd £50,000.

Against this, dirigists argue that the ballooning of public spending, with an inevitably huge deficit if anything happened (as it has) to diminish revenue, coupled with the huge growth of bank lending, has made most of the measures taken by the regulators unavoidable and it does not matter who makes the rules.  What matters is that ‘sound’ technical rules are made to prevent another crash.

There is a via media between the free market position and the dirigist position.

From 1950 until 1999 – notwithstanding well documented failings – there had been an impressive spread of ownership, rise in incomes and employment and a growth in prosperity unparalleled in our history.      A reasonable person might argue that a major reason for the social progress that was made in this half century was that economic decisions that prevented a free market  were ultimately taken by ministers accountable to Parliament and not by unaccountable ‘experts’.    Politicians wanted both growth and to see the electorate as a whole benefit from growth, and all things considered they did not do a bad job in the second half of the twentieth century.

The reign of independent ‘experts’ has been less happy.   The explosion in public spending and debt took place after economic decision taking was substantially removed from political and ultimately Parliamentary control.   The decisions of independent ‘experts’ largely got us into our present mess.

There is a social dimension to this.   The Coalition’s spending decisions have received intense scrutiny.  Changes to child benefit can only be implemented if there is a majority in the Commons.   The FSA’s rules that have the effect of denying young couples a home unless Daddy and Mummy can write a cheque for £50,000 cannot be challenged.     The Commons could force the MoD to increase the strength of the RAF against a possible threat.   It can do nothing to stop the FSA doing imposing rules that ensure credit cards are more rewarding than lending to SMEs – a policy that threatens to destroy more jobs than the Luftwaffe managed.

The FSA has its defenders – Mr Anthony Hilton has argued in the City pages of the Standard that FSA restrictions on mortgage lending were desirable to protect consumers on 24th November 2010.   He made good points, but did not address the central point I am making: the rules should be made under some form of Parliamentary control.   Anonymous apparatchniks – comfortably shielded like the old Soviet nomenklatura from what they inflict on ordinary people – should not be allowed to determine that only wealthy families should be able to access the funds needed to buy homes for their children.   If the system were controlled by Ministers accountable to Parliament we might have rules that provided for responsible lending but ensured the system allowed the children of, say, nurses or teachers to acquire their own homes.   The FSA policy is to confine home ownership to, for instance, children of lawyers and GPs.

Politicians have been more responsible economic managers than independent experts.  When they had the final responsibility politicians may occasionally have made errors of judgment but nobody who looks at the successive squeezes of Selwyn Lloyd, Roy Jenkins, Denis Healey, Geoffrey Howe, John Major, Norman Lamont and Ken Clarke could for one minute think that any of these chancellors lacked the courage to take painful decisions.

 

The independent regulator is an import from other constitutional systems – notably federal states.   The Vindication’s most convincing arguments are directed against importing institutions rather than relying on what we would call organic growth of established institutions.   If Disraeli were still alive and produced a new edition of The Vindication in 2010, to the catalogue of catastrophes brought about by attempt to important English and American institutions would undoubtedly be added Gordon Brown’s disastrous import into the British constitution of law making bodies not subject to Parliamentary control.

The creation of this independent regulator has not shielded politicians from blame when things go wrong.   Lord Turner, the chairman of the FSA, defended the FSA for allowing the banks to run amok by pointing to the political climate in which the FSA operated.   His argument was that the independent regulators really should not be blamed – it was politically impossible for them to close the bar just as the party got exciting.

Experience with an ‘independent’ regulator of bank credit growth after 1997 on Lord Turner’s admission shows that it failed to take the necessary decisions.   On past form, if politicians had been responsible for taking decisions in this area they would have acted responsibly and conscientiously.  As it was, with Gordon Brown telling everyone that he had abolished bust, and the independent FSA not doing its job to control the banks, politicians were led into a false sense of complacency that everything was all right and in any event they were no longer responsible.    Disraeli’s pamphlet, written 170 years ago, allows us to see just how disastrous Gordon Brown’s import was bound to be.

The mortal sin of cowardice

The FSA makes political cowardice too easy

In late 1914, the great Jesuit controversialist Fr Bernard Vaughan wrote a vigorous defence of Britain going to war in 1914.   He had no truck with those who were unwilling to take necessary decisions to secure the defence of the nation – such a failure, he argued, constituted the mortal sin of cowardice.    He rightly warned those in positions of authority who know that the economic and financial policy being pursued was disastrous but were too frightened of losing votes to act that they put their immortal souls in jeopardy.   It is a striking feature of churches today that whilst there has been plenty of condemnation of greed, few have told politicians to look to their role as leaders – a conspicuous exception to this being the Cardinal Archbishop of Edinburgh.

David Cameron and George Osborne were only elected in 2001 so had no role in the shameful assistance the Conservative front bench gave the passage of FSMA in the previous Parliament.

Anyone who adopted the approach of Fr Vaughan or the Cardinal would not throw all the blame for our recent financial disasters onto Mr Gordon Brown’s abdication of responsibility to manage the economy or the party that so supinely supported him.    The Conservative Opposition failed in its duty to oppose.  With a few honourable exceptions, the most important of whom is Mr Peter Lilley, although Andrew Tyrie, Michael Fallon, Howard Flight and Tim Loughton deserve honourable mention, the majority of the Parliamentary party and shadow cabinet collaborated in passing the disastrous legislation.   Had Mr Lilley remained shadow chancellor perhaps the opposition would have done its duty.   A low point was reached when the Shadow Cabinet – from which Mr Lilley had been ejected – allowed the Government to carry the Bill over.

It would be pleasant to say that Mr Cameron and Mr Osborne were entirely innocent of collaboration.   Sadly  in the run up to the 2010 election, the Conservatives succumbed to temptation.   Included in ‘the wash-up’ was a piece of legislation, now the Financial Services Act 2010, which gave the FSA the objective of maintaining financial stability.   Press reports state the chief executive of the FSA, Mr Hector Sants, told the Treasury Committee on 23rd November this year that the FSA should not have had this objective.   It would have been generally convenient if he had said this when it might have given the Opposition the backbone to veto an ill considered piece of legislation.   But Mr Sants, alas, only found his way to voice his thoughts after the demise of Mr Brown.   So those of us who voiced doubts about the legislation were told ‘it is politically impossible to block what will be presented as a piece of consumer legislation.’     Faced with a veritable flood of legislative proposals, and dire warnings of political consequences if they did veto the Financial Services Bill, it may well be that Mr Cameron and Mr Osborne relied on advice that there was no real reason to object to the reduced Bill – they can hardly be expected to have read every measure.   But they cannot escape some of the blame, even if the FSA was – with it usual contempt for Parliament – already behaving as if it had such powers.   Their advisors in this matter of course do not have their reasonable defence ‘I was badly advised’.   It would be both just and expedient for the Prime Minister to take Machiavelli’s advice to a prince who has fallen into disfavour with his people: execute your minister, and invite the people to see how you are revenged on their behalf on the man who did them such wrong.

It will be interesting to see what happens if MPs seek to assert the rights of the Commons to control the great Leviathan of Canary Wharf.    Ministers will be advised that their lives will be made very difficult if they resume control over financial regulation.    ‘Minister, you will have to defend decisions in the Commons.   Worse still – you may have to argue the case for new rules to sceptical MPs.  Leave it all to us.’   Lord Turner and his kind enjoy wielding power without responsibility – in Kipling’s great phrase, given to his cousin Baldwin, ‘the prerogative of the harlot throughout the ages.’     They will fight for their power and resist any attempt to subordinate them to Ministers and through them to Parliament.

Corruption and the revolving door

There is a revolving door between the FSA and the regulated.   FSA staff often move to positions in larger firms, trade associations and consultancies – and there is some traffic the other way.

The FSA has considerable patronage – and under S166 of FSMA can require firms to employ consultants.  The FSA has to approve the consultants and often provides regulated firms with a choice of consultancies.   It is not entirely surprising that the FSA recommends consultancy firms that employ former FSA staff.   It recently rejected a request from a regulated firm to use a consultant who had visited the firm and made an examination on the work to be done in favour of a consulting operation that had never visited the firm that it was to advise, had not been shown by the firm correspondence with the FSA, but employed former FSA employees.  The junior official who made the decision explained that she could find no evidence that the consultant who had properly scoped the project had experience of Collective Investment Schemes.  If she had asked she would have been given the name of one her colleagues who had indicated that the FSA might wish to use the consultant to facilitate a without prejudice negotiation to settle a problem with a CIS.  There is a distinct feel of FSA employees taking good care to support and sustain firms that might in due course employ them.  We are reminded of the parable of the unjust steward.

Bringing the FSA or the new regulators under closer Parliamentary control would would create pressure for probity.   Most MPs make significant financial sacrifices to serve the public.     They are unlikely to take a relaxed attitude to those who improperly use public office to secure personal benefit or form a mafia with the aim of collective enrichment.

 

It is also by no mean unknown for consulting operations employing former FSA employees to approach firms that have issues with the FSA.   It would be interesting to know how they acquired their marketing list.

This problem is not unique to the FSA.   Similar concerns arise when former ministers and civil servants take highly paid positions with companies with whom they had had official dealings, but at least there are some rules.  It may be said that what appear to be going on with the FSA is pretty small.   The alternative – and harsh – view is that such conduct is corrupt and incompatible with high standards that are required in public life.

At present there seems less scope for corruption with people coming in through the revolving door.   The problem here is different – talk to anyone in financial services and they will tell you that the FSA is recruiting those weeded out by banks and investment businesses because they had proved themselves incompetent in assessing loan applications..   In some cases the complaint is a generalised one – but in one case a senior non-exec was apoplectic to discover the managers who had caused heavy losses by failure to check the credit worthiness of borrowers and test the economic viability of business plans had found a comfortable berth on the good ship FSA.   A probable side effect of bringing so many people responsible for the ‘over supportive’ lending policies of some bank is to make bringing charges of negligence under FSA Statement of Principle 2 against the directors who presided over the destruction of their banks that much harder.

The use of lobbyists

The traditional channel for communication between MPs and public servants has been through a minister.   This establishes a clear responsibility and if a minister relies on a civil servant when he or she signs off a letter or written answer and the answer turns out to be wrong. the minister is embarrassed.    The advent of the select committee has meant that officials give direct evidence, but this is in a formal hearing, minutes are taken and ministers can and do intervene if they feel this is called for.

In contrast the FSA and a number of similar bodies use lobbyists and some have ‘directors of communication’ rather than simple press officers.   These ‘directors of communication’ are often employed lobbyists.

There are two problems with this.  The first is the lack of accountability – if a minister misinforms an MP, the MP knows who to kick.   If a Minister misinforms the House then that Minister is likely to have to come to the House, apologise and correct the information.   This process is supervised by the Speaker.   But if some anonymous lobbyist whispers in an MP’s ear there is no similar constraint.   Because the whole communication is secret, it is far less likely that an error will e detected than if a minister gives a duff answer in Hansard.

The second problem with lobbyists is that they hunt as a pack.  There has always been a tendency for groups to form and share information – in Whitehall, in the City, in politics.    But lobbying involves money in the form of direct payment – a source of corruption that other informal groups often resist.  There are many reasons why individuals lie – but money means lobbyists have a direct incentives to lie.  And when the FSA uses lobbyists who also serve firms the problem is intensified.  As lobbying costs money it gives an undue opportunity for the rich and the powerful to shape policy to suit their own interest rather than the common good.

IFAs cannot afford lobbyists.   It is sometimes suggested that trade associations can fill the gap.   As the Treasury Committee recently rather cruelly revealed these are populated by professional fixers who decide when to repeat members’ concerns.  This again creates a comfortable, private club where ‘we’ can sort out difficulties.  ‘They’ are of course excluded.   And ‘we’ can find that a certain compliance with the rich and powerful brings all manner of good things.   Unfortunately, from what the former chief executive of AIFA told me, it appears that in opposition professional fixers (e.g. said chief executive) were given easy access to policy groups while ‘ordinary’ people excluded from the policy making process.

For years big financial service firms have used lobbyists and employed in house lobbyists to influence government and MPs.   Involvement with the FSA often gives such people an edge.   Naturally the process is directed towards benefiting the well resourced firm.   This would be bad enough if it were limited to pressing for policy changes.   On occasion lobbyists have set out to destroy smaller competitors.    They still do – but alleging this is of course a quick way to find oneself silenced by a gagging injunction.    So we have to make do with older examples and remember that the leopard does not change its spots.

Some years ago, when MPs were still permitted to take consultancy positions with major firms and speak on matters directly related to their outside employer’s business in the House, a firm called Knight Williams started to make substantial inroads into a lucrative part of the savings market.  This firm was eventually destroyed after an MP retained by one of its competitors had alleged in the House that it was disreputable.

When the dust settled it turned out that the liquidator was able to settle all claims by investors and their assignees for the sum that had been set aside for claims in recent annual accounts.  The FSA’s Regulatory Decisions Committee then approved the former managing director to act as a director and chief executive of an IFA, having heard a QC argue against such approval.

Why had this happened?  Big competitors had engaged in lobbying of the regulators and MPs and a constant feed of criticism to the media.

Two MPs took a prominent role in this process.  Both were bamboozled by the firms that retained them.

One was retained by a large insurance company.  The then chief executive of the company’s lobbyist later told me ‘the only time X (the MP) earned his retainer was when he attacked Knight Williams’.   The other MP was retained by a bank.   He attacked Knight Williams in the House.   He stated that his bank was not a competitor.  Strange that as a director of the bank’ fund management arm had told a director of Knight Williams that KW was ‘the strongest independent competitor we have – and a more powerful competitor than most other banks and life offices.’    At the next Conservative Party conference, I found myself chatting at a drinks party to a member of that Bank’s ‘corporate affairs’ team.   Taking advantage of her slightly relaxed state, I turned the topic of conversation to the role of retained MPs and before too long she let slip confirmation of what I had suspected – ‘we were terribly embarrassed when Y (the MP) attacked Knight Williams in the House – we thought he would only talk to ministers and MPs in private.’

The FSA’s use of lobbyists is inappropriate for a public body – and encourages firms to use lobbyists to mislead MPs for commercial gain.

This sort of thing is not limited to attacks on individual companies.   As concern over pension mis-selling mounted in the ‘90s, and the question of regulation of advisors was opened up with the establishment of the PIA, lobbyists from major insurance companies set out to brief MPs that pension mis-selling was all the fault of IFAs.   In due course the PIA board was given an analysis that showed that the overwhelming majority of pension transfers had been effected not by IFAs but by the sales forces of the big life offices – the very people who had encouraged their lobbyists to tell MPs that IFAs were at fault and had used their funding of an all party group to promulgate this lie.   Fortunately this information leaked – those Members with long memories may relish the story.  The then chief executive of the PIA was Colette Bowe.   She had first become a public figure when it was revealed that as press officer to the Trade and Industry Secretary Leon Brittan she had leaked advice from the law officers to the press during the Westland affair.  This grave impropriety occasioned the resignation of Leon Brittan – one of the last occasions on which a Minister honourably has taken full responsibility for an official’s error.   In due course Colette Bowe was handed the job of chief executive of the PIA.   When figures escaped from the PIA Board she exploded with rage at ‘a gross breach of confidence.’   Unkind persons were heard to mutter about ‘hypocrisy’.

While MPs may no longer take retainers, nothing has been done to restrain lobbyists from whispering untruths or half truths into their ears.    Understandably IFAs are worried that they will not receive a fair hearing.  Hence the determination to get their message across loud and clear.

And the involvement of the FSA in lobbying should be a cause of great concern.   Some years back, when I ran Justice in Financial Services, a noisy pressure group focussed on ensuring that individual and small firms should be able to obtain a fair hearing, I was astonished to learn that the FSA was engaging a lobbying firm to ‘deal with your campaign for Sir Michael Richardson’.  My informant was quite clear that the brief was to discredit and disgrace me.   I appreciate that the FSA’s brief may have been misinterpreted, but even if it had been, what is a public body doing paying lobbyists?

I have some reason, I should add, to believe that the story was correct.  Justice in Financial Services had some discussions with a number of leading City law firms about establishing a service for individuals whose actions might come under scrutiny.  The big firms acted for the corporates, and as lawyers they were conscious that there was always going to be the potential for a conflict of interest between a corporate and its employee in any enforcement case as the FSA had power to inflict penalties on both.   The law firms involved thought that there would be benefit in JIFS running a service to support employees in obtaining their own advice from Barristers, using the direct access scheme.   The employee would always have an independent barrister to give advice and if necessary appear before the Tribunal but there would be no need for extra solicitors.    When this idea was discussed with the FSA, the FSA’s response was immediate and unequivocal.   It would strongly oppose any such arrangement and any law firm considering supporting Justice in Financial Services should consider the interest of its clients.

This is the mindset of the Stasi.

Part 2: the FSA and access to Parliament

There are stories that the FSA has on occasion told an individual that he may not go to his MP.  If this has happened, it is not part of the current standard operating procedures of the FSA.   If an actual case is identified, clearly a serious issue of Parliamentary Privilege arises.  However, as a recent case shows, the FSA’s standard procedure may not be substantially different from direct prohibition of contact with an MP.  So an issue of privilege arises.

When the FSA emails a constituent ‘We are happy for you to consult with your MP at any time, however, we are not prepared to delay our investigation to permit you to do so’ it is rather like a judge saying ‘you are free to appeal  the sentence of death but you hang at 8 o’clock tomorrow’

 

On 28th October 2010 the FSA demanded that a firm hand over documents and the director attend for interview.  The firm was not authorised or regulated by the FSA – the FSA was pursuing an investigation into a possible breach of the General Prohibition.   The firm that received the demand had a service contract with a firm that was selling land.  The FSA advised the director to come with a lawyer but refused to cover the costs of a lawyer.

The director concerned went to see Counsel and was advised that the FSA had very great powers under FSMA.   The courts would only interfere if the FSA exceeded them or failed to comply with some specific requirement.   The director explained that if he complied with the FSA’s demands his firm and indeed he himself would face almost certain ruin.    Counsel observed that the FSA’s paperwork was defective and that until the FSA put this right the director had grounds for not complying with the FSA’s demands – but the FSA could easily put this right.  Counsel suggested that the director approach his MP as the way the system should work is that the courts prevent a public body acting unlawfully but policy was really a matter for Parliament – and the starting point was the constituency Member.

On 11th November 2010 the director sent an email to the FSA making these points and asking that the FSA confirm that its prohibition on communication with third parties did not prevent him approaching his MP.   On 12th November at 0925, the FSA replied, stating that he was able to approach his MP, but demanding that he hand over documents by 1700 hours that day.   The email contained these words: Please note the deadline for your provision of information remains 5pm today. Counsel was not immediately available to advise and this did not allow time to contact the MP.   So the director replied by email timed at 1334 that the FSA’s behaviour was outrageous.   At 1422, the FSA gave time to consult counsel but wrote:   We are happy for you to consult with your MP at any time, however, we are not prepared to delay our investigation to permit you to do so.

So although the FSA has not told an individual ‘we forbid you from approaching your MP’  – which would appear a clear breach of Privilege – its refusal to allow time for an MP to consider the case and approach the FSA or Ministers on behalf of a constituent has in practice the same effect as ‘we forbid you from approaching your MP’.   Arguably ‘we are not prepared to delay our investigation to permit you to do so’ is a substantive breach of Privilege.

I would add that there is no obvious urgency in this case that might justify the FSA in acting before discussing the situation with the MP.    A senior FSA official signed a document authorising the investigation of the firm in question in early September and the FSA did nothing for seven weeks.

MPs might consider that the FSA’s conduct needs to be examined to determine whether a process clearly intended to render access to MPs ineffective is as much a breach of Privilege as a straightforward ban on approaching MPs.

Part 3: the RDR

The RDR is the retail distribution review.   Most MPs’ eyes glaze over – quite understandably – at the intricacies of FSA regulation.   This is one reason why the FSA uses rather than English Martian as its working language  (as one of its senior officials once foolishly admitted)– if FSA papers were translated into English, Parliament would have no difficulty in grasping what was going on and stopping it.

The original justification for regulation of advice and the rest of the distribution process was to protect honest savers from being made fools of.  The Gower report – the charter document for regulation – was emphatic that regulators should not seek to protect fools from their folly.

Restructuring the entire retail end of the financial services sector is a long way from Gower’s thinking.  Although MPs who took an interest in the technicalities always understood that the FSA’s actions would have an impact on the economics and structure of the industry, I do not think that anybody in the Committee that considered the Financial Service & Markets Bill thought that they were creating an authority that would re-shape the Financial Services Industry in the way in which successive ministers of health have re-shaped the NHS.

So the first question the House might to ask is whether this extraordinary use of powers granted for another purpose is proper.

The luckless Mark Hoban

Iain Macleod once rejected advice from his civil servants with the comment ‘I have no desire to be tarred and feathered in Palace Yard.’

One has instinctive sympathy for a junior minister forced to defend the actions of a creature of a previous administration – especially when the basic concept was so forcefully attacked by an exceptionally well qualified shadow chancellor in the person of Mr Peter Lilley.    Dr Vincent Cable also voiced his concern over the danger to liberty.   Such cogent opposition in the House sticks in the collective mind of MPs.   Although over a decade has passed, thanks to Mr Lilley and Dr Cable, the Conservative and Liberal Democrat Parties share an instinctive distrust of the FSA.

The Macdonalds gaffe

Mr Hoban made his position worse by foolishly repeating a line the FSA had given him comparing IFAs with Macdonalds’ employees.   This was a cheap gibe at many thousands of individuals who have collectively done a huge amount for their clients.   No minister should have said this, and if a senior cabinet minister had done such a thing one might have expected a resignation.   But Mr Hoban is an inexperienced junior minister and should be given an opportunity to redeem himself.   If he apologises, he may be pleasantly surprised at how well that is received.

This is particularly so as the line was in fact fed to him by the FSA.   The FSA knew exactly what it was doing – it manipulated a junior minister into voicing its contempt for part of the regulated community.   The FSA has, as we have noted, expensive lobbyists.   Lord Turner is primarily a politician who experienced the joys of belonging to all three major parties before attaching himself to Mr Brown who elevated him, recognising his usefulness.   One wag on hearing of his title observed ‘If I need to translate ‘arse licking’ into Gaelic I’ll know where to look.’

Did Lord Turner actually approve of the Macdonalds jibe that has landed the unhappy Mark Hoban in it?    Even if he did not, it tells us a good deal about the culture he has created that his subordinates should have thus manipulated a minister of the crown.     The FSA’s mistake was to fail to appreciate the magnitude of the reforms that the Coalition – in the person of Sir George Young – has already made.   Harriet Harman would have dismissed demands for a full debate with the contempt that would have won her the gratitude of the FSA.   Natasha Engel and her colleagues on the Backbench Business Committee have reacted rather differently.

However one does have to question whether Mr Hoban either fully grasps what is at issue here – a fundamental question of justice – or whether he has the authority to persuade cabinet ministers of the magnitude of the reforms that have to be made to the regulatory system.   It is greatly to be hoped that a cabinet minister will either reply to the debate or at least attend.

Justice

The RDR raises a number of difficult questions about what is the just thing to do.     What is it that consumers are entitled to expect?   What obligations are created?   Do people have a right to earn their living in their chosen profession?   How far should the state interfere?   Good answers to these questions will almost always be susceptible to being prefaced with ‘It is fair that…’ or ‘it is just that…’

There are competing accounts of justice.   These were highly visible in earlier decades – major political arguments have developed from differing approaches to justice.   For over 700 years England has accepted the decision of Parliament as to whish of the competing claims should be enforced by law.  Parliament may have been subservient at some times and dominant at others – but only Cromwell attempted to dispense with the form of enactment of laws by and with the consent of the Lords Spiritual and Temporal and the Commons in Parliament assembled and that experiment did not last long.

We now have a controversy over what is just – both for IFAs and consumers – and ultimately Parliament needs to decide.

Of course the protection of consumers is very important – and Adam Smith was entirely right in his belief that producers conspire to raise prices or otherwise disadvantage them.  But producers have their rights as well – as Hobbes observed without law there would be no commerce because the fruits thereof would be uncertain; Adam Smith also observed that it is not to the benevolence of the butcher, baker and brewer that we owe our dinner but their self-interest.

In one sense, Parliament is necessary a champion of consumers – for if it did not provide a framework of law there would be no ‘consumers’ because there could be no commerce so nothing would be offered for them to consume.   In another sense, it necessarily is a consumer champion, because it has to ensure that they are not exploited.  But in exactly the same way that Parliament is the champion of consumers it must also be the champion of producers.   For they need to know that they will be rewarded for their production.

If Parliament is to act as it should and secure the common good, it has to avoid championing one side against the other and ask what is just, what is true.   If no consensus emerges then what the majority votes for in divisions will provide an answer – but of course not an infallible and certainly not a final answer as a future Parliament might reach a different decision on what the common good requires.

Mr Hoban or whoever replies to the debate needs to get to grips with this.   Deciding the content of the Common Good cannot be delegated to the FSA.   If a minister tries to defend the indefensible, he deserves to be tarred and feathered.

Consumer issues

In any system – market or statist or even a religious community – human beings will always be tempted to feather their own nests.  The RDR is presented as addressing abuses in the financial services sector.

Nobody would deny that there are some problems – as is inevitable in a fallen world.   Emails from IFAs that I have seen suggest that in the totality of advice, the number of IFAs abusing the system is small and the impact small.   The Treasury Committee probed some of the evidence and this is probably the right way to approach the question.   However it is important to recognise that if one asks IFAs’ clients what they think they are in general very much more sympathetic than clients of banks.  Also only a small part of FOS’s work is taken up by complaints about IFAs that get to FOS and far lower proportion  of complaints againt IFAs are upheld than those made against banks.

The RDR is going to be expensive.   Quite how expensive is again a matter of some argument (mainly because it is difficult to work out compliance costs that will fall on firms and ultimately consumers).   One of the defence buffs will be able to tell the House what defence capability that money would pay for – which would be a way of putting the RDR into perspective.

A second argument – one that appear to have been produced rather late in the day, perhaps because the argument based commission bias is looking weak – is that the RDR will reduce the costs charged back to investors.  There is a problem in this area in that charges are dangerously high especially on low risk, low return products, but it is quite hard to see how the RDR contributes – except perhaps by making it worse.

Without the information needed for a full analysis it is impossible to be sure but the IFAs seem to have made a reasonable case for questioning whether the RDR will benefit consumers.

A bias towards the rich

Does Parliament want a state within a state to operate a social policy that protects the rich but leaves the rest of us dependent on banks that have captured the state within a state?

The RDR will undoubtedly have the effect of skewing the provision of independent advice towards the well off.   The banks will be given a clear run at the rest of the country – and the FSA is going to allow less well qualified bank advisers to be incentivised to push bank products with a state backed consumer education body trying to fill any gap created by the withdrawal of IFA advice.

One might defend such an approach by arguments similar to those used by the Labour Party to defend universal child benefit etc.    This is not a ridiculous approach and the legislation needed to implement it was nodded through in the wash up.

But it does not sit very well with the Coalition’s approach and in particular the ‘Big Society’.   The project is being financed by the FSA’s tax raising powers.  It has thus avoided the scrutiny that has been applied to that part of state spending funded by taxes raised under Finance Acts.

The right to pursue one’s profession

IFAs have argued that the RDR conflicts with a right to pursue one’s profession.     Both the English and Scottish courts have upheld such a general right, and Article 1 of Protocol 1 of the European Convention on Human Rights incorporates such a right.

The FSA’s argument appears to be that it is essential to raise the level of tested knowledge.   If the FSA can sustain its case, the IFAs’ argument is weakened.  But in a free society it is surely necessary that the FSA make its case and under a parliamentary constitution the FSA should not be allowed by fiat to force many thousands of our fellow citizens to abandon their livelihood.    If this were being done by Order subject to Negative Resolution, the debate on the 29th November would doubtless lead to a vote to annul the Order.

There are two additional points that greatly weaken the FSA case:

  1. It is not imposing high level requirements on advisers employed by bank and other institutions.   It seems quite acceptable to the FSA that ‘ordinary people’ get advised by individuals who lack the qualifications needed to advise those who live in the wealthy social milieu populated by senior IFA staff.
  2. The FSA has introduced rules (which of course it does without any opportunity for either House to object) that effectively prevent IFAs acting as GPs do when they refer a patient to a specialist and referring clients to specialist advisers who understand complex or risky products.   If an introduction is made, the FSA requires the specialist effectively to repeat much work done by the introducing IFA rather than allow the introducer IFA to give the basic facts about the client to the specialist.   If the FSA had more sensible rules on introducing or referring clients the need for every IFA to have specialist qualifications would evaporate.   We might wonder whether – given the limits of the human brain – it is sensible to try to create a cadre of super-specialists capable of advising on everything.   If your GP thought you might have cancer or a heart problem would you prefer treatment by the GP or a specialist in one discipline?

The explosion of rage over the RDR shows why root and branch reform of financial regulation is essential, with the restoration of Parliamentary control a priority.

Part 4: The FSA’s power grab

The regulators have used the FSMA to acquire powers that the various committees that scrutinised the legislation never contemplated.   The regulators have also been skilful in getting round the main constraints that Parliament imposed – the right to have a full hearing of any enforcement case before an independent tribunal without being at risk of being ordered to pay costs and an apparently fair process before the Financial Ombudsman Service to resolve consumer complaints.

FOS disregards Parliament

The FOS has treated with contempt the assurances given to the Commons Standing Committee that considered the Financial Services & Markets Bill.

 

This Committee was promised that if either side to a dispute over advice or some other similar matter asked, the FOS would hold a public hearing at which evidence would be taken and witnesses cross-examined.   This is exactly what happens in the small claims court or an employment tribunal.     On 30 November 1999 Miss Melanie Johnson MP, Economic Secretary to the Treasury, said to the House of Commons committee considering the Financial Services and Markets Bill in relation to a proposed amendments to what has now become section 228 and Schedule 17 of the Act,

It is perfectly possible to operate the [FOS] scheme effectively while also protecting the parties’ ECHR rights. Firms and complainants that bring disputes to the ombudsman will be able to exercise their right to a fair and public hearing. … Article 6(1) stipulates that in the determination of civil rights and obligations, everyone is entitled to a fair and public hearing by an independent and impartial tribunal. The scheme will provide for a hearing to be held if one is requested by a party to the complaint. We do not believe that the scheme will be legalistic. We expect the right to a fair hearing to be exercised frequently.

The reality, however, is that FOS hardly ever permits an oral hearing.    This was revealed by Mr Tony Boorman, FOS Principal Ombudsman and Decisions Director at a seminar convened by the Council on Tribunals on the subject “The Use and Value of Oral Hearings in the Administrative Justice System” He said that FOS would allow a hearing in only 1 out of 10,000 cases.   The report records him saying:‑

What about hearings?  Because processes are so flexible oral hearings can be held, but chances are very slim.  Only 1 oral hearing for every 10,000 cases.

In what circumstances?  A hearing, though exceptional, would be held if it was thought that a case would be particularly hard fought.  In some circumstances it might be better for the FOS to have a hearing in‑house as opposed to letting the matter go on judicial review to the Administrative Court.

May also decide, off own bat, that a hearing would assist with identifying facts of case or making a judgment about the reliability of the evidence that is being presented.

Until the advent of the Backbench Business Committee and the other Wright reforms creatures like Boorman could get away with casual disregard for what Parliament was promised.   Having got their legislation, they could behave like some tinpot dictator.

FSMA expressly provides that FOS awards that have been recorded in a register are enforceable by a simple court procedure.   But this is what Lord Justice Rix said in an Appeal Court judgment:

Finally, I would like to say something about the matter of the FOS “register”. This has been the subject of written submissions, but has not figured in oral argument, no doubt because the parties appreciated that it would not affect the outcome of this appeal. Nevertheless, it remains the case that the Act’s Schedule 17, at para 16, in providing for the enforcement of an ombudsman’s money award in the county courts of England and Wales and by similar means in Northern Ireland and Scotland speaks of such an award “which has been registered in accordance with scheme rules”. Thus it is a statutory requirement that the scheme rules provide for the registration of money awards. Accordingly, DISP 3.9.15 R requires the Ombudsman to keep a register: “The Ombudsman must maintain a register of each money award and direction made.” In referring to directions, the scheme rules go beyond the statute. FOS seeks to comply with its rule by keeping an internal data base. It is not available to public inspection. I have my doubts as to whether such an internal data base amounts to a “register” properly so called. A register is an official list or record. It may be that it can be kept in any form, but I suspect that it needs to be open to public inspection. Since we have not heard oral argument on this matter, I merely refer to this point in passing.  (Emphasis added).

Appeal Court Judges do not place such comments on record unless they believe that something needs to be said.   .   So here we have clear evidence that FOS is not doing what Parliament required.

And, we may add, who benefits from this act of defiance by FOS?  Why, our old friends the banks.  Any register would be a damning record of their appalling record in failing properly to deal with complaints.    It is clearly more important for FOS and the FSA – which is the master of FOS and has admitted such publicly – to protect bankers than it is to obey the law.   Of course Parliament does not have generous, well paid jobs with large expense accounts to offer those who run the FSA and FOS when they move on.   A mischievous thought – perhaps the pensions of employees of the FSA and FOS should be covered by the Treasury but only after each pension was approved by Affirmative Resolution of both Houses.

Misuse of Section 166

Section 166 of the Act provides that the FSA can require a firm to appoint a skilled person to provide a report.   In principle this seems a very good idea – much better to give firms a helping hand than punish them.

Unfortunately Section 166 has been abused.    Lawyers acting for firms are very concerned that the FSA has decided to force firms to pay a large sum for a S166 report rather than seek to impose a fine.  This avoids the inconvenience for the FSA of having to allow the firm to present a defence to an independent tribunal.    A S166 requirement can only be challenged by judicial review.     We are talking about sums of up to £100,000.

The FSA is also on occasion using the S166 procedure as a substitute for appointing investigators under its enforcement powers.   In some S166 notices the FSA requires the skilled person to discuss progress with it – despite the fact that the report is for the firm and paid for by the firm.   On one notice, the FSA required firms being put forward to meet an FSA employee for interview.   It is of course reasonable for the FSA to check that a skilled person is indeed skilled.  It is improper for the FSA to seek to appoint a skilled person that will write the report the FSA wants.

Further evidence that the FSA is misusing the process arises from – I accept – largely anecdotal evidence that when skilled persons submit reports that contain conclusions the FSA did not want (e.g. this firm is giving suitable advice to it clients) the FSA responds by rubbishing the report.

There is also evidence that the FSA will require firms to appoint consultancies employing former FSA staff even though those consultancies have taken no steps to scope the project in preference to firms that do not employ former FSA staff and have scoped the project.   When the scoping reveals that FSA supervision staff have made serious allegations but that there is no obvious evidence to support them, this suggests not so much corruption as a Stasi like system at work.

This misbehaviour seems to be confined to one part of the FSA, supervision.   There is anecdotal evidence that supervisory staff have passed over cases where skilled person have disagreed with them to the enforcement division, the enforcement division has been less than impressed with the allegation made by the colleagues in supervision.  In which case we may also be looking at a turf war between the enforcement teams and supervision.

The investigative process

The FSA has powers to investigate anyone – not just regulated firms and approved persons.

The relevant sections of FSMA are very clumsily drafted – section 177 in particular is very odd.   It was probably intended to protect third parties compelled to give evidence from having something they said under compulsion when the FSA was investigating somebody else used in a prosecution (e.g. being an accessory to, say, money laundering) against them.     This would have been a perfectly sensible provision to include.   The section also seems to have been intended to allow somebody who lies still to be prosecuted but only for that.  But what is actually achieves is to make it impossible to produce anything that is said in an interview to support a prosecution for telling lie in that interview.  This is bizarre and one can only assume the drafting is at fault.

More worryingly, it seems that Parliament intended that before launching an investigation into a third party the FSA (which means a senior member of staff) had to sign off a memorandum showing a reason for the investigation.   I have seen some memoranda but none of them actually show any sort of reason – they just repeat twice a statement that the FSA believes there may have been a breach of a long list of provisions.

These powers are heavy powers – individuals outside the regulated system can be forced to incur heavy costs (city lawyers have charges over £7500 for support for an interview lasting 3 hours) and may be asked to do something (e.g. hand over confidential papers) that will lead to the destruction of their livelihood because a client will sack them for complying with the FSA.

Any reasonable person will accept that this is a tricky area and most (although not all) FSA personnel working in this area are sensitive to the potential problems use of their powers might cause innocent individuals.   One difficulty is that competitors make allegations that are false – not always maliciously – and the FSA feels it has to investigate.

The expansion of FSA investigations to cover property sales in particular adds greatly to the need for investigative powers to be subject to proper control.   There  must be some mechanism for independent review of a demand that might destroy an individual’s livelihood before that individual is compelled to comply – obviously subject to some mechanism to allow the FSA to act very quickly if it can show reason.

I include this matter because it is a case in this area that gave rise to the section 2 – the FSA denying access to Parliament.


[1] The difference between ‘New’ Labour and proper Labour is vividly illustrated by James Callaghan’s appointment of his predecessor to carry out an enquiry into the City, aimed at boosting the flow of funds into investment; in contrast Mr Blair is now a prominent figure in a financial firm.   The FSA is still protecting the people New Labour lauded as national heroes and regarded their self-enrichment at the expense of those who deposited their savings with them as a matter for ‘intense relaxation.’

[2] Until the 1530s, when the Lords assembled the senior Archbishop (Canterbury unless York was a cardinal) sat on the King’s right, next to the throne.  Henry VIII changed that – he created the modern layout of the Lords with the throne elevated above the Peers.   And he created the office of Vicar General which he gave to Thomas Cromwell – so not only were the bishops made to sit apart from and below the throne, they were headed by a layman, the Vicar General.  The Lords Temporal previously headed by the senior Duke were headed by the chief ministers.

The 400 year gestation of the Backbench Business Committee

July 18, 2010

As Natasha Engel, the chair of the Backbench Business Committee said, ‘this is a historic occasion – for the first time backbenchers have decided what we want to debate in government time.’    And it is only the first stage in a reform that will hand control over Commons business to a Business Committee.

It is a reform that has been a long time coming – the idea that the Commons should control its own timetable was first set out by Robert Parsons (or Persons) in the 1590s.  This was part of a comprehensive set of proposals in The Memorial on the Perfect Reformation of England: ‘For that the English Parliament, by old received custom of the Realm, is the Fountain, as it were, of all publick Laws, and settled Orders within the Land, one principal care is to be had that the high Court and Tribunal be well reformed…’     A Business Committee (Parsons proposed that it be chaired by the Speaker) was only one of a number of reforms.   Elections were to be free, rotten boroughs should be suppressed, towns given proper representation.   The importance of proper scrutiny and an opposition were argued for the first time.

Parsons was building on his reading of English history, and particularly the powerful parliaments of the fifteenth century ruthlessly emasculated by the Tudors.  A few years earlier, in 1594, he and others had published the Conference on the Next Succession, which added to a tradition of government being established by the consent of the people (in England going back to the coronation of the William the Conqueror and in political theory through Aquinas to Isidore, the last of the Western Fathers) the then revolutionary idea, based on a reading of English history shared with Shakespeare in Richard II, that the English people could revoke their consent.   Parsons thus has a strong claim to be the father of constitutional political thinking.

He added to this political thinking advanced social policies – matched it should be added with the fiscal responsibility that one might expect from somebody influenced by the Salamanca school, praised by both Keynes and Hayek for their contribution to the emergence of economics.   Among Parsons proposals was universal secondary education, a major expansion and reform of university education, property right for women and the establishment of local banks to offer a substitute for money lenders.   This was to be financed by a levy on the 16th century equivalent of our Russian billionaire oligarchs and bloated bankers – the possessors of the Abbey Lands.

Parsons is now largely forgotten, except perhaps as the most sinister Jesuit of his and any age – the rich and powerful have never been enthusiastic for giving up their wealth and power and vehemently opposed Parsons’ plans for social reform implemented by a democratic parliament that would have achieved what Lloyd George’s twentieth century reforms eventually brought about – the eclipse of the oligarchy that first established itself under the Tudors.   But for a century after his death he remained the embodiment of constitutional government – and as such was denounced vehemently both by the Whigs who represented the oligarchy and by defenders of royal absolutism, notably Sir Robert Filmer, the author of Patriarchia, who maintained that Parliament was an institution that should be entirely subordinated to the King, that is the executive.

Parsons’ ideas survived.   Disraeli read him in his father’s great library, and the political theory that Disraeli sets out in Coningsby and Sybil is that of Robert Parsons.  In Coningsby, Disraeli includes an acknowledgement of debt to the Jesuit – appearing under the guise of Rebello, the tutor of Sindonia. Parsons’ books – particularly The Conference – were reprinted in the seventeenth century by the democratic radicals suppressed by Cromwell.   Filmer, in the opening of Patriarchia, expressly links Parsons (and his fellow Jesuits Bellarmine and Suarez) to the Calvinists.   Parsons thus also came to influence the democratic leftwing tradition in English politics.

We have fallen so much under the spell of Macaulay and his successors that we forget the long history of a representative Commons – Disraeli, who read English history while Gladstone was reading Homer, maintained that Parliament was as powerful under Henry VI as it was in 1689 when it conferred the crown on William and Mary.    Under the first Elizabeth, England was in a state we can recognise as that of England in 2009: the public finances in disarray, the prosperity of one half of the nation bought by the misery and oppression of the other half, and a Commons so dominated by the executive that is was unable to protect those it was intended to represent.  Parsons’ call for the Commons to take control of its agenda and assert it historic role as the fount of all public law fell on largely deaf ears.   The call of Tony Wright has been listened to, with the formation of the Backbench Business Committee.

For those who enjoy continuity, I offer two footnotes.  First, both Robert Parsons and Tony Wright were products of Baliol College, Oxford.   Second, on 26th April, to accompany a report by Matthew Engel on John Bercow’s campaign in Buckingham, the FT (paper edition) printed a picture of his team – including a 13 year old boy.   That boy is at the school that Parsons founded at St Omers in Flanders in 1592, established since 1793 at Stonyhurst in Lancashire, and this year celebrating the 400th anniversary of its founder’s death on 15 April 1610.    As Robert Parsons looks down on a House of Commons that is using its new found power to strengthen its hand over the ministers of the second Queen Elizabeth, it must give him a certain amusement that presiding over the House is  a Speaker whose re-election as an MP  was supported by a pupil of the school he founded to frustrate the tyrannical plan of the ministers of the first Queen Elizabeth.

More on Parsons:

Commons Reform from Robert Parsons to Tony Wright

Robert Parsons – a Jesuit for today?

Persons the peacemaker?

Biggles gets nastier

July 12, 2010

Alan ‘Biggles’ Lockwood, IPSA’s Compliance Officer is bidding for real power over MPs.   They will soon live in terror of this man who will be able to ruin them for the hideous crime of using the office phone to tell the wife or husband that they’re late or wish a son or daughter a happy birthday.

Any MP who makes a tiny error in claiming expenses will be hauled before a kangaroo court presided over by Biggles.    We know what he thinks of MPs because he told the Guardian:  An “older” generation of MPs were accused tonight of resisting the expenses system and told to “get used to it” by the man responsible for resolving complaints about the new regime – the system was needed to counter the perception of “enormous fiddling” . Anyone hauled before Biggles can expect no mercy.  IPSA will publicise the hearing –  the Daily Telegraph will have a field day when Biggles accuses you of fiddling because you allegedly made a personal call on an office phone.  Then he can fine you £1000 and add a demand for whatever he thinks his costs were.

This is not a joke.   This is the procedure that IPSA has set out in a consultation document that they issued on 16th June – closing on 7th July.   If you put in a submission now you are told ‘it may not be considered’.

Costs will not be light.   Until 2001, financial service regulators could make those they disciplined pay costs – and these were typically well over £100,000.  Parliament put a stop to that in 2001 with the FSA – because nobody could have a fair trial.    If IPSA’s regime had been in place in the last parliament, people like Alan Beith, Menzies Campbell, Peter Lilley and Jeremy Browne would have faced ruin – even though every single one of them was found to have acted with integrity – simply because it could be said that they had made a technical error.

IPSA has made sure that MPs were not consulted.  The Constitutional Reform and Governance Act stated that IPSA had to consult the Standards and Privilege Committee on this  – but there isn’t one.

The Consultation Document wrongly – I believe dishonestly – tries to use the European Convention to justify this shabby process.   It tries to say Article 6 requires publicity.  Balls.  As you can see from my submission the ECHR does not require any such thing.   The whole IPSA process could be entirely confidential – just as the FSA process is; you can go to prison for revealing that the FSA has put charges to somebody.

The idea behind IPSA was that it would restore the reputation of Parliament.   This is what it has to say about reputation:   ‘IPSA would not expect reputational damage to the MP to be a sufficient reason for withholding or deferring publication’ – that is before a finding has been made.   If you ring your wife from your constituency office to say you will be late, you can be trashed in the Telegraph and your local press long before you get an independent tribunal to strike down Biggles.

My submission in Response to the IPSA consultation on the Compliance Officer

The consultation is at: http://www.parliamentarystandards.org.uk/.   Click on Publications, then on ‘consultation on compliance officer’ in list on left hand side.

  1. I apologise for being a few days out of time.   Nevertheless I ask that you consider this submission and confirm that you are going to do so to joe@ignacity.info
  2. I am a former Parliamentary Candidate, an expert in regulatory compliance, and am contemplating standing at the next Parliamentary election.    Of specific relevance to the consultation, I have been involved in cases involving sanctions imposed by Financial Regulators, have written papers on the topic, given evidence to Select Committees, provided briefing paper to Clerks of Select Committees and given expert evidence.   My evidence to the Financial Service & Markets Tribunal (now the Upper Tribunal) on the question of public hearings was described by that Tribunal as follows:

As this was the first case of its kind we agreed, without objection from the parties, to receive a written submission from Mr Joseph Egerton on behalf of Justice in Financial Services, an organisation which we were told exists to provide support and representation for individuals and small firms in difficulties with the FSA or facing a claim before the Ombudsman. Mr Egerton’s submission dealt with general principles and was not made with reference to the facts of the particular case with which we are concerned. Mr Egerton’s impressive and learned submission drew to our attention the wisdom of notable philosophers, the jurisprudence of the European Court of Human Rights, and historical examples ranging from the trial of Jesus Christ to the Nürnberg Tribunal. The general thrust was that it was in the interests both of the public and of the financial services industry that hearings be in public. (Case 001, paragraph 40).

  1. Under primary legislation, IPSA is required to consult the Standards and Privileges Committee of the House of Commons on this matter.   The Committee has not as yet been constituted and it is hard to see how IPSA can proceed until it has given the Committee an opportunity to discuss the proposals.
  2. As a brief summary, based on experience of disciplinary and redress proceedings in the financial services industry, I suggest that the proposals are flawed both in respect of publicity and in respect of the proposal that MPs could be asked to pay costs.   Neither of these are permitted to the FSA under the Financial Service & Market Act.   Further, IPSA is straightforwardly wrong in what it says about the requirements of Article 6 of the European Convention on Human Rights.

English Law

  1. The relevant law was enacted in the Constitutional Reform and Governance Act 2010, which amended the 2009 Act.   It may be convenient to reproduce the relevant sections as the version of the 2009 Act on the statute data base has not been updated and I have done that as an appendix to this paper.
  2. In summary, this legislation provides that there is to be a COMPLIANCE OFFICER (the infamous ‘Biggles’ Lockwood) who is to operate a number of schemes set up by IPSA.  IPSA is required to consult the Standards and Privileges Committee before setting up these schemes.   The consultation ended on 7th July so cannot have done so as there is no such Committee at present.
  3. The Compliance Officer has to deal with complaints that an MP has been paid money he or she should not have been paid.   He may also deal with a complaint by an MP that IPSA has refused to pay a claim for expenses.    In addition he may decide to apply a penalty of up to £1000 and/or demand payment of his costs in connection with recovery of over-payment.
  4. In all these matters, a dissatisfied MP has the right to refer a case to ‘the Lower Tribunal’.   This is an independent Tribunal whose members are appointed basically in the same way as judges.  Its hearings are public.  The Tribunal is not an appeal tribunal – the Act specifies that it will conduct a re-hearing, which means it will start from the beginning.
  5. There are various provisions in the relevant statute as to what must be done and what may be done – the latter is characteristically accompanied by a requirement to consult.  Essentially, if the Compliance Officer finds that through his or her own fault an MP claimed something they should not have done they must repay, but if IPSA was at fault the Compliance Officer has a discretion.  The Compliance Officer has a discretion over requiring an MP to pay interest, pay a penalty and pay costs.    The Compliance Officer also has a discretion over allowing an MP time to pay.  All of these decisions may be appealed.
  6. There are also provisions over publicity.   IPSA is required to publish such information as it considers appropriate over claims.  Further IPSA is required to consider whether and under what circumstances the Compliance Officer should publish (1) a provisional decision on whether a MP has been paid money wrongly (this is an initial finding that an MP mat require the Compliance Officer to re-consider) or a final decision (which can only be challenged before the Tribunal) and a penalty notice.
  7. The consultation is about the procedures that the Compliance Officer will follow and publicity.

The European Convention on Human Rights

  1. These matters do engage Article 6 of the Convention, and the Consultation Document refers to this.   Unfortunately whoever wrote the document has only the haziest idea of the Convention and the relevant case law and has got it all wrong – with consequences for what is proposed.
  2. Article 6 reads:
  1. 1. In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. Judgement shall be pronounced publicly but the press and public may be excluded from all or part of the trial in the interest of morals, public order or national security in a democratic society, where the interests of juveniles or the protection of the private life of the parties so require, or the extent strictly necessary in the opinion of the court in special circumstances where publicity would prejudice the interests of justice.
  2. 2. Everyone charged with a criminal offence shall be presumed innocent until proved guilty according to law.
  3. 3. Everyone charged with a criminal offence has the following minimum rights:

a) to be informed promptly, in a language which he understands and in detail, of the nature and cause of the accusation against him;

b) to have adequate time and the facilities for the preparation of his defence;

c) to defend himself in person or through legal assistance of his own choosing or, if he has not sufficient means to pay for legal assistance, to be given it free when the interests of justice so require;

d) to examine or have examined witnesses against him and to obtain the attendance and examination of witnesses on his behalf under the same conditions as witnesses against him;

e) to have the free assistance of an interpreter if he cannot understand or speak the language used in court.

  1. The recovery of overpaid sums and interest on them is clearly a matter of civil obligation.  The imposition of a penalty would seem to be a criminal matter, although there are arguments to the contrary to be drawn from the regulation of the Financial Services system.
  2. At paragraphs 2.3, 2.30 and 3.9, the Consultation Document discusses Article 6(1) as if IPSA were required to follow it, and at 2.30 and 3.9 seems to regard Article 6 as requiring that the Compliance Officer conduct public hearings.   In paragraph 3.6, IPSA states that it proposes to limit publication only in circumstances which it lifts from Article 6:  the interests of morals, public order or national security, where the interest of juveniles or the protection of public life so require, or in special circumstances where publicity would prejudice the interest of justice. Whoever wrote this either did not read the UK primary legislation with any care at all or knows nothing of the application of the Convention or – and I fear this may be the case – is deliberately seeking to bamboozle the readers of the document into thinking that the Compliance Officer has to inflict public hearings on everyone.
  3. As I observed above, every single decision of the Compliance Officer is subject to reference to an independent tribunal – ‘The Lower Tribunal’ which is to conduct a re-hearing.   That satisfies Article 6.  The Consultation Document is therefore quite wrong to suggest that there is any European Convention requirement that these hearing be in public.   Nor is there any requirement to publish anything.  The Lower Tribunal is required to hold hearings in public and to publish its findings.   But IPSA and the Compliance Officer have only to consider the UK law, saving that it might be thought that any publication of a penalty by IPSA or the Compliance Officer before a hearing before the Lower Tribunal might breach the requirement of Article 6(2) to treat anyone charged as innocent until proven guilty.
  4. Further, the Compliance Officer is obviously not going to be independent as required by Article 6.   He is to act on guidance from IPSA, is appointed by IPSA, works in their office.  To cap it all, Biggles has shown himself enthused with hatred of MPs.
  5. As we have seen all this twaddle about the ECHR is irrelevant.  The question is what makes best sense.
  6. Everyone would agree that there is a need for matters to be dealt with quickly and speedily.  Most overpayments will be the result of simple errors.   Some will be the result of genuine errors of interpreting the rules.  All of these should be put right be re-payment of the overpayment, with interest at a realistic rate.   The idea that an MP who has made an honest mistake should be treated as a criminal is frankly disgusting
  7. There will be occasions when an MP is suspected of deliberately making a false claim.   These should be tried for theft and severely punished.   A £1000 fine is ludicrous for an offence for which abolitionists from St Augustine of Hippo to Herbert Morrison wished to retain judicial execution.   The Act provides a perfectly sensible provision that there should be liaison with the Police, and IPSA is right to want to ensure that nothing stops a fair trial.
  8. In between fraud and honest errors lies recklessness and repeated carelessness.    Those of us of a certain age can recall the standard punishments for being late with studies, turning up scruffily dressed or rendering a Latin subjunctive with an English indicative.   More recently, the financial service regulators have charged £250 for late returns – and HMRC has a similar policy.  But this is not intended to humiliate.   The FSA does not publicise on its website firms that have been late with their RMARs.   HMRC does not list all the late payers.  Local councils do not reveal those that have been pursued for late payment of council tax.   Although the legislation is hugely complex, there is nothing much wrong with the idea of MPs who muck up their expenses claims and get too much paying a modest penalty.
  9. But there is, I would suggest, a great deal wrong with MPs being humiliated for minor carelessness.
  10. What is even more objectionable is the possibility of very real damage to an MP who turns out to be entirely innocent.   One has only to look at what Sir Paul Kennedy had to say in overturning decisions by Sir Thomas Legg to realise that honest, competent professionals can reach very different conclusions on essentially the same facts.       If IPSA’s proposed approach had been in place, both Mr Peter Liiley and Mr Jeremy Brown would have suffered heavy public criticism although they were later found quite innocent of any impropriety and to have behaved entirely properly.
  11. The costs issue raises real concerns.   Until 2001, the financial regulators operated a costs rule similar to that in the current legislation.   I cannot believe that this would have survived scrutiny in the Lords – one reason for the demise of the old regulatory rule was it castigation by authoritative legal experts in the Lords.   Under the old system, if somebody was found guilty of a minor infraction, they could be ruined by the costs demanded by a regulator – in many cases well into six figures.  If similar costs rules had been applied in the last Parliament to the question of the contractual arrangements for the rent of flats in Dolphin Square, both Sir Menzies Campbell and Sir Alan Beith (who were found to have made technical errors but not to have benefitted personally) would have been ruined, as would many others whom Sir Paul Kennedy found had claimed less than they were entitled to for various expenses but either put claims under the wrong head or claimed in the wrong period.
  12. f the Compliance Officer is to be allowed to charge costs then they should not exceed the amount reclaimed or £1000, which ever is the higher.
  13. There is overall a very unpleasant tone to some of IPSA’s comments – for instance on the culture of MPs.   Biggles in an interview with the Guardian propagated a falsehood – that in the Rotten Parliament, most MPs were up to good.   This is just not true.  Most MPs were blameless.
  14. IPSA’s indifference to reputational damage – it declares at 3.6 ‘IPSA would not expect reputational damage to the MP to be a sufficient reason for withholding or deferring publication’ is in danger of becoming carelessness with the reputation of Parliament.
  15. The misrepresentation of the ECHR is so egregious and so gross that one must suspect that there was a deliberate attempt to mislead.   If so, IPSA is guilty of what St Thomas Aquinas described as ‘not a species of lying but its perfection’.     This is seriously worrying as it suggests an organisation so set on it mission that it has no regard for truth at all and is likely to use the procedures it seeks to implement to terrorise MPs.

What would make sense?

Conclusion: an unpleasant tone

J R S Egerton MA MPhil

joe@ignacity.info

www.ignacity.com

APPENDIX

Extracts from the Constitutional Reform and Governance Act 2010

amending the Parliamentary Standards Act 2009

PARLIAMENTARY STANDARDS ETC

Amendments of the Parliamentary Standards Act 2009

26 Compliance Officer

(1) For section 3(3) and (4) of the Parliamentary Standards Act 2009 (Commissioner for Parliamentary Investigations) substitute—

“(3) There is to be an officer known as the Compliance Officer for the Independent Parliamentary Standards Authority (“the Compliance Officer”).

(4) Schedule 2 (which makes provision about the Compliance Officer) has effect.”

(2) For Schedule 2 to that Act substitute the Schedule set out in Schedule 3.

28 Transparency etc

(1) The Parliamentary Standards Act 2009 is amended as follows.

(2) After section 3 insert—

“3A General duties of the IPSA

(4) In section 6 (dealing with claims under the MPs’ allowances scheme) after subsection (7) insert—

“(8) The IPSA must publish such information as it considers appropriate in respect of—

(a) each claim made under or by virtue of this section, and

(b) each payment of an allowance by the IPSA under or by virtue of this section.

(9) The IPSA must publish the information at times it considers appropriate and in a way it considers appropriate.

(10) The IPSA must determine procedures to be followed by the IPSA in relation to publication of the information, and in doing so must consult—

(a) the Speaker of the House of Commons,

(b) the Leader of the House of Commons,

(c) the House of Commons Committee on Standards and Privileges,

(d) the Compliance Officer, and

(e) any other person the IPSA considers appropriate.”

31 Allowances claims

(1) Section 6 of the Parliamentary Standards Act 2009 (dealing with claims under the MPs’ allowances scheme) is amended as follows.

(2) Omit subsections (4) and (5).

(3) In subsection (6) for paragraph (b) substitute—

“(b) provision for deducting amounts within subsection (6A) from allowances payable under the scheme or salaries payable under section 4;

(c) provision about how such deductions, and deductions under paragraph 5 or 12 of Schedule 4, are to be made.”

(4) After subsection (6) insert—

“(6A) This subsection applies to amounts which a member (under section 9(8) or otherwise) has agreed to repay, in respect of amounts paid to the member under the MPs’ allowances scheme that should not have been allowed.”

(5) After section 6 of that Act insert—

“6A Review of IPSA’s determination

(1) This section applies if—

(a) the IPSA determines under section 6(3) that a claim is to be refused or that only part of the amount claimed is to be allowed, and

(b) the member (after asking the IPSA to reconsider the determination and giving it a reasonable opportunity to do so) asks the Compliance Officer to review the determination (or any altered determination resulting from the IPSA’s reconsideration).

(2) The Compliance Officer must—

(a) consider whether the determination (or the altered determination) is the determination that should have been made, and

(b) in light of that consideration, decide whether or not to confirm or alter it.

(3) The Compliance Officer must give the IPSA a statement of any decision under subsection (2)(b), and may include a statement of the Compliance Officer’s findings about the way in which the IPSA has dealt with the claim.

(4) The IPSA must make any payments or adjustments necessary to give effect to the Compliance Officer’s decision; but it must not do so until—

(a) it is no longer possible for there to be a relevant appeal, and

(b) all relevant appeals have been withdrawn or determined.

(5) A relevant appeal is—

(a) an appeal under subsection (6) brought before the end of the period mentioned in subsection (7), or

(b) a further appeal in relation to the Compliance Officer’s decision which—

(i) is brought before the end of the usual period for bringing such an appeal, and

(ii) is an appeal against the determination of an appeal which was itself a relevant appeal.

(6) The member may appeal to the First-tier Tribunal against a decision of the Compliance Officer under subsection (2)(b).

(7) The appeal must be brought before the end of the period of 28 days beginning with the day on which notice of the decision is sent to the member (unless the Tribunal directs that it may be brought after the end of that period).

(8) The appeal is by way of a rehearing.

(9) On an appeal under subsection (6) the Tribunal may—

(a) allow the appeal in whole or in part, or

(b) dismiss the appeal.

(10) If the Tribunal allows the appeal (in whole or in part) it may—

(a) order the IPSA to make any payments or adjustments necessary to give effect to that decision;

(b) make any other order it thinks fit.

(11) If the Tribunal dismisses the appeal it may make any other order it thinks fit.

(12) The Compliance Officer must notify the IPSA of the Tribunal’s decision (and the result of any further appeal).”

33 Investigations

For section 9 of the Parliamentary Standards Act 2009 (investigations) substitute—

“9 Investigations

(1) The Compliance Officer may conduct an investigation if the Compliance Officer has reason to believe that a member of the House of Commons may have been paid an amount under the MPs’ allowances scheme that should not have been allowed.

(2) An investigation may be conducted—

(a) on the Compliance Officer’s own initiative,

(b) at the request of the IPSA,

(c) at the request of the member, or

(d) in response to a complaint by an individual.

(3) For the purposes of the investigation the member and the IPSA—

(a) must provide the Compliance Officer with any information (including documents) the Compliance Officer reasonably requires, and

(b) must do so within such period as the Compliance Officer reasonably requires.

(4) The Compliance Officer must, after giving the member and the IPSA an opportunity to make representations to the Compliance Officer, prepare a statement of the Compliance Officer’s provisional findings.

(5) The Compliance Officer must, after giving the member and the IPSA an opportunity to make representations to the Compliance Officer about the provisional findings, prepare a statement of the Compliance Officer’s findings (subject to subsection (7)).

(6) Provisional findings under subsection (4) and findings under subsection (5) may include—

(a) a finding that the member failed to comply with subsection (3),

(b) findings about the role of the IPSA in the matters under investigation, including findings that the member’s being paid an amount under the MPs’ allowances scheme that should not have been allowed was wholly or partly the IPSA’s fault.

(7) If subsection (8) applies, the Compliance Officer need not make a finding under subsection (5) as to whether the member was paid an amount under the MPs’ allowances scheme that should not have been allowed.

(8) This subsection applies if—

(a) the member accepts a provisional finding that the member was paid an amount under the MPs’ allowances scheme that should not have been allowed,

(b) such other conditions as may be specified by the IPSA are, in the Compliance Officer’s view, met in relation to the case, and

(c) the member agrees to repay to the IPSA, in such manner and within such period as the Compliance Officer considers reasonable, such amount as the Compliance Officer considers reasonable (and makes the repayment accordingly).

(9) Before specifying conditions under subsection (8)(b) the IPSA must consult the persons listed in section 9A(6).

(10) References in this section (and section 9A) to a member of the House of Commons include a former member of that House.

9A Procedures etc

(1) The IPSA must determine procedures to be followed by the Compliance Officer in relation to investigations under section 9.

(2) The procedures must in particular include provision about—

(a) complaints under section 9(2)(d),

(b) representations under section 9(4),

(c) representations under section 9(5), and

(d) the circumstances in which the Compliance Officer must publish the documents listed in subsection (4).

(3) Provision under subsection (2)(b) must include provision giving the member who is the subject of the investigation—

(a) an opportunity to be heard in person, and

(b) an opportunity, where the Compliance Officer considers it appropriate, to call and examine witnesses.

(4) The documents referred to in subsection (2)(d) are—

(a) statements of provisional findings under section 9(4),

(b) statements of findings under section 9(5), and

(c) agreements under section 9(8).

(5) The IPSA must also determine procedures to be followed by the Compliance Officer as to the circumstances in which the Compliance Officer must publish—

(a) statements under section 6A(3), and

(b) penalty notices under paragraph 6 of Schedule 4.

(6) Procedures under this section must be fair, and before determining procedures the IPSA must consult—

(a) the Speaker of the House of Commons,

(b) the Leader of the House of Commons,

(c) the House of Commons Committee on Standards and Privileges,

(d) the Compliance Officer, and

(e) any other person the IPSA considers appropriate.”

34 Enforcement

(1) After section 9A of the Parliamentary Standards Act 2009 insert—

“9B Enforcement

(1) Schedule 4 (which makes provision about the enforcement powers of the Compliance Officer) has effect.

(2) The Compliance Officer may provide to the Parliamentary Commissioner for Standards any information connected with an investigation under section 9 or action taken under Schedule 4 which the Compliance Officer considers may be relevant to the work of the Parliamentary Commissioner for Standards.”

(2) After Schedule 3 to that Act insert the Schedule set out in Schedule 4.

35 Relationships with other bodies etc

After section 10 of the Parliamentary Standards Act 2009 insert—

“10A Relationships with other bodies etc

(1) The IPSA and the Compliance Officer must prepare a joint statement setting out how the IPSA and the Compliance Officer will work with the following—

(a) the Parliamentary Commissioner for Standards,

(b) the Director of Public Prosecutions,

(c) the Commissioner of Police of the Metropolis, and

(d) any other person the IPSA and the Compliance Officer consider appropriate.

(2) Before preparing the statement the IPSA and the Compliance Officer must consult the persons listed in subsection (1).

(3) Nothing in sections 9 to 9B (or Schedule 4) affects the disciplinary powers of the House of Commons.

(4) The powers conferred by sections 9 to 9B (and Schedule 4) may be exercised in relation to the conduct of a member of the House of Commons even if—

(a) the member is or has been the subject of criminal proceedings in relation to that conduct (whether or not convicted of an offence);

(b) the House of Commons is exercising or has exercised any of its disciplinary powers in relation to that conduct.

(5) References in subsection (4) to a member of the House of Commons include a former member of that House.”

SCHEDULE 4

ENFORCEMENT

PART 1

RECOVERY OF OVERPAYMENTS

Power to give repayment direction

1 (1) This paragraph applies where the Compliance Officer—

(a) has conducted an investigation in respect of a member of the House of Commons under section 9, and

(b) has made findings under section 9(5) that the member was paid an amount under the MPs’ allowances scheme (the “overpayment”) that—

(i) should not have been allowed, and

(ii) has not been repaid.

(2) The Compliance Officer—

(a) if sub-paragraph (3) applies, may give the member a direction under this paragraph (a “repayment direction”), and

(b) otherwise, must give the member a repayment direction.

(3) This sub-paragraph applies if the Compliance Officer has made findings under section 9(5) that the member’s being paid an amount under the MPs’ allowances scheme that should not have been allowed was wholly or partly the IPSA’s fault.

(4) A repayment direction must require the member to pay to the IPSA—

(a) if sub-paragraph (3) applies, such amount (not exceeding the amount of the overpayment) as the Compliance Officer considers reasonable, and

(b) otherwise, the amount of the overpayment.

(5) The repayment direction must specify the period (the “repayment period”) before the end of which that amount is to be paid.

(6) A repayment direction may also require the member to do one or both of the following before the end of the repayment period—

(a) pay to the IPSA interest on the amount mentioned in subparagraph (4), at the rate and in relation to the period specified in the direction;

(b) pay to the IPSA an amount reasonably representing the costs incurred by the IPSA in relation to the overpayment, including the costs of the Compliance Officer in conducting the investigation.

(7) The Compliance Officer must send a copy of the repayment direction to the IPSA.

(8) References in this Part of this Schedule to a member of the House of Commons include a former member of that House.

(9) In this Schedule “overpayment”, “repayment direction” and “repayment period” have the meaning given by this paragraph (but in relation to the repayment period, see further paragraph 4(3)).

Guidance etc

2 (1) The IPSA must prepare guidance about the circumstances in which the Compliance Officer should include in a repayment direction a requirement under paragraph 1(6)(a) or (b).

(2) The guidance must include guidance about whether the Compliance Officer should include such a requirement if paragraph 1(3) applies.

(3) The amount mentioned in paragraph 1(6)(b) is to be calculated by the Compliance Officer in accordance with a scheme prepared by the IPSA for that purpose.

(4) Before preparing guidance under sub-paragraph (1) or a scheme under sub-paragraph (3) the IPSA must consult the persons listed in section 9A(6).

Appeal against repayment direction

3 (1) A member who has been given a repayment direction under paragraph 1 may appeal to the First-tier Tribunal against—

(a) the Compliance Officer’s findings under section 9(5);

(b) if paragraph 1(3) applies, the Compliance Officer’s decision to give the member a repayment direction;

(c) if paragraph 1(3) applies, the amount the member is required to repay because of paragraph 1(4)(a);

(d) a requirement contained in the repayment direction because of paragraph 1(6).

(2) An appeal under this paragraph must be brought before the end of the period of 28 days beginning with the day on which the repayment direction is sent to the member (unless the Tribunal directs that it may be brought after the end of that period).

(3) An appeal under this paragraph is by way of a rehearing.

(4) On an appeal under this paragraph the Tribunal may—

(a) allow the appeal in whole or in part, or

(b) dismiss the appeal.

(5) If the Tribunal allows the appeal (in whole or in part) it may—

(a) revoke the repayment direction;

(b) revoke or vary any requirement contained in the repayment direction;

(c) make any other order it thinks fit.

(6) If the Tribunal dismisses the appeal it may make any other order it thinks fit.

(7) The Compliance Officer must notify the IPSA of the Tribunal’s decision (and the result of any further appeal).

Extension of repayment period

4 (1) The member may at any time before the end of the repayment period make an application to the Compliance Officer for the Compliance Officer to extend (or further extend) the repayment period.

(2) The Compliance Officer must notify the IPSA of any decision by the Compliance Officer to extend (or further extend) the repayment period.

(3) If the Compliance Officer extends (or further extends) the repayment period, references in this Schedule to the repayment period are to that period as extended (or further extended) by the Compliance Officer.

(4) The member may appeal to the First-tier Tribunal against the Compliance Officer’s decision on an application under this paragraph.

(5) An appeal under this paragraph must be brought before the end of the period of 28 days beginning with the day on which notice of the decision is sent to the member (unless the Tribunal directs that it may be brought after the end of that period).

(6) The appeal is by way of a rehearing.

(7) The Tribunal may—

(a) allow the appeal in whole or in part, or

(b) dismiss the appeal.

(8) If the Tribunal allows the appeal (in whole or in part) it may—

(a) revoke or vary the Compliance Officer’s decision;

(b) make any other order it thinks fit.

(9) If the Tribunal dismisses the appeal it may make any other order it thinks fit.

(10) The Compliance Officer must notify the IPSA of the Tribunal’s decision (and the result of any further appeal).

Enforcement of repayment direction

5 (1) This paragraph applies to any amount which a member is required by a repayment direction to pay to the IPSA, but only when—

(a) it is no longer possible for there to be a relevant appeal, and

(b) all relevant appeals have been withdrawn or determined.

(2) A relevant appeal is—

(a) an appeal under paragraph 3 brought before the end of the period mentioned in paragraph 3(2), or

(b) a further appeal in relation to the repayment direction which—

(i) is brought before the end of the usual period for bringing such an appeal, and

(ii) is an appeal against the determination of an appeal which was itself a relevant appeal.

(3) The IPSA may recover the amount by making deductions from—

(a) any salary payable to the member under section 4;

(b) any allowances payable to the member under the MPs’ allowances scheme.

(4) In England and Wales and Northern Ireland the amount is recoverable, if a county court so orders on the application of the Compliance Officer, as if it were payable under an order of that court.

(5) In Scotland the amount is recoverable as if the repayment direction were an extract registered decree arbitral bearing a warrant for execution issued by the sheriff court of any sheriffdom in Scotland.

PART 2

PENALTIES

Power to impose penalties

6 (1) If sub-paragraph (3) or (4) applies to a member of the House of Commons, the Compliance Officer may by notice (a “penalty notice”) impose a penalty on the member.

(2) A “penalty” means a sum of money payable by the member to the IPSA.

(3) This sub-paragraph applies if the Compliance Officer has made a finding under section 9(5) that the member has without reasonable excuse failed to comply with a requirement under section 9(3) (provision of information to Compliance Officer).

(4) This sub-paragraph applies if the Compliance Officer is satisfied that the member has without reasonable excuse failed to comply with any requirement contained in a repayment direction.

(5) The Compliance Officer must send a copy of the penalty notice to the IPSA.

(6) References in this Part of this Schedule to a member of the House of Commons include a former member of that House.

(7) In this Schedule “penalty notice” and “penalty” have the meanings given by this paragraph.

Amount of penalty

7 (1) The penalty notice must state the amount of the penalty.

(2) The amount of the penalty must not exceed £1,000.

(3) The amount in sub-paragraph (2) may be increased (or further increased) by an order made by a Minister of the Crown.

(4) An order under sub-paragraph (3) is to be made by statutory instrument.

(5) A statutory instrument containing an order under sub-paragraph

(3) may not be made unless a draft of the instrument has been laid before and approved by a resolution of the House of Commons.

Information to be contained in notice

8 (1) The penalty notice must (as well as stating the amount of the penalty) include information as to—

(a) the reasons for imposing the penalty,

(b) the period before the end of which the penalty is to be paid,

(c) how the penalty may be paid,

(d) the procedure and time limit for appealing,

(e) the effect of paragraph 12, and

(f) any other matter specified by the IPSA.

(2) Before specifying a matter the IPSA must consult the persons listed in section 9A(6).

9 (1) The IPSA must prepare guidance about—

(a) the circumstances in which the Compliance Officer should impose a penalty under paragraph 6, and

(b) how the Compliance Officer should determine the amount of the penalty.

(2) Before preparing the guidance the IPSA must consult the persons listed in section 9A(6).

Review of penalty

10 (1) The Compliance Officer may at any time review a decision to impose a penalty on a member under paragraph 6.

(2) Following the review the Compliance Officer may cancel the penalty or reduce the amount of the penalty.

(3) If the Compliance Office does either of those things, the Compliance Officer must notify the IPSA.

(4) If the penalty (or part of the penalty) has already been paid the IPSA must repay the member accordingly.

Appeal against penalty

11 (1) A member on whom a penalty has been imposed under paragraph 6 may appeal to the First-tier Tribunal.

(2) An appeal under this paragraph must be brought before the end of the period of 28 days beginning with the day on which the penalty notice is sent to the member (unless the Tribunal directs that it may be brought after the end of that period).

(3) The appeal is by way of a rehearing.

(4) On an appeal under this paragraph the Tribunal may—

(a) allow the appeal and cancel the penalty,

(b) allow the appeal and reduce the penalty, or

(c) dismiss the appeal.

(5) The Compliance Officer must notify the IPSA of the Tribunal’s decision (and the result of any further appeal).

Enforcement of penalty

12 (1) This paragraph applies to the amount of a penalty imposed on a member under paragraph 6, but only when—

(a) it is no longer possible for there to be a relevant appeal, and

(b) all relevant appeals have been withdrawn or determined.

(2) A relevant appeal is—

(a) an appeal under paragraph 11 brought before the end of the period mentioned in paragraph 11(2), or

(b) a further appeal in relation to the penalty notice which—

(i) is brought before the end of the usual period for bringing such an appeal, and

(ii) is an appeal against the determination of an appeal which was itself a relevant appeal.

(3) The IPSA may recover the amount by making deductions from—

(a) any salary payable to the member under section 4;

(b) any allowances payable to the member under the MPs’ allowances scheme.

(4) In England and Wales and Northern Ireland the amount is recoverable, if a county court so orders on the application of the Compliance Officer, as if it were payable under an order of that court.

(5) In Scotland the amount is recoverable as if the penalty notice were an extract registered decree arbitral bearing a warrant for execution issued by the sheriff court of any sheriffdom in Scotland.

Payment of penalty into Consolidated Fund

13 The IPSA must pay into the Consolidated Fund—

(a) the amount of any penalty paid to the IPSA, and

(b) where the IPSA makes a deduction under paragraph 12(3), an amount corresponding to the amount of the deduction.”