about the amount of money it had. In 2000, Equitable Life stated that the value of its customers’ polices was £3 billion more than the total amount of the assets of the company. Equitable Life’s position worsened when the House of Lords handed Equitable Life a bill of more than £1.5 billion to pay for annuity guarantees.134 Singh took the view that ‘the difficulties surrounding Equitable Life occurred because of the gross failures of management to mitigate the problems arising from its approach to calculating annuity rates’.135

The near collapse of Equitable Life resulted in several public investigations, including the Baird Report,136 the Penrose Report,137 and one by the Parliamentary Ombudsman.138 The Baird Report highlighted and commented upon a number of inadequacies in the approach adopted by the FSA towards the scandal.139 The Penrose Report criticised the FSA for failing to keep abreast of the problems that Equitable Life was facing. It must be noted, however, that the vast majority of the problems associated with Equitable Life occurred under the watchful eye of the Department of Trade and Industry and HM Treasury.140 According to Singh, the FSA was also criticised because it did not ‘notify consumers fully about the problems associated with Equitable Life so they could avoid buying policies that were relatively unmarketable by other providers without some sort of financial penalty’.141

Q3 How effective was the Bank of England’s approach to banking regulation prior to 1997?

Q4 What is meant by the concept of ‘self-regulation’?

4â The Financial Services Authority

The purpose of the FSMA 2000 is to provide a single legal framework for the FSA, replacing the different frameworks under which the various regulators operated. The Act contains a number of important provisions and policies that aim to overcome some of the inadequacies highlighted above. The FSA is responsible for the authorisation and prudential supervision of members of the financial services sector.

134Equitable Life Assurance Society v. Alan David Hyman [2000] 1 All ER 961. For a more detailed commentary see L. Roach, ‘Equitable Life and non-executive directors: clarification from the High Court?’ (2005) 26(8) The Company Lawyer 253.

135See Singh, above n. 86, at 29.

136Financial Services Authority, Report of the Financial Services Authority on the Review of the Regulation of Equitable Life Assurance Society from 1 January 1999 to 8 December 2000 (London, 2001) (Baird Report).

137Lord Penrose, Return to an Order of the House of Commons dated 8 March 2004 for the Report of the Equitable Life Inquiry, HC 290, (Penrose Report).

138Parliamentary Ombudsman, The Prudential Regulation of Equitable Life,: Overview and Summary of Findings, HC 809–1 (London, 2002).

139 See above n. 136, at 187.â 140â Ibid.

141Singh, above n. 86, at 29. The impact of the near collapse of Northern Rock will be discussed below.

157Financial Services Authority, A New Regulator for the New Millennium (London, 2000) 6.

158Howard avies, FSA, ‘The role of financial regulators in promoting financial stability’, speech at IOSCO Conference, 23–29 June 2001, available at www.fsa.gov.uk.

The imposition of the objective of consumer protection was a welcome step in such a complex and evolving financial system. The general ethos of this objective is that, although consumers need to be protected and adequate mechanisms for protection need to be established, the FSA has to strike a balance between the expectations for protection that consumers have and the level of responsibility that they must accept for their own actions. The aim of the objective is not to protect consumers from every possible risk that they may face. The most obvious example of how the FSA intends to achieve this statutory objective is via the Financial Services Compensation Scheme and Ombudsman Scheme.

The purpose of the Compensation Scheme is to compensate customers who have suffered loss as a consequence of the inability of an authorised firm to meet its liabilities. It also acts as a safety net for customers of authorised firms and compensation is payable if such a firm is unable, or likely to be unable, to pay claims against it. In general, this is when a firm is insolvent or has gone out of business. The Scheme covers business conducted by firms regulated by the FSA and is funded by levies on authorised firms. However, it should be noted that the Scheme is not intended to compensate people where a regulatory breach has occurred. Customers may also make a claim against an authorised person even if the claim arises in relation to an activity which the authorised person did not have permission to do under the FSMA 2000.172 The FSA claim that membership of both Schemes could significantly benefit the financial services sector unions, because members will have access to a compensation scheme. This means that if a firm were to fail, members are protected and will be refunded a significant proportion of their savings. Following the near collapse of Northern Rock, the FSA announced in October 2008 that the level of

166For an in-depth commentary see Financial Services Authority, Better Informed Consumers (London, 2000).

430 Government policy

Muhammad Adnan Ashraf,211 Muhammad Asim Iqbal,212 Mohammed Atif Mayo,213 Andrew Talai Kiplimo,214 John Paul Keay,215 Gerard McStravick,216 Sadia Nasir217 and Ian Sanderson.218

In addition to the ability to impose a financial penalty, the FSA also has the power to ban authorised persons and firms from undertaking any regulated activity.219 For example, in April 2008, the FSA banned John Paul Keay, who operated as Jack Keay Mortgage Services ‘for not being competent or capable to perform any functions related to regulated activities, including giving advice’.220 The FSA determined that Mr Keay ‘failed to maintain adequate control over [the business], which made the business a target for mortgage fraudsters’ and that his business was ‘used for the submission of mortgage applications containing false information and supported by falsified pay slips, bank statements and employer references’.221 Another illustration of the FSA using these powers related to Mr Amjad Malik and Mr Tahir Mahmood.222 The FSA banned the two partners of a mortgage broker firm for their involvement in submitting false mortgage applications to lenders. The FSA determined that the partners had submitted bogus loan applications on behalf of clients that contained misleading information relating to their annual income and means of employment.223

(c)â Accountability mechanisms

One of the main concerns regarding financial regulation has been the ineffective mechanisms to ensure the accountability of regulatory agencies. Instead of being addressed and corrected, the concern has once again reared its head with the creation of the FSA.224 Omoyele took the view that ‘the need

211Financial Services Authority Press Release, ‘FSA bans East London brokers for involvement in mortgage fraud’, 23 June 2008, available at www.fsa.gov.uk.

212Ibid.â 213â Ibid.

214Financial Services Authority Press Release, ‘FSA bans introducer for making false mortgage applications’, 5 March 2008, available at www.fsa.gov.uk.

215Financial Services Authority, Final Notice: Mr John Paul Keay, Trading as Jack Keay Mortgage Services (London, 2008), available at www.fsa.gov.uk.

216Financial Services Authority Press Release, ‘FSA bans Belfast mortgage broker for involvement in fraud’, 8 June 2008, available at www.fsa.gov.uk.

217Financial Services Authority, Press Release FSA bans and fines mortgage broker £129,000 for involvement in mortgage fraud, 7 July 2008, available from www.fsa.gov.uk.

218Financial Services Authority Press Release, ‘FSA fines a mortgage firm £11,900 and bans adviser in relation to false mortgage applications’, 15 July 2008, available at www.fsa.gov.uk.

219FSMA 2000, s.56.

220Financial Services Authority, Final Notice to Mr John Paul Keay trading as Jack Keay Mortgage Services, 21 April 2008, available at www.fsa.gov.uk.

221Ibid.

222Financial Services Authority Press Release, ‘FSA bans mortgage brokers for submitting false loan applications’, 21 February 2008, available at www.fsa.gov.uk.

223Ibid.

224For an excellent commentary on the legal accountability of financial regulators see Singh, above n. 86 at 181–210.

for accountability of the Financial Services Authority arises almost innately out of the unprecedented nature of its powers’.225 Lomnicka stated that ‘a body exercising such enormous authority over such a major sector clearly needs to be “accountable” in the sense of having suitable constraints placed on its wide discretion so that it operates appropriately’.226 The Joint Parliamentary Scrutiny Committee raised concerns about the accountability of the FSA.227 In response to these concerns, the then Chairman of the FSA, Howard Davies, boldly asserted:

the second crucial advantage of the new regime is that it incorporates clear lines of accountability. There is clearly no doubt about who is responsible in the event of a regulatory failure. I may live to regret that clarity of responsibility, but at least as a theoretical proposition it is attractive.228

The first method of accountability is the statutory objectives of the FSA. In the Financial Services and Markets Bill Progress Report, it was stated that the creation of the four statutory objectives would ensure ‘transparency and accountability’, with the FSA’s activities being assessed against them.229 The FSA is required to carry out its regulatory functions in a way that, as far as is reasonably possible, is compatible with the four statutory objectives.230 The FSA must also take into account the general regulatory principles.231 Then Chancellor of the Exchequer, Gordon Brown, stated that ‘the objectives will give the new regulator a clear sense of priorities and will provide a benchmark against which the performance of the regulator can be measured. They will form the basis of the regulator’s annual report.’232 Howard Davies described the statutory objectives as the capstone of the FSMA 2000.233 However, the extent to which the statutory objectives provide a mechanism for accountability is debatable. Lomnicka argued that the ‘objectives and principles operate at a very general level and do not apply to specific decisions’.234 The effectiveness of the statutory objectives

225O. Omoyele, ‘Accountability of the Financial Services Authority: a suggestion of corporate governance’ (2006) 27(7) The Company Lawyer 194.

226E. Lomnicka, ‘Making the Financial Services Authority accountable’ (2000) Journal of Business Law 65, 66.

227Joint Parliamentary Scrutiny Committee, Draft Financial Services and Markets Bill: First Report

(London, 1999).

228Howard Davies, FSA, ‘Building the Financial Services Authority: what’s new?’, Travers Lecture, London Guildhall University Business School, 11 March 1999, available at www.fsa.gov.uk.

229HM Treasury, Financial Services and Markets Bill, Progress Report (London, 1999) para. 4.1.

230FSMA 2000, Sch. 1, para. 10(1)(b). It has been argued that the term ‘general functions’ under s.2(4) is too narrow and as such ‘the objectives only operate at a general level and do not impose specific statutory duties on the FSA’. See G. Bevers, ‘The accountability of the Financial Services Authority under the Financial Services and Markets Act 2000’ (2001) 22(7) The Company Lawyer 220.

231FSMA 2000, s.2(3).

232HM Treasury Press Release, ‘NEWRO gets new name’, 28 October 1997, available at www. hm-treasury.gov.uk.

233See above n. 228.

234See Lomnicka, above n. 226. Bevers described the statutory objectives as merely a ‘self assessment exercise’. See above n. 230, at 220.

433 4â The Financial Services Authority

similar role to the Consumer Panel but also has to consider to what extent the FSA are giving due regard to the considerations set out in the legislation. FSMA 2000 imposes a general duty on the FSA to consult practitioners and consumers ‘on the extent to which its general policies and practices are consistent with its general duties’, this covers both the statutory objectives and the principles of the FSA.242 The consultation arrangements must include a Practitioner Panel and a Consumer Panel, the membership of which must follow the requirements specified in the Act.243 The FSA must consider all representations from these panels and provide written explanations if it disagrees with their views.244 This therefore acts as a mechanism of accountability, with the FSA having to be formally accountable to both panels for its decisions. Both the Consumer Panel and the Practitioner Panel are independent of the FSA and are free to publish their views. The Consumer Panel can also commission research into consumer views. Both panels also produce annual reports on their activities and an assessment of the FSA’s effectiveness each year. However, Bevers noted that the FSMA 2000 ‘puts a limit on the influence that the Panels have, by stating that the FSA must consider the representations made by the Panels. They are merely consultative.’245

The FSA is a body conducting public functions and as such can be subject to judicial review, which provides a fourth accountability mechanism. It should be noted, however, that when drafted, the FSMA 2000 was designed to limit the instances of an action for judicial review. The FSA, as the United Kingdom’s sole financial regulator, undoubtedly needs to have in place clear lines of accountability without at any time losing its position as an independent regulatory body. Omoyele concluded ‘it is apparent, however, from a detailed examination of these existing accountability mechanisms that they do not go far enough to ensure the FSA’s accountability’.246

(d)â The credit crunch and Northern Rock

The following highlights the impact of the performance of the FSA. The first signs of a global recession appeared between 2005 and 2006, when the United States’ financial markets showed signs of weakening. This was preceded by a period of economic prosperity that was fuelled by the sub-prime market for low cost mortgages, which also began to falter. The sub-prime market permitted the granting of mortgages to people who were generally unable to afford such loans and as such the loans represented a greater level of risk for the lender. The impact of the sub-prime crisis on the US banking and mortgage market was catastrophic. Freddie Mac (an organisation that was set up to encourage the growth of the US secondary mortgage market) and Fannie Mac (an organisation

242â Ibid. s.8.â 243â Ibid. ss. 9 and 10.â 244â Ibid. s.11.

245Bevers also noted that the FSA appoints the Chairperson of both Panels and provides their funding. See above n. 230, at 221.

246See Omoyele, above n. 225, at 195.

that provides funding for the US mortgage sector) encountered severe financial problems, as did American International Group, the Bank of America and Lehman Brothers. These events had a domino effect across the Atlantic, and the first United Kingdom bank to be adversely affected was Northern Rock. Other banks affected included Bradford and Bingley, which went into administration in September 2008, the Royal Bank of Scotland and HBOS.

Northern Rock was established in the middle of the nineteenth century, demutualised in 1997 and by 2006 it was worth over £100 billion.247 By September 2007, following the sub-prime crisis, the bank was unable to acquire loans from other financial institutions via the inter-bank lending market (‘the Libor’).248 The Bank of England agreed to lend Northern Rock £25 billion, which it promised to repay by 2010.249 This led Tomasic to conclude ‘the rescue of Northern Rock Plc by the Bank of England in September 2007 has been a significant event in the history of British banking and in the wider application of corporate rescue ideas’.250 After the loan was made public, thousands of Northern Rock’s customers queued in desperation to withdraw their savings, despite their savings being protected by the Financial Services Compensation Scheme. HM Treasury announced that it would cover all the deposits of Northern Rock.251 In February 2007, the share price of Northern Rock was 1,200 pence, by January 2008 the price had fallen below 200 pence and its shares were suspended in February 2008.252 The bank was later nationalised after emergency legislation was rushed through the House of Commons.253 As a result of this financial scandal, the FSA has been severely criticised and in March 2008 it published a review of its actions.254 The review highlighted four areas of concern:

(1)a lack of sufficient supervisory engagement with the firm, in particular the failure of the supervisory team to follow up rigorously with the management of the firm on the business model vulnerability arising from changing market conditions;

(2)a lack of adequate oversight and review by FSA line management of the quality, intensity and rigour of the firm’s supervision;

247R. Tomasic, ‘Corporate rescue, governance and risk taking in Northern Rock’ (2008) 29(11) The Company Lawyer 330.

248See X. Lok, ‘LIBOR and market disruption: the future of LIBOR’ (2008) 23(8) Journal of International Banking and Financial Law 421.

249BBC News, ‘Rock pledges to repay tax payers’, 31 March 2008, available at www.bbc.co.uk. For a more detailed discussion of the options available to the Bank of England when a bank collapses, see C. Bamford, ‘Northern Rock and the single market’ (2008) 29(3) The Company Lawyer 65.

250R. Tomasic, ‘Corporate rescue, governance and risk-taking in Northern Rock’ (2008) 29(10)

Company Lawyer, 297.

251HM Treasury, Statement by the Chancellor of the Exchequer on financial markets, 17 September 2007, available at www.hm-treasury.gov.uk.

252BBC News, ‘Northern Rock, in facts and figures’, 18 February 2008, available at www.bbc.co.uk.

253Banking (Special Provisions) Act 2008.

254Financial Services Authority, Executive Summary of Review (London, 2008).

(3)inadequate specific resources directly supervising the firm;

(4)a lack of intensity by the FSA in ensuring that all available risk information was properly utilised to inform its supervisory actions.255

The review upheld the FSA’s principles-based regulation as opposed to a rules-based approach. The review also concluded that responsibility for the collapse of Northern Rock rested with its senior management team. The review made several important recommendations:

•the FSA senior management to have increased engagement with high impact firms;

•the FSA to increase the rigour of its day-to-day supervision;

•the FSA to increase its focus on prudential supervision, including liquidity and stress testing;

•the FSA to improve its use of information and intelligence in its supervision;

•the FSA to improve the quality and resourcing of its financial and sectoral analysis;

•the FSA to strengthen its supervisory resources, and

•the FSA senior management to increase the level of oversight of firms’ supervision.

Rosemary Hilary stated that the aim of the recommendations are to ‘ensure that the framework is properly applied, with good record-keeping, good information flows, the appropriate levels of challenge and the right amount of engagement and supervision of front-line staff by management. Whilst the recommendations are designed to apply to the supervision of all high impact firms, many are more generally applicable.’256 HM Treasury Select Committee took the view that ‘the FSA was asleep on the job … A very clear signal of a bank running a big risk is rapid expansion. Northern Rock was giving that signal quite clearly; it is remarkable that [the FSA] missed it.’257

However, it must be noted that the Bank of England and the SIB also got it wrong during the collapses of financial institutions outlined above. It is impossible for the FSA to implement a regulatory regime that will achieve a zero failure rate. The FSA must learn lessons from this incident and ensure that it does more to maintain market confidence and protect the consumers who have been adversely affected by Northern Rock.

The ‘credit crunch’ highlighted the inadequacies of the regulatory regime created by the Labour government in 1997 and resulted in the introduction of the Financial Services Act (FSA) 2010, which received Royal Assent on 8 April 2010. The Act containes a number of important provisions, which include the extension of the statutory objectives of the FSA to include ‘financial stability’.258

255Ibid.

256Financial Services Authority Press Release, ‘FSA moves to enhance supervision in the wake of Northern Rock’, 26 March 2008, available at www.fsa.gov.uk.

257HM Treasury Select Committee, Northern Rock on the Run (London, 2007) 22.

258FSA 2010, s.1.