The Treasury wants parliament to give up large swathes of its lawmaking power in favour of a handful of unelected appointees. Mocking constitutional requirements of the separation of powers and the rule of law (as opposed to rule by human beings), the draft Conduct of Financial Institutions (CoFI) Bill delegates colossal legislative power to the “executive committee” of the Financial Sector Conduct Authority (FSCA). This committee will consist of three to five “commissioners”, all to be appointed by the finance minister.
The bill assigns wide-ranging, unrestrained legislative power to this committee. It contains very few rules or guidelines relative to the myriad new laws it is to be authorised to prescribe, to be known as “conduct standards”. The Constitutional Court has declared that while parliament may, within limits, delegate power to make subordinate legislation, it may not assign plenary legislative powers.
At Westminster, the constitution committee of the house of lords concluded that it is objectionable for parliament to grant the government delegated legislative powers simply because it has not yet made substantive policy decisions. Broad delegated legislative powers, often ostensibly sought for mere convenience of flexibility, are constitutionally inappropriate. There must be a compelling justification for delegated powers.
Delegation may be legitimate for complex environments such as financial or energy markets where regulatory flexibility could be required, but even there caution is paramount.
The Treasury’s bill does not govern a complex financial market. It merely proposes to regulate financial institutions. The bill authorises the FSCA’s committee of commissioners to make standards to govern providers of financial products (insurance, pension or medical-scheme benefits, credit facilities) and services (marketing, advising on, administering or dealing in financial products or shares, foreign exchange). The committee is to prescribe standards for banking and insurance groups, conglomerates and holding companies, and anyone involved in pension funds.
Financial institutions are to be prohibited from providing financial products or services without a licence from the committee stipulating which activity listed in a schedule to the bill they are licensed to perform, and regarding which product categories prescribed by the committee. A licence applicant would have to convince the committee that they meet the prescribed fit-and-proper requirements and can comply with all the prescribed requirements for conducting the activity.
The committee is to impose conduct standards for licensees’ governance, threshold operational ability, capital requirements and local presence and require anyone to whom a licensee outsources functions also to be licensed. It will prescribe licensing requirements for prudentially regulated and systemically important financial institutions, foreign-exchange and payment-service providers, and foreign entities.
Licensees’ key persons would have to comply with prescribed fit-and-proper standards. If the FSCA believes a key person does not comply, it could direct the business to comply with prescribed standards for addressing noncompliance. Licensees’ representatives would also have to meet prescribed fit-and-proper, operational-ability and capital requirements. The committee could by conduct standards prohibit representatives from providing financial services regarding certain products or acting for more than one licensee.
Licensees would have to debar their representatives who fail to comply with prescribed requirements from rendering financial services. Licensees would be prohibited from appointing previously-debarred representatives who do not comply with the committee’s prescribed requirements. The committee would be able to prescribe how licensees must disclose to customers the effects of retail contracts, failing which contracts will be deemed unfair and unreasonable.
The committee would be authorised to prescribe standards about the composition and duties of a financial institution’s governing bodies. It would stipulate who has power or duty to act for the institution and under which circumstances. It would be able to make standards about a financial institution’s compliance, internal controls and risk management. This committee would be able in conduct standards to prohibit outsourcing, specify functions that require the FSCA’s approval to be outsourced, and prescribe the contents of outsourcing agreements.
The committee would even make standards limiting the remuneration payable to industry employees and the compensation payable to outsourced contractors, regulate conditions of payment, and require the refunding of any “unauthorised” payments. It would prescribe standards requiring a financial institution in its governance policy to align its remuneration practices with its deemed long-term interests so as to avoid the taking of risks deemed by the committee to be “excessive”.
Financial institutions that are profit companies would be prohibited without the FSCA’s approval from allotting shares or registering share transfers to anyone other than intended holders of beneficial interests in the company, unless the committee prescribes circumstances in which approval is not required. The committee would be able to make standards about operational requirements, safeguarding of assets, and requirements with which auditors would have to comply.
On all these matters the draft bill reveals a lack of effort to prescribe substantive rules in the bill itself. It delegates excessive legislative power to the committee and fails to strike the proper balance with parliament’s legislative powers. This bill is so profoundly flawed that one wonders whether it is possible for a revision to improve on it.
• Moore is an enrolled attorney and senior researcher at the Free Market Foundation.
This article was first published on BDLive on 29 April 2019