UK watchdog promises internal overhaul

London's City watchdog is to overhaul the way it investigates companies accused of breaching financial rules, it was revealed today.

The Financial Services Authority (FSA) said it had accepted “entirely” the findings of a report carried out into the fairness of its procedures.

Under the new rules, there will be greater independence for the FSA division that hands down punishments and fines.

This team – the Regulatory Decisions Committee (RDC) – will no longer take legal advice from the enforcement division, which investigates whether there has actually been a breach of the rules.

Cases will have to be thoroughly reviewed by lawyers who are not part of the investigation team before a decision is referred to the decision makers.

The report highlighted the “considerable concern” over the current practice where the enforcement team provides undisclosed legal advice to the RDC. All communication between the two divisions will have to be disclosed in the future.

The report was commissioned by the FSA after a tribunal criticised its “excessive” fine on insurer Legal & General earlier this year.

The Financial Services & Markets Tribunal ruled that L&G had breached rules but cleared it of widespread mis-selling of mortgage endowment policies and reduced its £1.1m penalty.

The FSA said today that it would implement the changes by the end of the year. Its chairman Callum McCarthy said: “This has been a full and careful review of the FSA’s enforcement processes and the FSA board has accepted its recommendations entirely.”

The review was carried out by David Strachan, the FSA’s director of retail firms.

Sir David Prosser, chief executive of Legal & General, welcomed the findings.

He said: “The review of enforcement procedures at the FSA has been very thorough and will lead to a fairer and better process. We welcome the improvements and the additional checks and greater transparency built into the enforcement systems.”

He said the implementation would be good news for the health of the UK financial services industry and for customers.