TABLE OF CONTENTS

Overview of the proposed changes

So why is this important?

An example of discretion in use?

So what is the position in other jurisdictions?

The manner of consultation

Have your say – respond to the consultation today

Proforma consultation response

By Francesca Signorio-Hooper

On 28 May 2021 the Isle of Man Financial Services Authority (IOMFSA) issued a six week consultation proposing changes to the Financial Services Tribunal Rules 2015.

In the consultation document the IOMFSA explain that:

“It is not believed that the proposed Financial Services Tribunal (Amendment) Rules will have any adverse impact on any party, whether individual or business, regulated entity or adviser, because they merely serve to clarify meaning.“

Our initial reaction is, that this is not the case. We set out our rationale for this below.

Rather than the proposed changes not having any adverse impact on any party, we believe that the proposed changes amount to a significant and far-reaching limitation in the rights of aggrieved parties to challenge the decisions of the IOMFSA through the Financial Services Tribunal.

Currently the Tribunal Rules do not limit the grounds for appeal.  If this proposal is brought into law aggrieved persons will only be able to seek redress if there is an error of law or there is an error of fact.

In our view, this is a significant limitation of the right to appeal compared to the current position.

The proposals insert a new rule, 6A,  which in the words of the consultation document is ‘taken from regulation 24 in the (now revoked) 2001 Regulations’.

The consultation document then goes on to quote regulation 24 as:

‘24(1) The Committee must decide, taking into account in particular the applicant’s grounds of review and the Reply of the regulatory authority whether –
(a) the disputed decision is based on an error of fact;
(b) the disputed decision is wrong in law… ’

Rowany Solutions have obtained a copy of the 2001 regulations and have reproduced regulation 24(1) below in its entirety. We have emphasised in the text below the elements omitted by the IOMFSA.

‘24(1) The Committee must decide, taking into account in particular the applicant’s grounds of review and the Reply of the regulatory authority whether –
(a) the disputed decision is based on an error of fact;
(b) the disputed decision is wrong in law; or
(c) the regulatory authority’s exercise of its discretion in relation to the disputed decision was justified on its merits. ’

So not only does the proposal result in a significant limitation of the right to appeal on the current position, but by excluding appeals on the grounds of unjustified discretion this change imposes an even greater limitation on the rights of any person aggrieved by a decision of the IOMFSA than was the case under the now revoked 2001 regulations.

The existence of a credible and effective range of remediation and enforcement powers by the Island’s financial services regulator is essential to deter bad actors, enhance international trust in our financial services sector and ultimately the economic success of the island.

No-one is perfect however, the right of firms to appeal regulatorydecisions is central to ensuring robust decision-making and holding regulators to account in the interests of justice. Where firms are materially affected by regulatory decisions, they should have an effective right of challenge if they consider that the regulator has made a mistake or has not acted reasonably.

The Financial Services Tribunal itself, perhaps argues this point best in it’s 2013 decision:

‘The Tribunal is aware that the FSC is not infallible and may therefore make mistakes. It is for this reason, as submitted by [the Advocate], that an appeal may be made to the Tribunal. However, the question is whether a regulatory body objectively assessed in exercising its functions would have acted in the manner in which the FSC acted. The Tribunal notes that it is a truism of administrative law that even in circumstances where the exercise of a discretion is itself not open to challenge, the manner of the implementation of that discretionary decision undoubtedly is.’

The exercise of discretion is a key cornerstone of modern effective regulatory oversight. Rowany Solutions is concerned that the exclusion as a grounds of appeal of a disputed decision in relation to the exercise of discretion by the IOMFSA will in and of itself severely limit the ability for those regulated and overseen to challenge the decisions of the IOMFSA.

The word ‘may’ appears 207 times in the Financial Services Act, 85 times in the DBROA15 and 257 times in the Insurance Act.

Rowany Solutions recognises that not all these instances will amount to a discretionary power of the IOMFSA, but we believe that a large proportion of them are just that. It could be argued that the exercise of discretion is the most significant power at the disposal of the regulator and the way the IOMFSA uses that power must be open to scrutiny in the interests of justice, fairness and accountability.

Further, we note that no limitation as to grounds of appeal is considered in any of primary Acts setting out the IOMFSA’s role as financial services regulator or oversight body. Each of these Acts provide that a person aggrieved may appeal, in accordance with rules made under section 8 of the Tribunals Act 2006, against any decision of the Authority. In some Acts this right of appeal is limited to certain decisions of the IOMFSA, whereas in other Acts (the Insurance Act 2008) there is no restriction as to which decisions can be appealed.

By denying parties the right to appeal to the Financial Services Tribunal the only other course of action is the more costly option of a doleance claim (judicial review) which may take the recourse of appeal out of reach for many of the smaller firms who may have a legitimate grievance against a decision of the IOMFSA.

We thought it might be useful to put the exercise of discretion into context to understand how significant a role discretion plays in the day-to-day activities and enforcement decisions of a well-respected regulator, such as the Isle of Man Financial Services Authority.

IOMFSA has the power to perform an on-site inspection at the premises of any person undertaking regulated activities through the powers set out in schedule 2 of the Financial Services Act 2008 (‘FSA08’).  Similar powers exist in the Insurance Act 2008 and the Designated Businesses (Registrations and Oversight) Act 2015, although for this purpose we will concentrate on the FSA08.

The power to inspect is a discretionary one.  There is no rule or regulation that requires the FSA to undertake an inspection in any circumstance. In practice, inspections are undertaken by the FSA based on risk.  As the regulator moves towards the long awaited new supervisory approach, high impact, high risk firms are more likely to be inspected more often than low impact, low risk firms.  Other drivers that may determine the timing and extent of an inspection will be if the regulator has received complaints, a whistleblowing report or the return submissions received put the Authority on notice as to an issue.

The scope of an inspection (what the regulator will look at once they are with you and who they will talk to) is also discretionary.

When the report is issued following an inspection it will invariably set certain milestones for corrective action.  The length of time given to undertake remediation is again a discretion.

If the regulator subsequently undertakes a repeat inspection to assess for itself the implementation of the remediation plan and is not satisfied with the results then the courses of action available to the regulator are many and varied.  Many factors will be considered in determining the most suitable course of action including customer detriment, reputational risk, the potential for financial crime, the attitude of the board and senior management to the issues at hand, the actions taken to date by the company.  The regulator has complete discretion as to which route is pursued, whether it is to be used in isolation or in conjunction with one or more other powers.  These powers and possible courses of action include:

• a further remediation plan,
• regular enhanced reporting by the entity to the regulator,
• the appointment of a business manager,
• the appointment of a reporting accountant,
• the imposition of a civil penalty,
• the issue of a warning notice,
• direct a person in a controlled function, not to continue in that role
• prohibit an individual from acting in a particular role, within a company or within an industry (this in itself is a substantive discretionary power)
• the issue of a public statement,
• the ultimate power of revocation of licence.

In the UK, appeals against a decision given by the Financial Conduct Authority, the Prudential Regulation Authority, the Pensions Regulator or the Bank of England are made to, and heard by, the Upper Tribunal.

The Tribunal Procedure (Upper Tribunal) Rules do not seek to limit the grounds of financial services appeals. Guidance issued by HM Courts and Tribunal Service notes that “you must state the issues you wish the tribunal to consider and to explain why you are referring the decision to the Upper Tribunal. This will include the reasons why you believe the decision to be wrong. Examples of such reasons include the following.

• The respondent did not apply the correct law or wrongly interpreted the law.
• The decision is factually incorrect.
• The respondent had no evidence, or not enough evidence, to support its decision.
• The respondent made a procedural error.

This list is not exhaustive and you may say the decision is wrong for some other reason not mentioned here. If you are unsure whether the decision was wrong you may wish to seek professional advice.”

Currently, our system and right to challenge the regulatory decisions of the IOMFSA appears to be on a par with the UK and the Republic of Ireland when considering the grounds of appeal.  If the proposed changes are brought into law this will no longer be the case.  Similar appeals which would be successful in competitor jurisdictions may fail at the first hurdle in the Isle of Man.  Not a favorable picture if you are considering setting up a business in the Isle of Man.

The subject matter of the consultation, whilst in our view is contentious, is subject to scrutiny through the consultation process, giving interested parties the opportunity to express any concerns, so that they may be taken into account when formulating the final position. That is transparency at work.

In our view, however, that transparency could be compromised as the consultation appears to underplay the potential impact on firms; there is no consideration of our human rights, including the right to a fair trial; and the consultation may be viewed as potentially misleading as a result of the omission of relevant elements of quoted extracts within the consultation document.

Further, it is the normal practice of the IOMFSA to circulate consultations to industry bodies. It is our understanding that this consultation was not circulated to industry bodies in the usual way.

The Island and the Financial Services Authority have a strong reputation for fair governance, and it is important that this reputation is maintained. This is why we are seeking to bring this consultation to the attention of all industry bodies, regulated entities and designated businesses.

You have an opportunity to have your voice heard.  If any of the above issues concern you please take the time to respond to this consultation.  To assist you we have created a proforma response which can be downloaded here.

Don’t limit your challenges – challenge your limits

The consultation closing date is 9 July 2021.  Don’t miss your opportunity – respond today.