The Financial Services Authority (FSA) launched a wide-ranging review of its procedures for handling investigations and making enforcement decisions last week, as it separately emerged that the City regulator expects to overshoot its 2004/05 budget for using external lawyers and accountants in enforcement cases by 60%.

The review comes in the wake of severe criticism from the Financial Services and Markets Tribunal of its handling of the high-profile case against insurer Legal & General, which appealed a ruling by the watchdog's regulatory decisions committee that it had engaged in widespread mis-selling of endowment mortgages.


The tribunal found that the FSA's four-year investigation was flawed, that it had erred in its approach and reached conclusions that were not justified by the material before it.


Kent: FSA not typical regulator

Legal & General was cleared of widespread mis-selling, but the tribunal found the insurer did have deficient procedures and that the FSA had proved eight mis-sales out of the 60 alleged. The tribunal said it is likely to reduce the £1.1 million fine imposed on the insurer.

There is concern among City lawyers about how much the FSA's review can achieve, however.


Michael Kent, a senior partner in City firm Linklaters' financial markets group, said: 'In the context of enforcement, the FSA's biggest challenge is that the disciplinary regime is prescribed by the Financial Services and Markets Act 2000 - assuming there is no change in the law, the regulatory decisions committee has to deal with two fundamentally different types of cases with different needs.'


Where both parties want to settle, a quick, cheap, flexible and confidential system is appropriate, but where there is a fundamental disagreement - as in the Legal & General case - a transparent quasi-judicial system is needed, Mr Kent said.


He added: 'The committee was never meant to be a court of first instance and was not designed to operate in the independent way that regulated bodies might expect it to.'


The FSA meanwhile revealed in its business plan that it expects to spend £7.9 million on external lawyers and accountants in enforcement cases in 2004/05, up from a budgeted £5 million.


It blamed the bulk of the over-spend on its work on the split capital investment trusts scandal. The watchdog announced in January that investors would receive £194 million in compensation, although the FSA was criticised as this was more than £100 million short of the sum it originally set out to obtain.