FSA 'regularly surprised' by number of companies that do not tackle legal risk

REGULATION: chairman seeks to reduce litigation by telling companies to seek legal advice

The Financial Services Authority (FSA) is 'regularly surprised' by the number of companies that do not address legal risk, its chairman told a gathering of lawyers last week.

Speaking to the London School of Economics' Lawyers Alumni Group, Howard Davies explained that the FSA is founded on a risk-based approach to regulation, but though legal risk should be one of the risks financial services firms should actively manage, the FSA finds that many 'are operating on the basis of an implicit assumption about the legal position of the contracts to which they are a party, without seeking to clarify the position'.

He added: 'Firms seem surprisingly willing to proceed without the benefit of counsel's opinion, even in what is known to be heavily contested territory.'

Mr Davies said he was 'uncomfortably aware' that he may be accused of encouraging the practice of opinion shopping, and 'giving an unjustified boost' to the profession's turnover.

'But my motives are pure.

They are to reduce the volume of litigation, normally a more lucrative source of business for the legal profession - and also to reduce the risk of financial failure.'

Turning to the FSA's own legal staff - of whom there are around 100 - Mr Davies said the authority has made a priority of integrating lawyers with other professionals.

'Our experience is that we get best value from our legal resource if we ensure a lively interaction between lawyers and those from other disciplines, notably economics, accountancy and other types of financial qualification.

If that interaction is to work well it requires lawyers who are innovative, and activists,' he said.

Mr Davies said the FSA learnt from the previous regulatory regime that if legal powers are not used, they can ossify.

However, in many cases, supervisors can be reluctant to invoke legal powers.

He said the general counsel's division is explicitly tasked with assessing how best to use the provisions in the Financial Services and Markets Act to ensure that supervisors are aware of 'the full potential of the legal toolkit at their disposal'.

'We think, therefore, that we have found an interesting new approach to integrating legal thinking with the other disciplines which make up the regulatory cocktail.

Only time will tell whether this is the best solution, though we are encouraged so far,' he said.