The FSA has come to believe that most of what goes wrong in regulated firms happens at the top, through insufficiently knowledgeable and motivated directors and senior managers.
The FSA’s enforcement guide states that taking action against individuals sends an important message about its regulatory objectives and priorities. The regulator considers such cases have important deterrence value. The message is clear – be better or we will discipline you.
But the FSA will be ruing the day it proposed a fine of £100,000 on John Pottage for his alleged failings when chief executive of UBS in his capacity as both CF3 (chief executive) and CF8 (apportionment and oversight). Pottage appealed against the FSA’s decision to discipline him and the Upper Tribunal found that his failure to institute a “systematic overhaul” of UBS’ controls at an earlier date than when an internal review was initiated was not beyond the bounds of reasonableness. Indeed, it agreed that the actions taken by Pottage prior to July 2007 to deal with operational and compliance issues as they arose were reasonable steps.
Repeatedly in the decision, reference is made to the fact that the tribunal took into account that Pottage was not a risk expert and nor was it his job to carry out the function of a risk expert. It said: “…If people who are specialists in compliance and risk control do not have material concerns about compliance monitoring and operational risk management, a chief executive in Mr Pottage’s position and with his experience will more likely have no or insufficient information on which to base his own challenge or with which to make his own corroborative tests”.
The decision reinforces the fact that directors and senior managers are not automatically liable for failures that take place in the areas for which they have functional responsibility. The test for liability is the reasonableness of conduct, and there will invariably be a range of reasonable responses – if the conduct under examination falls within that range, a disciplinary case will fail. It matters not that the conduct was not sufficient to achieve the regulatory or risk management objectives of the firm or the FSA, nor that more could have been done.
We need to see if changes in rules or legislation are made so the FSA and its successor bodies have a lower hurdle to overcome to make a director liable. Strict liability for directors of non-compliant banks has been proposed, although one criticism of that is the law is already onerous. What the Pottage decision shows is the law is not as hawkish as some had supposed.
Personal responsibility is important and conduct that falls outside reasonable should be punished but any liability trigger lighter than this one would have prevented anyone sensible from wanting to direct the affairs of all but the lowest-risk financial services firms. The tribunal has got it right and the rule and policymakers should leave the law alone.
Steven Francis is a partner at City law firm Reynolds Porter Chamberlain