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Crisis management

At N2 on December 1 last year the FSA acquired its full powers as the sole regulator of the UK&#39s financial services industry – it is now a regulator with teeth.

The FSA&#39s Enforcement Division is located at its Canary Wharf office and is staffed with lawyers, accountants and ex-policemen. They conduct forensic investigations into suspected misconduct and regulatory failures. They also conduct civil and criminal proceedings. The division was integrated and reorganised last year and is now actively recruiting more staff.

The marks left by the FSA&#39s teeth can be viewed on its website, which lists the names of those people who have had a prohibition order made against them and gives details of enforcement action taken against firms.

An investigation may start as a result of whistleblowing, a complaint or following a routine monitoring visit. When faced with an FSA investigation many firms would benefit from having a crisis management system in place which should incorporate the following.

Don&#39t panic

Although the FSA has been given a comprehensive array of powers, it is required to exercise them properly and there are opportunities to challenge any decisions it makes. A complaints commissioner has been appointed to investigate any unreasonable delay, unprofessional behaviour, bias or lack of integrity by the FSA and report back to the complainant.

Identify any conflict between the authorised firm and the approved persons

If the investigation relates to unauthorised activities carried out by an approved person (someone approved by the FSA for the performance of a controlled function) and it appears that the activities were carried out in an unauthorised manner, there may be a conflict between the firm and the approved person.

If it appears possible that such a conflict exists or might arise, it would usually be necessary for the firm and the individual to have separate legal representation for the FSA investigation.

Consider what insurance cover is available

If the FSA commences an investigation it is likely that the firm will require legal representation and possible that individual approved persons will require separate representation. It is likely that a firm and the approved persons will have errors and omissions or directors and officers insurance to provide cover for such costs.

Insurers should be notified of the investigation and care should be taken to comply with the terms and conditions of the insurance.

Assess the affect of the investigation on any related claim by the client/third parties

If the investigation is conn-ected with any loss suffered by clients or third parties, it will be necessary to coordinate the response to the FSA investigation with the response to any civil liability claims.

Consider whether to give evidence voluntarily

The FSA has the power to require a person to answer questions in interview. However, it is believed that the FSA will try to persuade people to give voluntary interviews as the transcripts can be used more widely than the transcripts of compelled interviews.

Compelled evidence cannot be used as evidence in any subsequent criminal proceedings against the person interviewed. This protection arose from the judgment of the European Court of Human Rights concerning Ernest Saunders and the questions from the DTI that he had to answer in connection with the Guinness affair. If there is any possibility that the FSA investigation could lead to a criminal prosecution, interviews should not be given voluntarily.

Secure relevant documentation

Section 177 Financial Services and Markets Act 2000 makes it a criminal offence to falsify, conceal, destroy or otherwise dispose of a document relevant to an investigation. Anyone who causes or permits such action is also guilty of a crime.

The Enron scandal is an example of the bad publicity generated by the shredding of documents. It is very important to have a reasonable document retention policy – see that all employees understand it and make sure that no relevant documents are disposed of following receipt of notice of an FSA investigation.

Ensure documents are protected from disclosure

The FSA cannot require disclosure of any document connected with the giving of legal advice or in contemplation of legal proceedings. Steps should be taken to ensure that this protection is given to the widest possible selection of documents.

Use the Regulatory Decisions Committee – beware of the tribunal

It is the Regulatory Decisions Committee of the FSA that will impose penalties for breaches of the rules. It is possible for parties to make written or oral representations direct to the RDC. This opportunity should be taken as it gives access to the decision makers.

The mediation scheme built into the FSA rules should also be used. A challenge to a decision of the FSA taken by the RDC is done by way of a full re-hearing of the matter before the Financial Services and Markets Tribunal.

This is independent of the FSA and its hearings will be in public unless there is good reason for it to be in private. The possible advantages of a challenge to a decision of the FSA should be weighed against the possible damage that might result from any ensuing publicity from the tribunal hearing and its decision.

Keep to time limits

A party has 28 days to respond to a warning notice from the FSA. The FSA must be notified at least five business days before the end of the 28-day period if the party wishes to make oral representations to the RDC. Reference to the tribunal must be made within 28 days of the date on which a decision notice was given.


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