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Regulator’s power is growing stronger

Every person working in the financial services industry will be aware of the wide-ranging powers of the FSA. Many of those powers are disciplinary in nature and it would be difficult to argue that the regulator should not have powers to discipline those in the regulated community who act in breach of the rules. But there are some powers of punishment for a breach of the rules which are so severe that the question arises as to whether the regulated person is adequately protected against mistaken or wrong accusations.

By contrast, someone accused of a criminal offence has the substantial protection of the law. To name but some of the more important rules which act to protect a defendant against an over-mighty prosecutor: the Crown has to frame a charge with precision, so that the defendant knows exactly what he or she is accused of doing wrong; for most serious offences, the defendant has the right to a trial before a judge and jury; the trial takes place in public; witnesses are examined and cross-examined in public; the defendant sees and hears the witnesses; the Crown has to prove the facts to a very high standard: that is, the jury has to be sure that the defendant is guilty before it can convict. If the defendant is found guilty, it is the judge who decides on the appro-priate punishment, not the prosecution.

These are strong legal safeguards that have stood the test of time.

Compare that with the new rules relating to someone who has knowingly performed a controlled function without the FSA’s approval.
The Financial Services Act 2010 gave the FSA a new power to impose a penalty “of such amount as it considers appropriate” on a person who “has at any time performed a controlled function without approval”, and who knew, “or could reasonably be expected to have known” that he or she was performing the function. The penalty is open-ended.

In other words, there could be an unlimited fine imposed. What safeguards does that person have?

First, what is the standard of proof which the FSA has to meet? The Act simply says that the FSA can impose the penalty if it is satisfied that the person has knowingly performed the function without approval.

The Act provides no help as to the degree to which the FSA needs to be satisfied before it can impose the financial penalty. There is no clue as to whether the FSA has to satisfy itself simply on the balance of probabilities or to the higher standard that is applicable in the criminal courts.

But the Act does require the FSA to set out its policy relating to this disciplinary offence. In that policy statement, the FSA “must include an indication of the circumstances in which it would expect to be satisfied that a person could reasonably be expected to have known that the person was performing a controlled function without approval”.

In its statement of policy, the FSA says that it would expect to be so satisfied if, for example, the person has performed a similar role before for which he had approval. That would seem to be good evidence. Other similar circumstances are set out. But there is apparently nothing to stop the FSA becoming satisfied on lesser evidence or on evidence which is disputed.

How will the FSA deal with a case where there is a legitimate difference of view as to whether the person’s role did in fact fall into a controlled function as defined in the rules? Crucially, the FSA does not have to satisfy an independent court, tribunal or other body.

Secondly, although the FSA’s statement of policy is also required to set out its approach for determining penalties and must take a number of matters into account, it is still the FSA that decides the penalty.

Thus, up to that point, the FSA will have been not only the prosecuting authority and the judge of whether the wrongful act has been committed but it will also have been the judge of what penalty to impose.

It is fair to acknowledge that there are a number of checks and balances in the FSA’s internal procedures but the fact remains that the FSA is in control of the whole procedure. No court or other independent body will have been involved.

Generally, once the FSA has reached the stage of proposing to impose a penalty, it must give the person affected a warning notice in which the penalty is set out. The person then has at least four weeks in which to make representations to the FSA.

If the FSA then decides, despite the representations, to impose the penalty, it must issue a decision notice. That is the end of the FSA’s own internal process.

The only safeguard, external to the FSA, comes at this stage. Once the FSA has issued a decision notice in which it sets out the facts of the case, the person subject to the penalty has the right to refer the matter to the tribunal where the procedure is analogous to that of a court, and where the matter is considered afresh.

Although the tribunal will require the FSA to prove its case, by the time the matter gets to the tribunal, the person affected will have spent a huge amount of effort and time attempting to alter the FSA’s collective view that the person is guilty of the breach of rules. No doubt he will have engaged lawyers and perhaps others, such as experts, and therefore incurred significant expense. No legal aid is available to help with the cost of taking on an organisation with effectively unlimited resources.

’Protection for this community against mistaken or wrong accusations may now well prove to be inadequate’

Dealings between the FSA and a regulated firm or person are confidential to the involved parties. Disciplinary matters are no exception.

But if the result is a finding against the person being disciplined, the FSA must publish a final notice with appropriate details.

Until October 12, 2010, neither the FSA nor the person affected was permitted to publish a warning notice or a decision notice or any details from it.

If the person referred the matter to the tribunal, nothing could be published until after the tribunal had dealt with it.

If the person did not refer the matter to the Tribunal, the FSA would then have to publish a final notice.

Thus, the matter did not get into the public arena, at the earliest, until after the person had decided whether to take the matter to the Tribunal.
However, since October 12, the FSA must bring forward the publication to the time at which it issues the relevant decision notice.

Thus the person no longer has the private space in which to decide whether or not to take the matter to the Tribunal; and more importantly, if the Tribunal chooses to take a different view of the facts to the FSA, then it is difficult to see how the damage caused by the earlier publication of the FSA’s decision can then be undone effectively.

Despite the fact that the FSA is to be at least partly dismantled, its powers over the regulated community are continuing to grow, and protection for this community against mistaken or wrong accusations may now well prove to be inadequate.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court

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