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The case in point

FSA director of enforcement Margaret Cole noted recently that if firms settling cases stated publicly they did so for commercial reasons, the FSA might rethink the settlement process, saying those behaving in this way are guilty of “sour grapes”.

Triggered by public comments made by Woolworths following a £350,000 fine by the FSA for listing rule breaches, Cole’s comments are relevant to all FSA-regulated companies. But while Cole was no doubt attempting to discourage behaviour that undermines the regulatory process, this raises a number of points.

Companies often take commercial considerations into account when settling FSA actions. Indeed, they are encouraged to do so through early settlement discounts.

Cole said the FSA does not accept “non-admissive” settlements. However, the rules do not require the firm to admit matters. Rather, they require the facts set out by the FSA are not disputed and that matters are not referred to the Financial Services and Markets Tribunal.

In most cases, the company does not dispute that there have been regulatory breaches. Indeed, it may have drawn these to the attention of the regulator in the first place. However, there may still be room for disagreement as to specific findings. For example, a firm might dispute that such breaches risked customer detriment.

The reality is that if the FSA dismisses what the firm considers to be mitigating factors, it can take the position that the company has a simple choice – either accept a settlement based on the FSA’s findings or take the matter to the Tribunal.

The FSA knows they will rarely choose the latter as it makes no sense to reject a settlement and a discounted penalty to show aspects of the FSA’s case are wrong or overstated.

However, where the essence of the case is unchallenged, it does not undermine the process if a firm states that commercial considerations were relevant or draws attention to aspects of the case where it took a different view to the FSA.

At present, few companies comment when a case goes public. In Cole’s words, most accept the outcome with “good grace”. But if a published settlement is taken to mean the firm accepted the FSA’s case unequivocally, this may have the adverse effect of encouraging firms to comment in the future.

According to Cole, the FSA is “happy to have a fight” and firms may rise to the challenge if a more restrictive settlement process is imposed. That the FSA has increased its fines means that in some instances there is an economic incentive to “fight”.

If it is to encourage firms to support its role publicly, real credit needs to be given for open, honest and proactive co-operation with the FSA.

The settlement process can undoubtedly be improved and should be looked at again. But any further weighting of the process in favour of the FSA risks leaving a bitter taste in the mouth for firms that are the subject of action.

Jonathan Crook is a partner at Eversheds LLP

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