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The enforcers

There was some tough talking from FSA speakers at its recent enforcement conference on the theme of credible deterrence: changing behaviour through enforcement action.

Chief executive Hector Sants said: “A critical part of our regulatory objective is to ensure firms have and believe in a strong compliance culture and framework and exhibit the right behaviours. However, when firms are failing to deliver in the round, we need to take determined action. A key element of this proposition has to be our willingness to take robust action. More recently, we have been referring to this as credible deterrence.”

Director of enforcement Margaret Cole emphasised that enforcement is a key part of the FSA’s goal to deliver credible deterrence. She said it is determined to bring about real changes in behaviour to protect customers and guard against abuse in the markets.

She gave the example of the selling of unsuitable payment protection insurance policies and how the FSA intends to take enforcement action to bring about real changes in practices. She also dwelt on market abuse and insider dealing and emphasised that the FSA will be targeting individuals – especially those in senior and influential positions – and increasing its focus on prosecutions.

There can be no doubt that the FSA means business and that action will be taken against those who flout the rules but how did all this come across to the vast majority of people in the industry who do a good job for their clients and who comply with the rules?

There are about 19,000 small firms regulated by the FSA. These firms have little or no contact with the FSA apart from completing an online return every six months. It would come as an unwelcome shock to one of these firms if it were to find itself under scrutiny.

One of the difficulties with principles-based regulation is that it increases the area in which there can be genuine differences of opinion between a firm and the FSA. For example, a situation could arise in which the regulator requires a firm to take some action which the firm considers on reasonable grounds to be unnecessary.

The firm is faced with a conflict. It can do as the FSA requires. That may be expensive and against the firm’s commercial interests. Or it can refuse. However, it may be reluctant to refuse because it may feel that it cannot stand up to the FSA without in some way becoming marked for future unwelcome attention. The FSA is big, powerful and has limitless resources but it can be resisted in the right circumstances.

If those in the firm knew and understood how the process of enforcement and discipline operated, they would appreciate that there are many ways in which the firm can successfully defend its reasonable position against the FSA.

There are many ways in which the FSA can enforce its rules and requirements. It can require information and reports. It can carry out investigations. It can intervene in a firm. It can censure a firm or approved person publicly. It can exact fines and modify or withdraw authorisation or approved person status.

Most of its powers derive directly from the Financial Services and Markets Act and are often limited in some significant way. It is always important to make sure that the FSA is acting within its powers by checking the terms of the Act or the rulebook.

The regulator is sensitive to the charge that it is not being fair or is acting in a disproportionate manner. One of the consequences of the requirement to be fair, however, is that the processes are very detailed and involve several stages. At almost every stage, the firm has an opportunity to put its point of view and to argue its case.

The general principle behind the FSA’s decision-making relating to enforcement action is that someone senior and not involved in the investigation itself will decide whether to proceed.

A lawyer not involved in the case will review it before the matter is referred to the regulatory decisions committee, which in turn will make the decision in many cases to proceed further. This is a committee of the FSA board but it sits outside the management structure and is at least semi-independent. It has to be satisfied that the proposed action is appropriate and will take the FSA’s policy on the relevant issues into account.

Regulatory decisions committee chairman Tim Herrington told the recent conference that firms should always ask for the opportunity to make oral representations at a meeting of the committee. A personal appearance by someone from the firm is usually more effective than simply relying on written submissions. Legal representation is also permitted and appropriate.

If the decision to take action is made, this will result in a statutory warning notice. At this stage, the firm has the important right to see all the material on which the FSA relies for taking its decision. The right should always be exercised.

There is a detailed process available for without prejudice discussions and for settling with the FSA but one of the difficulties with settlement is that some firms feel it has been forced on them. Although the case is disposed of without having to go through the whole enforcement process, the firm feels a lingering sense of injustice because it still believes that its point of view was valid and reasonable and that if the matter had been argued out, perhaps before the committee or tribunal, its point of view would have prevailed. So settlements should not be entered into lightly.

After a warning notice and after all the representations have been considered, the FSA may still wish to proceed to a decision in relation to the matter. If the committee agrees, a decision notice is issued. If this happens, the firm has the right to refer the matter to the Financial Services Tribunal which will determine what would be the appropriate action for the FSA. In effect, this amounts to a full reconsideration of the decision. The tribunal is an independent judicial body and its procedure is analogous to other tribunals.

An important change takes place when the case moves from the FSA to the tribunal. The FSA is concerned with enforcement. The tribunal’s concern is to do justice between the FSA and the firm.

One of the tribunal’s judges, Judge David Mackie QC, was at the conference and was at pains to emphasise that the tribunal is in the “justice business”, not in the “enforcement business” like the FSA.

The whole enforcement process is complex, due partly to the formal and express incorporation into the procedures of the requirement to be fair. Every firm and approved person should take full advantage of that requirement.

At the end of the process, the tribunal is there to do justice between the FSA and the firm.


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