UK: FSA Consults On Increased Enforcement Powers

Last Updated: 27 October 2010
Article by Alison McHaffie and Simon Morris

On 14 October 2010, FSA issued a consultation paper outlining its proposals on amendments to the Decision Procedure and Penalties Manual (DEPP) and the Enforcement Guide (EG).  The consultation will run until 14 December 2010 and a policy statement is expected to be published by FSA in January 2011.

There are two issues which are likely to be of particular interest to the industry.  Firstly, FSA proposes introducing a new rule prohibiting authorised firms from paying a financial penalty imposed on a present or former employee, director or partner of a firm or an affiliated company.  FSA believes that individuals would be less likely to breach FSA rules if they knew that their employers would not pay the financial penalty imposed on them.

The second is that it sets out the policy FSA intends to follow when exercising its new power to publish enforcement actions earlier in the disciplinary process.  This power was granted to FSA by the Financial Services Act 2010 and the provision has now been activated through a Commencement Order.  The consultation paper deals with how FSA proposes to exercise this new power.  Before the enactment of the 2010 legislation, the firm or individual had the right to appeal an FSA decision to the Upper Tribunal before any notice containing details about the action was published.  From now on, FSA has the right to publish its decision notice before any appeal has been heard.  

Another notable power granted to FSA by the 2010 Act and brought into force by the Commencement Order is the power to create a consumer redress scheme.  The new power will be used in instances when there is evidence of widespread or regular failings that have caused consumer detriment.  It is a rule making power, so FSA must undertake cost-benefit analysis and consult each time it wants to establish a redress scheme.

New rule preventing firms from paying employees' fines

FSA's rationale for introducing the rule that an authorised firm (other than a sole trader) may not pay the financial penalty imposed on a present or former employee, director or partner of a firm or an affiliated company, is that of credible deterrence.  In other words, FSA believes that if a person is required to pay the fine himself, he is less likely to break FSA's rules. 

The impact of this rule is not clear; FSA does not have any information about how often fines imposed on individuals are actually paid by firms.  It is of the view that under the present rules, firms should not be paying the fines of employees, directors or partners due to FSA Principle 1 (acting with integrity) and 11 (dealing with regulators in an open and co-operative way).

In the context of ever-increasing fines from FSA coupled with its commitment to take more individual enforcement actions against senior management, this may be a cause of serious concern to directors and senior management.  It should be noted that individuals are also prohibited from insuring themselves against FSA fines. 

There are FSA rules dealing with reducing fines in cases where payment would cause the individual serious financial hardship, but this is likely to be of little relief to those caught under this provision.

Publishing decision notices

As noted above, FSA now has the right to publish decision notices as well as final notices, giving FSA the right to publish information about a particular matter earlier in enforcement proceedings.  In the consultation paper, FSA does state that it will only publish a decision notice if a matter is in fact appealed to the Upper Tribunal; otherwise, it will only publish a final notice (as is presently the case). 

This new power is in keeping with FSA's increased appetite for publicity for its actions.  FSA is concerned that if a firm refers the matter to the Upper Tribunal, there may be a long delay before consumers and the industry become aware of FSA's reasons for taking action.  FSA states that this measure imposes no costs on firms and should allow consumers to avoid any possible harm.  However, this now means that firms could find themselves the victim of negative publicity and suffer significant reputational damage even if FSA's case is later dismissed on appeal. The proposals do not explain how FSA will act if it publishes a decision notice and then the Upper Tribunal remits the matter back to FSA or dismisses the matter completely.  In such cases, the final notice from the Upper Tribunal would be published, but it is not clear whether a statement clarifying that the original decision notice is no longer satisfactory or relevant would also be produced, and whether the (outdated) decision notice would immediately be removed from FSA's website.

Other key changes to DEPP and EG proposed in the consultation paper

FSA also proposes amending its policy for reviewing published notices and press releases.  Currently FSA automatically reviews these after six years, and decides at this point if the notices should be amended or removed from its website.  The proposals state that rather than an automatic review after six years, the review will only occur if the firm so requests.  Firms may not make this request before six years have passed.

FSA has also proposed aligning its new power to suspend with the early settlement discount regime which it currently applies to financial penalties.  This means that for misconduct on or after 6 August 2010, if a firm agrees to FSA's proposed action at the earliest possible stage, the firm would receive a 30% discount.  In practice this would mean that a ten-month suspension, for example, would be reduced to a seven-month suspension.

Consumer Redress Scheme pursuant to the Financial Services Act 2010

As noted above, FSA now has the power to order firms to set up consumer redress schemes.  These schemes may be established in cases where there may have been a "widespread or regular failure" by relevant firms to comply with FSA rules (or general law) and consumers may have suffered detriment as a result.

Previously, such schemes would have had to be authorised by HM Treasury, but the new Act gives FSA the power to act on its own authority.  Industry has raised a concern that FSA can introduce schemes requiring a firm to provide redress, without actually conducting an investigation of the particular firm in question.

There is a lack of clarity as to how and when FSA will choose to exercise this power.  On the one hand, these schemes may prove a useful tool for FSA to drive forward its aim of dealing with, reducing and potentially eradicating large-sale mis-selling and the causes of it, which would clearly have an important impact on the financial services industry going forward. 

On the other hand, FSA may choose to continue to deal with obtaining customer redress through its general supervisory and regulatory relationship with authorised firms.  This is potentially attractive from FSA's point of view, not only because it allows for focused-FSA responses to particular failings, but also because the process of creating a consumer redress scheme is cumbersome.  Every time that it wishes to establish a scheme, FSA will have to undertake a cost-benefit analysis and carry out a formal consultation (usually lasting three months).

It is also worth noting that there are a number of safeguards in FSA's guidance about how they will use these schemes.  For example, consumer redress schemes cannot be used to require redress in relation to those failures in respect of which a consumer would not have a right of action in court.  Furthermore, if FSA is found to be using its powers improperly, it may be challenged by making an application to the Upper Tribunal. 

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 22/10/2010.

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