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 www.law-now.com/law-now/mondaq
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.