UK: Risk To Confidentiality Of Settlements Reached With FSA

Last Updated: 24 August 2007
Article by Alison McHaffie

A recent decision of the Information Commissioner has highlighted the risk of any settlement or arrangement that firms may have entered into with FSA becoming public. It is not uncommon for firms involved in FSA investigations or enquiries to reach an early informal resolution with FSA rather than embark on defending what can be a lengthy and expensive enforcement action which carries with it the risk of adverse publicity if FSA eventually makes findings against the firm. One of the key benefits for firms entering into these arrangements is that FSA does not usually make any public announcement about the arrangement thereby avoiding the reputational risks that defending FSA enforcement actions entails. Firms dealing with FSA will now need to consider the possibility that details of any arrangement could find its way into the public domain through a freedom of information request. This Law Now explains how the Information Commissioner reached this decision and the implications this may have for firms in future.

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Full Article

A recent decision of the Information Commissioner* has highlighted the risk of any settlement or arrangement that firms may have entered into with FSA becoming public. It is not uncommon for firms involved in FSA investigations or enquiries to reach an early informal resolution with FSA rather than embark on defending what can be a lengthy and expensive enforcement action which carries with it the risk of adverse publicity if FSA eventually makes findings against the firm. One of the key benefits for firms entering into these arrangements is that FSA does not usually make any public announcement about the arrangement thereby avoiding the reputational risks that defending FSA enforcement actions entails. Firms dealing with FSA will now need to consider the possibility that details of any arrangement could find its way into the public domain through a freedom of information request. This Law Now explains how the Information Commissioner reached this decision and the implications this may have for firms in future.

Freedom of Information Requests

The Freedom of Information Act 2000 (the "Act") deals with access to official information and gives individuals or organisations the right to request information from any public authority including the FSA. However, there are a number of exemptions under the Act, such as national security or the protection of commercial interests, which allow the authority to withhold certain information.

If the authority refuses the request for information it must gives reasons for its decision and inform the applicant of its rights to refer the decision to the Information Commissioner who can, if it upholds the complaint, instruct the authority to provide the information.

The Decision

This decision concerned a request made for FSA to provide the names of any companies it had identified as using inappropriate charges when setting premiums when selling mortgage endowments. These firms were identified during FSA’s informal mortgage endowment review in 2001. As the firms involved voluntarily agreed to compensate their clients, FSA did not use its formal powers to publicly censure these companies. FSA refused the request for information on the grounds that exemptions under section 31 (law enforcement), section 43 (commercial interests) and section 44 (statutory prohibition) applied. The Commissioner rejected FSA’s arguments and upheld the complaint requiring FSA to disclose the names.

In reaching the decision the Commissioner found that:

  • Disclosure would not prejudice the exercise of FSA powers of law enforcement. FSA argued that disclosure of the names would undermine the willingness of companies to engage in open dialogue with it and provide information voluntarily. The Commissioner rejected this argument on the basis that FSA has formal powers to require this information and it received information from other sources such as the FOS. He also did not agree that disclosure would discourage firms from seeking informal resolutions as this would still be in the firm’s best interests.
  • Disclosure would be likely to prejudice the commercial interests of the companies concerned but, having carried out a public interest test, the public interest in maintaining the exemption did not outweigh the public interest in disclosing the information. In reaching this decision, he took into account the fact that the sector had already been substantially affected by bad publicity surrounding the sale of these products, some of the companies had publicly admitted they were at fault, that FOS was still receiving a large number of complaints and that the disclosure would be given at a time when many companies are setting time limits on claims being made against them. Interestingly, the Commissioner also noted that disclosure would highlight FSA’s actions in this case and would allow public debate on why no formal action was taken.
  • The information requested was not covered by any statutory bar on disclosure. FSA accepted that the information did not fall within the confidentiality provisions of s348 FSMA which would exempt such information from disclosure. However, it argued that disclosure of the information would amount to a statement of misconduct without giving the firms the full due process rights provided by the warning notice procedure in sections 207 and 208 FSMA, and disclosure would therefore be incompatible with the requirements of the Human Rights Act. The Commissioner rejected this argument on the grounds the firms in question had the opportunity to dispel FSA’s findings when the review was presented to them and could have forced FSA to take formal action but chose not to do so.

Conclusion

It remains to be seen whether FSA will appeal this decision and refer it to the Information Tribunal. It has until the beginning of September to do so. It appears from the decision that the Commissioner did not like the way in which FSA came to these arrangements with firms and felt that its actions should be more transparent and not conducted behind closed doors. However, this view fails to recognise that FSA believes that by using these informal methods it is best able to protect the interests of consumers and secure early compensation for those affected.

In the absence of any successful appeal, firms would be well advised to consider the implications of this decision before reaching any arrangement with FSA that involves any understanding that FSA will not make any public announcement. FSA has never been able to offer a guarantee of confidentiality, but this decision will make any offer of no public censure less meaningful and therefore less attractive to firms considering settlement. However, firms should remember that much of the information that FSA receives from them will be covered by the confidentiality restrictions in s348 FSMA and as such will continue to be protected from disclosure. Moreover, this decision has been decided on its own facts and, in particular, in the light of the very public debate surrounding the selling of mortgage endowment policies, although most FSA investigations will not have attracted the same level of publicity or interest.

The concern therefore remains that, as one of the prime considerations for firms when faced with the possibility of an investigation and enforcement action is the risk of unwelcome publicity, FSA might now find it more difficult to achieve early settlement or obtain voluntary cooperation from firms who must now also weigh up this increased risk of the information finding its way into the public domain.

A further consequence of the judgement is the possibility of FSA facing an increase in the number of information requests it receives and to which it will have to accede. As a result of this decision, documents that previously many would have assumed that FSA had a right to withhold, will now be available to those making freedom of information requests. This may mean that in future FSA will be forced to adopt a more transparent approach to its enforcement functions.

* Case Ref: FS50075781
Date: 07/08/2007
Public Authority: Financial Services Authority

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 23/08/2007.

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