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An Overview of Enforcement Processes of the Financial Services Authority

Founding principles of the FSA

Information gathering and investigation powers

Decision making and the role of the Regulatory Decisions Committee

Discipline of authorised firms and approved persons

Market abuse

Restitution and redress

The Financial Services & Markets Tribunal

Introduction

The world of financial services permeates through most aspects of every day life. It is often a barometer for significant social and political change. Financial services institutions in the UK are long established and play a vital role in the economy of the country. For many years wealth was concentrated in the hands of a few large financial institutions. Those institutions and markets were largely trusted to regulate themselves. The increase in retail investment products and the number of smaller investors motivated Parliament to establish a system of investor protection using self-regulation as its guiding principle. So it was that a prescribed system of self-regulation in the financial services industry was laid down in the Financial Services Act 1986 (“the 1986 Act”). Under that system self-regulatory organisations (SROs) were established to authorise persons carrying on investment business in respect of certain investments. The cornerstone of this legislation was investor protection. The regulation of banks and deposit taking fell outside the scope of the 1986 Act and was governed by other legislation.

The whole financial services industry, including banks, is now unified under a single statutory regulator - the Financial Services Authority (“the FSA”). Key to this new structure is the Financial Services and Markets Act 2000 (“the Act”), which received royal assent on 14 June 2000. Underpinning the Act is the FSA Sourcebook, containing detailed rules, policy and guidance to be found on the FSA's website at http://www.fsa.gov.uk

This presentation provides an overview of how the FSA enforces its powers. We will look, in turn, at a number of key elements of the enforcement structure in order to understand the principles behind the new regime its powers and processes.

These are as follows:

(1) Founding principles of the FSA;

(2) Information gathering and investigation powers;

(3) Decision making and the role of the Regulatory Decisions Committee;

(4) Discipline of authorised firms (“firms”) and approved persons;

(5) Market abuse;

(6) Restitution and redress;

(7) The Financial Services and Markets Tribunal (“FSMT”).

Founding principles of the FSA

The FSA is accountable to Parliament through ministers. The Act achieves this through the following:

(1) prescribed statutory objectives and general duties, with accountability through Parliament and through courts by means of judicial review;

(2) governmental structures whereby the Board and Chairman of the FSA are appointed by the Treasury with a majority of non-executive Board members having the prescribed responsibilities;

(3) the obligation upon the FSA to report annually to the Treasury and to hold an open public meeting to discuss its annual report;

(4) practitioner panels and a requirement to consult publicly on rules and proposed guidance;

(5) oversight on competition matters by the Director General of Fair Trading and an independent judicial tribunal administered by the Lord Chancellor’s Department to determine issues of enforcement and authorisation in the event that agreement cannot be reached;

(6) an independent commissioner to consider complaints against the FSA;

(7) accountability through the Treasury to Parliament.

The FSA's statutory objectives

At the heart of the Act lie four key statutory objectives, which govern the thinking behind the new regime:

(1) Market confidence: Maintaining market confidence in the financial system;

(2) Public awareness: Promoting public understanding of the financial system;

(3) Consumer protection;

(4) Reduction of financial crime.

The FSA has assumed duties in the performance of these objectives which include:

(1) using its resources in an efficient manner;

(2) acting in a proportionate manner;

(3) not impeding or distorting competition unnecessarily;

(4) promoting innovation in regard to the UK's position within the global financial services industry.

It is plain how much wider ranging the objectives of the new regime are in comparison to the objectives of investor protection that governed the old self-regulatory regime under the 1986 Act. When balanced against the statutory objectives, the duties of the FSA provide a counter weight for market practitioners. The way the FSA carries out its duties may be used in arguments before Parliament or the Courts if the FSA is brought to account either by the political process, the Financial Services & Markets Tribunal or the courts (through appeal from the Financial Services & Markets Tribunal or judicial review).

What do these statutory objectives entail and what obligations to they place upon the FSA?

To promote market confidence the FSA:

(1) has established memoranda of understanding with the Treasury and the Bank of England to align responsibilities in the context of the stability of the financial services markets;

(2) Exercises a supervisory regime in the financial services industry to reduce individual and systemic risk;

(3) investigates misconduct, brings enforcement action in appropriate cases and seeks to ensure redress for mis-selling;

(4) has established a code of market conduct in connection with the new market abuse regime.

On the issue of public awareness, the FSA has ensured extensive public accessibility to its functions and consultative process through web publications and has maintained a clear emphasis on consumer education.

On the issue of consumer protection it has undertaken to supervise the relevant markets and, where necessary, to take enforcement action in the interests of policyholders and depositors, and has developed single compensation scheme and Ombudsman scheme.

On financial crime the FSA has established important links with the relevant criminal prosecution authorities and has placed particular emphasis on supporting the international aspects of anti-money laundering supervision and on fighting financial crime at home and overseas.

The FSA's role and duties in the context of these obligations under the Act are designed to provide a cohesive and systematic system of regulation and enforcement for the financial services industry.

Information gathering and investigation powers

The FSA has substantial powers to gather information and investigate matters within its jurisdiction. The primary legislation contained within the Act forms the foundation and further detail is contained within the FSA's enforcement manual.

Specifically, the Act sets out the FSA's powers to:

(1) require firms to provide information and documents;

(2) require firms to provide reports by skilled persons;

(3) appoint investigators to carry out general investigations into firms;

(4) appoint investigators to carry out investigations into specified matters;

(5) require information and appoint investigators in support of overseas regulators;

(6) appoint investigators to carry out investigations into collective investment schemes.

We will look at each of these powers in turn and examine some of the detail contained within the statute and enforcement manual, together with the policy on the use of these powers in respect of:

(1) individuals within the FSA's jurisdiction;

(2) unauthorised entities and individuals;

(3) investigation by overseas regulators; and

(4) collective investment schemes.

There are separate powers of investigation under the market abuse regime that do not form part of this presentation.

Requiring information and documents from firms

Section 165 of the Act deals with the FSA's powers to require information and documents from firms. The FSA may do this in two ways under the provisions of section 165 (1) as follows: either a) require the provision of specified information or information of a specified description; or b) require the production of specified documents or documents of a specified description.

The firm must comply with the FSA's requirements within a reasonable period of time, as specified by the FSA, and provide information in any form that the FSA may reasonably require.

Officers of the FSA have express powers under section 165 (3).

Importantly, these powers are extended in section 165 (7) to permit the FSA to require the production of information or documents by: a) a person who is connected with the firm; b) an operator, trustee or depository of certain types of recognised collective investment scheme that is not an authorised person; and c) a recognised investment exchange or recognised clearing house.

The definition of “firms” also extends to those who cease to be authorised under the provisions of section 165 (8).

Importantly, the FSA's powers to require the production of information and documents by firms may be used in support of its supervisory and its enforcement functions.

Note: The FSA's use of information gathering and investigation powers are capable of very wide application, including beyond mere enforcement action.

Reports on firms by skilled persons

Importantly, this is an obligation that the FSA can place upon firms to provide reports by a skilled person at the firm's own expense. The extent of this requirement goes beyond firms themselves and includes any member of the firm's group, a partnership of which the firm is a member or a person who acted in these capacities at any relevant time.

The FSA has a discretion to specify the form of any such report and its terms of reference.

Additionally, under section 166 (4), the skilled person must be nominated or approved by the FSA and must appear to the FSA to have the skills necessary to report on the matter concerned.

It is important to note that the provision of information and documents by firms and the provisions relating to reports on firms by skilled persons go hand in hand and extend broadly to supervisory as well as enforcement functions. By this means, the FSA is able to impose managerial obligations and resources onto the firm or entity under investigation, thereby optimising the use of the FSA's resources and minimising cost to the FSA.

General investigations of firms and appointed representatives

Section 167 of the Act deals with the appointment of investigators to conduct general investigations into firms and appointed representatives. The scope under section 167 (1) is necessarily very broad and empowers the FSA or the Secretary of State if “there is good reason to do so” to conduct an investigation into the nature, conduct or state of the business of the firm in question or any particular aspect of that business or, indeed, into the ownership or control of a firm.

This power is extended in section 167 to apply in respect of a member of a group or partnership of which the firm under investigation is a part. It is still further extended in section 167 (4) to matters concerning business carried on at any time when the firm, authorised person or appointed representative under investigation was formerly authorised.

The appointment of investigators to carry out investigations into specified matters

Section 168 of the Act relates to specified contraventions, offences and other matters and the FSA's powers to appoint investigators. These powers (which may be exercised in relation to any person whether authorised or not) relate to the commission of certain criminal offences, breach of the general prohibition that no person may carry out a regulated activity in the UK or purport to do so unless he is an authorised or exempt person and breaches of the financial promotion and the market abuse regimes.

Under section 168 (4 & 5), the FSA may appoint one or more competent persons to conduct an investigation on its behalf if there are circumstances suggesting that:

(a) a firm may have contravened the requirements of its permission to carry on regulated activities;

(b) a person may be guilty of an offence under the money laundering regulations;

(c) a firm may have contravened a rule made by the FSA;

(d) an individual may not be a fit and proper person to perform functions in relation to a regulated activity; or

(e) an individual may have performed or agreed to perform a function in breach of a prohibition order [these are just examples of the scope of this additional power].

The FSA has developed distinct policies on the use of these powers to deal with specific instances of market misconduct. The policies, which are set out in the enforcement manual, cover powers exercisable in relation to firms, approved persons individuals employed by firms and appointed representatives and powers in relation to unauthorised businesses.

Investigations in support of overseas regulators

These provisions recognise the international nature of the financial services markets.

Section 169 relates to investigations conducted to assist an overseas regulator. The FSA may exercise its powers to require documents under section 165 or to appoint a person to carry out an investigation. However, before doing so, the FSA must take into account a number of material factors when considering whether to exercise these powers in support of an overseas regulator. The policy is divided into two broad categories: first of all, community obligations and compliance by the FSA with those obligations; and secondly, where there is no community obligation, the FSA has to consider other factors. These include 1) whether there are reciprocal arrangements in the country that has requested assistance; 2) whether the case concerns a breach of a law or other requirement that has a close parallel in the UK or involves the assertion of a jurisdiction not recognised by the UK; 3) the seriousness of the case and its importance to persons in the UK; and 4) whether it is otherwise appropriate and in the public interest to give such assistance. There is also a discretion under section 169 (5) for the FSA not to provide such assistance unless the overseas regulator makes a contribution towards the FSA's costs. Additionally, the FSA will consider whether or not it can obtain such information as is requested voluntarily prior to exercising its formal powers.

The appointment of investigators to carry out investigations into collective investment schemes

The FSA may appoint an investigator to carry out an investigation into a collective investment scheme if it is in the interest of the participants or potential participants in those schemes to do so or a matter of public concern is raised (section 284 (1)). The FSA can, in the absence of voluntary compliance by the managers of those schemes, use its general investigative powers. However, the powers under section 284 may be more appropriate where matters of public concern are raised or the interests of potential participants are prejudiced.

Protected items, banking confidentiality and privilege

Many advisors will be obliged to consider these factors in responding to any request from the FSA or from investigators or skilled persons made in the course of an investigation. The Act contemplates these issues and makes specific provision for them. Let us now deal with these issues in turn.

Section 413 (1) states that a person may not be required under the Act to produce, disclose or permit inspection of protected items. “Protected items” are defined as follows:

“a) communications between a professional legal advisor or client or any person representing his client which fall within section 413 (3);

b) communications between a professional legal advisor, his client or any person representing his client and any other person which fall within section 413 (3);

c) items which:

i) are enclosed with, or referred to in such communications,

ii) fall within section 413 (3); and

iii) are in the possession of a person entitled to be in possession of them.

A communication falls within section 413 (3) if it is made, a) in connection with the giving of legal advice to the client; or b) in connection with or in contemplation of legal proceedings and for the purposes of those proceedings.

Section 413 is subject to two important clarifications. Firstly, under section 413 (4), a communication or item is not a protected item if it is held with the intention of furthering a criminal purpose and, under section 175 (4), a lawyer may be required to furnish the name and address of his client.

Banking and confidentiality

Sections 175 (5) and 284 (8) of the Act broadly preserve banking confidentiality in that they ensure that no person may be required to disclose or produce documents in respect of which he has an obligation of confidence by virtue of carrying on banking business.

Admissibility of statements

Section 174 of the Act relates to the admissibility of statements made by persons in compliance with the information requirements imposed under the relevant provisions of the Act, including requirements made by investigators. Broadly, such statements are admissible with two important exceptions. They are not generally admissible in criminal proceedings, in which the person making the statement is charged with an offence or is subject to proceedings under the market abuse regime. (The exceptions therefore recognise the right against self incrimination). Where these exceptions apply, no evidence relating to the statement may be used and no question relating to it may be asked by the prosecution in Court or by the FSA unless the person making the statement adduces evidence or raises a question in relation thereto in the relevant proceedings.

There is one important exception to the above, as statements are admissible in order to prove offences such as making false statements or providing false or misleading evidence to the FSA's investigation.

Policy and practice

It is claimed that the FSA sees its investigation powers as essentially fact finding powers. In practice, however, the FSA with probably hold its statutory powers in reserve. The FSA's investigation process is more likely to proceed voluntarily or consensually as it would within the jurisdiction of the overseas regulator. The possibility will remain, however, of penalties for any failure to comply with statutory requirements.

The FSA usually appoints members of staff as its investigators in routine cases, but may resort to relevant external professional resources when required. The FSA does, however, at all times have powers to direct the investigation including its scope, the period in which it is to be conducted, the conduct of the investigation itself and its reporting under section 170 (7). Section 170 (8) gives the FSA control over the investigation’s terms of reference, including the capacity to extend the investigation to additional matters if required and the power to require investigators to make interim reports or discontinue the investigation if necessary.

Notification

There is an express requirement under section 170 (2) to give a person the subject of the investigation written notice that the FSA has appointed an investigator (with limited exceptions). Such notice must specify the provision under which the investigator is appointed and state the scope and reasons for the investigator’s appointment. The FSA will generally give written notification of any change in the terms of reference or appointment. Exceptions to the notification rule are available where the FSA believes the investigation might be frustrated or where the investigator is appointed under section 168 (2) of the Act (i.e. certain criminal offences, market abuse, and breaches of the general prohibition and financial promotion regime).

Publicity

Although currently the subject of consultation as part of the N2 review, the general principle is that the FSA will neither confirm nor deny the existence of an investigation into a particular matter or the outcome of any investigation. Exceptionally the FSA may make a public announcement, for example to avert speculation, where it is desirable to maintain public confidence in the financial system, protect consumers, prevent widespread malpractice or to facilitate the investigation itself.

Interviews

When the FSA, using its powers under the Act, requires a person to answer questions in interview, it will give the individual an appropriate warning that failure to answer questions may result in further enforcement action.

The interviewee has the right to be accompanied by a legal advisor and will be provided with a record of the interview. The FSA will also explain to the individual that the answers he gives in interview will be of limited use in subsequent criminal proceedings or proceedings under the market abuse regime.

The FSA may decide to exercise its power to interview under caution where it is contemplating criminal proceedings or proceedings under the market abuse regime. The FSA may also decide to conduct subsequent interviews (which may or may not be compulsory) after it has conducted an interview under caution. It will, of course, be obliged to explain the difference between the two types of interview as well as how the answer can be used in any subsequent proceedings. As a matter of policy, the FSA currently seeks to use its compulsory powers where available.

Lastly and importantly, the FSA has significant powers (section 176) to enforce requirements under the Act in pursuance of investigations. These include powers to apply for a search warrant. A warrant may be granted in the following circumstances:

(a) if the registrant is satisfied that there are reasonable grounds for believing that a person has failed to comply with requirements to produce documents, and

(b) those documents or information are on the premises specified in the warrant (section 176 (2)); or (c) the premises specified in the warrant are the premises of the firm or appointed representative concerned and the registrant is satisfied that there are documents or information on the premises, and that the requirement would not be complied with or the documents or information would be removed or tampered with or destroyed if such a requirement was made (section 176 (3)), or

(d) a serious offence has been or is being committed and the registrant is satisfied that documents or information relevant to that offence are on the specified premises, and an information requirement could be imposed on those documents or that information and that the relevant requirement would not be complied with or the documents or information would be removed, tampered or destroyed (section 176 (4)).

A search warrant under section 176 entitles a constable to enter and search premises, take possession of documents or information to which the warrant relates, reserve those documents or information or take copies or extracts from any such documents or information. A search warrant under section 176 authorises a constable to require personnel on the premises to provide an explanation for any such document or information or to state where it may be found.

The FSA will usually seek as a matter of practice to ensure its investigator is named on the warrant and is entitled to accompany the constable on any such search.

Section 177 of the Act creates criminal offences in relation to non-cooperation with information gatherers and investigators. Liability will be incurred by an individual who knows or suspects that an investigation is being or is likely to be conducted and falsifies, destroys, conceals or disposes of a document relevant to the investigation or causes or permits the falsification, concealment, destruction or disposal of such a document. It is a defence for the individual to show on the balance of probabilities that he had no intention of concealing facts disclosed by such document from the investigator (section 177 (3)). An individual will also incur liability, where he provides false or misleading information, recklessly provides information which is false or misleading or intentionally obstructs the exercise of any rights confirmed by a warrant (sections 177 (4) and (6)).

Certification Procedure

The FSA may, under section 177 (1) certify in writing to the Court any person’s failure to comply with these requirements. If the Court is satisfied that the person has no reasonable excuse for his failure to comply, it may deal with him as if he were in contempt (section 177 (2)).

Decision Making and the role of the Regulatory Decisions Committee

General

The FSA has developed a decision making process that it will implement where it exercises its enforcement powers via:

the warning notice procedure;

the decision notice procedure;

the supervisory notice procedure.

A warning notice is a formal notification to the person concerned that the FSA proposes to take certain action. A decision notice contains the FSA's decision to proceed with that action or not to take action, subject to the person’s right to refer a case to the independent Financial Services and Markets Tribunal (this will be addressed later). A supervisory notice is similar to a warning notice or decision notice, but the Act confers different rights on a person in relation to whom such a notice is given. For example, a supervisory notice confers an immediate right to refer a case to the Financial Services and Markets Tribunal, but confers no right to obtain the evidence relied upon by the FSA at supervisory notice stage.

The FSA's decision making procedures are designed to reflect the fundamental requirements of the Act, namely:

the separation of the FSA's investigative process from its decision-making process when issuing warning notices, decision notices and supervisory notices (section 395(2))[1];

the right of the firm or person concerned after the warning or decision notice has been issued to have access to the evidence on which the FSA relies and to any secondary material which, in the FSA's opinion, might undermine the decision to issue a warning or decision notice (section 394);

the right of the firm or person concerned to make representations in all warning notice and supervisory notice cases (section 387 in respect of warning notices and other sections in respect of supervisory notices). The FSA has proposed that an opportunity be afforded to make both oral and written representations.

The Regulatory Decisions Committee

Decisions relating to the exercise of these powers are made in general by the Regulatory Decisions Committee (“RDC”) on behalf of the FSA Board. The RDC is empowered in certain cases to delegate decisions to FSA staff of appropriate seniority. The RDC is not intended to duplicate the function of the Financial Services and Markets Tribunal (the "Tribunal") and it does not therefore provide a judicial hearing. It is designed to enable the principal issues to be identified and, if possible, resolved without the need to resort to a Tribunal hearing.

The RDC, therefore, is responsible for the issue of warning notices, decision notices and supervisory notices. Additionally, the RDC makes decisions in cases relating to Part IV permissions or requirements on incoming firms (for example, where the FSA is exercising its own initiative power to vary a firm’s Part IV permission or to intervene against incoming firms). However, the RDC will only make such decisions if the variation or intervention would make a fundamental change to the nature of the firm’s permission or, in the case of an incoming firm, would have an effect equivalent to a fundamental change to the nature of the permission.

What is a ‘fundamental change’? The FSA has proposed that making a fundamental change to a Part IV permission should mean:

removing a type of activity or investment from the firm’s permission; or

restricting a firm from taking on new business, dealing with a particular category of client or handling client money; or

imposing or varying an assets requirement (as defined in section 48(3) of the Act).

In more routine cases involving Part IV permissions or requirements on incoming firms, decisions are made in accordance with certain executive procedures as described in the FSA's decision making manual. Modified procedures arise in the following situations:

urgent supervisory notice cases, where it is necessary to protect the interests of consumers (section 395(3))[2]. In these cases, the FSA proposes that it will be necessary to involve a member of FSA's executive before it is possible to make a recommendation to the Chairman of the RDC;

cases where there is a common understanding between the FSA and the person concerned about the need for requirements to be imposed. In these cases, FSA staff will decide the issue of the first supervisory notice and the person concerned will make representations to the RDC. The RDC will then be responsible for deciding on whether to continue with the action by issuing a second supervisory notice.

The FSA has stated that it expects to use the alternative process provided by section 395(3) only in exceptional cases where, in its view, the standard requirements cannot be met and action must be taken to protect the interests of consumers from a material threat.

The RDC is established as a body outside the FSA's management structure. Apart from the Chairman, none of the members of the RDC panel are employed by the FSA. The other members of the RDC are drawn from a pool of market practitioners and other public interest representatives. In accordance with section 395(2) of the Act, therefore, the RDC is not directly involved in establishing the evidence on which its decisions are based.

Warning notice and decision notice procedure

Shortly before an investigation is concluded, FSA staff or FSA-appointed investigators may send a preliminary findings letter to the person under investigation. The letter will set out the facts that the FSA staff consider relevant to the matters under investigation, and will invite the person concerned to confirm that those facts are complete and accurate. The FSA staff will allow a reasonable period (normally 28 days) for a response to this letter.

Before FSA staff conclude an investigation, they will take into account any response received within the period stated in the preliminary findings letter. The FSA staff are not obliged to take into account any response received outside this period.

The FSA staff will then consider whether to recommend that enforcement action be initiated. If so, they will recommend to the RDC that a warning notice be given. Having considered this recommendation, the RDC may either take no further action or decide to send a warning notice to the person concerned.

Where the RDC decides to send a warning notice, it must comply with the requirements of section 387 of the Act. The notice must:

(1) state the action the FSA proposes to take;

(2) be in writing;

(3) give reasons for the proposed action;

(4) state whether section 394 of the Act applies (relating to access to FSA material); and

(5) if section 394 applies, describe the effect of the section and state whether any secondary material exists to which the person concerned must consequently be allowed access.

The FSA has stated that, in addition to the statutory requirements of section 387, the warning notice will also contain:

(1) a statement that the person is entitled to make representations to the FSA (usually) within 28 days of receiving the warning notice[3]; and

(2) where appropriate, a statement that the FSA's mediation scheme is available.

The FSA will send the warning notice to the relevant person as soon as practicable after the RDC has decided to issue it.

Representations

Any written representations are to be sent to the Secretary to the RDC. A firm or person may also make oral representations before the RDC. If a firm or person wishes to make oral representations, he must notify the Secretary of the RDC in writing at the time that the written representations are made, with an estimate of how much time the oral representations will take. If the RDC receives no such request, it will consider the matter on the basis of written representations alone.

Third party rights and access to FSA material

Sections 393 and 394 confer additional procedural rights relating to third parties and to disclosure of FSA material. These rights apply in warning notice and decision notice cases, other than those arising out of the FSA's response to an application.

Section 393 provides that the FSA will send a copy of the warning notice to a third party where any of the reasons given in the warning notice relate to a matter that :

(i) identifies a person other than the person to whom the notice is given (“the third party”); and

(ii) in the opinion of the FSA is prejudicial to the third party.

When the FSA has sent a copy of the notice to a third party, the rules governing access to FSA material and the right to make representations will also apply to the third party. Where the FSA discloses material under section 394, it must allow access to a third party to material relating to the matter that identifies the third party.

Section 394 provides that the FSA must, upon service of either a warning notice or a decision notice, allow the person upon whom it is served access to the following:

(1) the material on which the FSA relied in taking the decision giving rise to the obligation to give the warning notice or the decision notice; and

(2) any secondary material which, in the opinion of the FSA, might undermine that decision.

This general duty is qualified, however, by section 394, which provides that the FSA does not have to allow access to material if:

(1) it is excluded material as defined; or

(2) if it-

(a) relates to a case involving a person other than the person upon whom the notice was served; and

(b) was taken into account in that person’s case only for the purposes of comparison with other cases; or

(3) in the opinion of FSA, allowing the person who has received a notice access to the material would not be in the public interest or would not be fair, having regard to:

(a) the likely significance of the material to the person concerned in relation to the matter in respect of which he has been given a notice; and

(b) the potential prejudice to the commercial interests of a person other than the person to which the notice applies would be caused by the material’s disclosure.

If the FSA relies upon such a qualification, it must provide written notice of the fact of and reasons for such refusal.

Mediation

A mediation scheme may operate in certain disciplinary and market abuse cases (normally excluding those involving alleged breach of Principle 1 or similar conduct), where settlement discussions break down after the warning notice has been issued. Key features of the scheme include the following:

the scheme is administered by an independent mediation service provider;

independent mediators are appointed from a panel selected by the mediation service provider[4];

the scheme is flexible and no strict structure is imposed other than a requirement to identify a clear end date to avoid process becoming protracted;

the scheme is voluntary. The firm or individual concerned may consent to the submission of the case to mediation, but they are under no obligation to use the scheme;

the scheme is limited to disciplinary or market abuse cases where the warning notice imposes financial penalties or statements of public censure[5].

At what stage of the process is mediation available to the parties? Any time after the issuance of the warning notice. The warning notice issued by the FSA will set out details of the alleged breach and proposed disciplinary action. At this stage the firm or individual concerned is entitled to have access to the evidence on which the FSA relied when it decided to take action. There are likely then to be informal settlement discussions between the parties. In the event that these become unproductive, the firm or individual can elect to refer the case to mediation.

The scheme as currently operated envisages that the FSA and the firm or individual share equally the costs of the mediation and of the mediator. Each party will be responsible for its own legal costs and any additional costs it might incur.

Decision notice procedure

Once the RDC considers the written representations that have been made in relation to a warning notice and any oral representations, it states its decision in a decision notice or, where appropriate, a notice of discontinuance.

Section 388 of the Act provides that a decision notice will:

(1) be in writing;

(2) give the FSA's reasons for the decision to take action;

(3) state whether section 394 (access to FSA material) applies;

(4) if so, describe the effect of the section and state whether any secondary material exists to which the person concerned must consequently be allowed access;

(5) give an indication of any right to have the matter referred to the Tribunal, and the procedure on referring a case to the Tribunal.

Supervisory notice procedure

The regulatory powers relating to the supervisory notice procedure are essentially preventative, protective and remedial, rather than disciplinary in nature. The supervisory notice procedure differs from the warning notice and decision notice procedures in the following main ways:

instead of a warning notice, the FSA will issue a first written supervisory notice;

the FSA may specify in the first supervisory notice that the action may take effect immediately (or on such date as may be specified in the notice) if the FSA reasonably considers that this is necessary for the action to take effect immediately (or on the date specified in the notice);

section 393 (third party rights) and section 394 (access to FSA material) do not apply to the supervisory notice procedure;

the Act does not prescribe a minimum period within which representations may be made from the date of the first written supervisory notice. However, the notice will specify a reasonable period;

after the RDC has considered any representations, it will issue a second notice. This will retract, confirm or vary the action proposed in the first supervisory notice;

the FSA's mediation scheme does not apply to action arising from supervisory notices;

under the Act, the procedures for final notices and notices of discontinuance do not apply to supervisory notices.

A person who receives a decision notice or supervisory notice (including a third party who has been given a copy of a decision notice) has the right to refer the FSA's decision to the Tribunal. Such reference must be made within 28 days of the date on which the decision notice or supervisory notice is given, or within any other period that may be prescribed in the Tribunal rules.

Publication

Section 391 (1) of the Act provides that neither the FSA nor any person to whom a warning notice or decision notice is given may publish the notice or any details concerning it.

By virtue of section 391 (4), the FSA must publish ‘such information about the matter to which a final notice relates as it considers appropriate’. Of course, a final notice may not come into existence until the Tribunal has finally determined the matter.

Under section 391 (5), when a supervisory notice takes effect, the FSA must publish such information about the matter to which the notice relates, as it considers appropriate.

However, the Act provides that the FSA may not publish information if publication would, in the FSA's opinion, be ‘unfair to the person with respect to whom the action was taken or prejudicial to the interests of consumers’.

Information that is published is done so in such manner as the FSA considers appropriate.

Where FSA has given a notice of discontinuance, it may publish but only with the consent of the person to whom the notice is given.

Discipline of authorised firms and approved persons

Disciplinary sanctions are one of the regulatory tools available to the FSA. The disciplinary measures available to the FSA under Parts V and XIV of the Act are:

(1) public statements of misconduct and public censure;

(2) financial penalties;

(3) variation or cancellation of permissions and the withdrawal of a firm’s authorisation;

(4) withdrawal of an individual’s status as an approved person;

(5) prohibition of an individual from performing a specified function in relation to a regulated activity.

These notes will address the first two of the above measures.

Alternatives to commencing disciplinary proceedings

The FSA will not bring formal disciplinary action against every contravention committed by a firm or approved person. It may instead issue a private warning to the firm or individual. It will take this action in cases where it considers that the contravention comes close to requiring the instigation of disciplinary action, but there is a feature of the case that allows the FSA to draw back from taking formal disciplinary action. The contravention may only have been minor in nature or degree or the firm or approved person may have taken immediate and full remedial action.

A warning will be recorded on the person’s compliance history, together with any response. It will not, however, be used to substantiate any subsequent allegation. Warnings can also be issued in potential cases of market abuse.

The decision to take disciplinary action

In common with most other regulators, the FSA will apply certain criteria that it will take into account when deciding whether or not to take disciplinary action[6]. These are:

  • the nature and seriousness of the breach:

(a) whether the breach was deliberate or reckless;

(b) the duration and frequency of the breach (including how long the breach lasted and, in relation to a firm, when it was identified by those exercising significant influence functions in the firm);

(c) the amount of any benefit gained or loss avoided as a result of the breach;

(d) whether the breach reveals serious or systemic weaknesses of the management systems or internal controls relating to a firm’s business or any part of it;

(e) the impact of the breach on the orderliness of financial markets, including whether public confidence in those markets has been damaged;

(f) the loss or risk of loss caused to consumers or other market users;

(g) the nature and extent of any financial crime facilitated, occasioned or otherwise attributable to the breach;

  • the conduct of the firm or the approved person after the breach:

(a) how quickly, effectively and completely the firm or approved person brought the breach to the FSA's attention;

(b) the degree of co-operation the firm or person showed during the investigation of the breach;

(c) any remedial steps the firm or person has taken since the breach was identified[7];

  • the previous regulatory record of the firm or approved person:

(a) whether the FSA (or its predecessors) has taken any previous disciplinary action against the firm or person;

(b) whether the firm or person has previously given any undertakings to the FSA not to do a particular act or engage in particular behaviour;

(c) whether the FSA has taken any protective action in respect of the firm or person, using its own initiative powers by means of a variation of a Part IV permission;

(d) the general compliance history of the firm or person.

  • guidance given by the FSA:

whether the FSA has given any guidance on the conduct in question and the extent to which the firm or person has sought to follow the guidance[8];

  • action taken by the FSA in previous similar cases. The FSA will take account of action it has taken previously in cases where the breach is the same or similar to that in the present case;
  • action taken by other regulatory authorities, e.g. whether other regulators propose to take action in respect of a breach that is the same or similar to that under consideration by the FSA. The FSA will consider whether the other regulator's action would be adequate to address the FSA's concerns, or whether it would be appropriate for the FSA to take its own action.

Action against Approved Persons

The primary responsibility for ensuring compliance with a firm’s regulatory obligations rests, of course, with the firm itself. In the ordinary course of events, the FSA's main focus when considering whether disciplinary action is appropriate will be on the firm rather than the approved person.

If, however, the firm can demonstrate that it took all reasonable steps to prevent the breach, it will not be appropriate to hold the firm responsible.

In some cases, the FSA will take action against both firm and approved person. For example, a firm may have breached the rule requiring it to take reasonable care to establish and maintain such systems and controls as are appropriate to its business and an approved person may have taken advantage of those deficiencies to front run orders or misappropriate assets.

In what circumstances will the FSA take action against an individual? The FSA will take into account the responsibilities of those exercising significant influence functions in the firm. However, it will only take disciplinary action against an approved person where he is personally culpable. In deciding this issue, FSA will apply an objective test. Personal culpability will tend to arise in two circumstances:

where the breach was deliberate, or

where the individual’s standard of behaviour was below that which would be reasonable in all the circumstances.

Public censures and statements of misconduct

The Act empowers the FSA to publish a public statement of misconduct or public censure. The statements or censure may be an alternative to a financial penalty and are to be taken seriously in the light of the clear reputational damage that they may cause the firm or approved person.

In what circumstances can the FSA publish a public statement of misconduct or public censure?

(1) The FSA may issue a public censure on a firm (see section 205) where it considers that the firm has contravened a requirement imposed on it by or under the Act;

(2) The FSA may issue a public statement of misconduct in relation to an approved person (see section 66) where it considers that he is guilty of misconduct (Section 66 defines misconduct as failure to comply with a Statement of Principle issued by the FSA under section 64 of the Act, or being knowingly concerned in a contravention by a firm of a requirement imposed on that firm by or under the Act).;

(3) The FSA may issue a public statement (under section 123) where a person has engaged in market abuse;

(4) The FSA may issue a public statement (under section 91) where there has been a contravention of the Listing Rules.

The FSA will publish a censure or statement of misconduct where it considers that a financial penalty is not appropriate. It will do so in cases where it considers it important to highlight the requirements and standards of conduct expected of firms and approved persons and to demonstrate that those standards are being enforced to maintain confidence in the financial markets.

The criteria for determining whether it is appropriate to impose public censure or a statement of misconduct are similar to those for determining the level of financial penalty.

Financial penalties

Under the Act, the FSA is empowered to impose a fine in the following circumstances:

(1) on a firm when it has contravened a requirement imposed upon it by the Act;

(2) on an approved person where he is guilty of misconduct as defined;

(3) on any person where the FSA is satisfied that the person is or has engaged in market abuse, or by taking or refraining from taking any action, has required or encouraged another person to engage in market abuse;

(4) on an issuer of listed securities or an applicant for listing where there has been a contravention of the Listing Rules, or a director of an issuer or applicant who at the material time was knowingly concerned in the contravention (see section 91).

Under sections 69 and 210, the FSA is required to issue statements of policy about the imposition of fines on firms and approved persons. Chapter 13 of the enforcement manual constitutes these statements of policy and guidance and the FSA is enjoined by the Act to ‘have regard to’ them in exercising or deciding whether to exercise its powers under sections 66 and 206.

The FSA has currently chosen not to adopt a tariff approach to imposing fines, with the exception of contraventions involving the submission of returns no more than 28 days late.

Section 69 of the Act imposes an obligation on the FSA, when determining the amount of a penalty in relation to an approved person, to have regard to:

(i) the seriousness of the misconduct in question in relation to the nature of the Principle or requirement concerned;

(ii) the extent to which that contravention was deliberate or reckless; and

(iii) whether the person on whom the penalty is to be imposed is an individual.

Section 210 (2) contains similar requirements for the FSA's policy in determining the amount of penalty to be imposed upon a firm.

Factors which may be relevant in determining the level of fine:

The seriousness of the misconduct:

The financial penalty needs to be proportionate to the nature and seriousness of the contravention in question. The following may be relevant:

(a) the duration and frequency of the contravention;

(b) whether the breach revealed serious or systemic weaknesses of the management systems or internal controls relating to all or part of a firm’s business;

(c) the impact of the breach on the orderliness of financial markets, including whether public confidence in those markets has been damaged;

(d) the risk of loss caused to consumers or other market users.

The extent to which the contravention was deliberate or reckless:

I.e. whether the behaviour was intentional, (the extent to which the firm or individual intended or foresaw the consequences of their actions). In determining this issue, the FSA will have regard to whether the firm or approved person:

(a) has failed to comply with a firm’s procedures and/or FSA guidance;

(b) has taken decisions beyond their field of competence;

(c) has given no apparent consideration to the consequences of the conduct that constitutes the breach.

If the FSA considers that the conduct was deliberate or reckless, it may be more inclined to impose a higher penalty than otherwise.

Whether the person on whom the penalty is to be imposed is an individual and the size and financial resources of the firm and individual.

This will include having regard to the size and financial resources of the firm or approved person and whether there is verifiable evidence of serious financial hardship or financial difficulties. Size may be a relevant consideration for the following reasons:

(a) the degree of seriousness of a breach may be linked to the size of the firm. For example, a systemic failure in a large firm could damage or threaten to damage a much larger number of consumers than would be the case with a small one.

A firm with a large volume of business in a particular area will be expected to deploy systems and controls proportionate to that business, and may reasonably be expected to identify problems at a much earlier stage than firms with a smaller volume of the same business. Breaches in large firms over a protracted period may, therefore, be more serious than contraventions over similar periods in smaller firms.

(b) the size of a firm and its resources may also be relevant in relation to mitigation, in particular the steps the firm took after the contravention had been identified. The FSA will take into account what it is reasonable to expect from a firm in relation to its size and resources and factors such as the proportion of a firm’s resources that was used to resolve a problem.

(c) The FSA will impose a lower fine if it would be likely to render a firm or approved person insolvent or threaten its solvency. On the other hand, if a firm or person reduces its solvency with the purpose of reducing its ability to pay a fine, for example by transferring assets to third parties, the FSA will take account of those assets when determining the amount of the penalty.

The amount of profits accrued or loss avoided

This is based upon the principle that a firm or approved person should not benefit from their contravention.

Conduct following the contravention

The degree of co-operation during the course of any investigation and any remedial steps taken since the contravention was identified, including compensating consumers in the event of loss.

Disciplinary record and compliance history

Previous action taken by FSA.

Clearly a repeat offender can expect to pay a larger fine.

The one exception to the FSA's non-tariff approach is for financial penalties for late submissions of reports, i.e. annual controller’s reports, annual close links reports, compliance reports, financial reports, accounts and balance sheets, actuary’s and auditor’s reports, and certificates and statements that must be submitted to the FSA by specified dates.

The FSA attaches great importance to the timely submission of these types of documents because the information they contain is essential to the FSA's assessment of whether a firm is complying with its requirements and standards and to the FSA's understanding of that firm's business.

In short, the FSA has adopted a fixed penalty system whereby the level of fine is fixed by reference to a scale of penalties in an annex of the Enforcement Manual. If submission is more than 28 days late, the FSA is not bound by the scale, and can impose a penalty higher than that contained on the table in the enforcement manual.

Market abuse – an overview of the regime

The Act creates a market abuse regime. Its primary purpose is to protect the integrity of prescribed markets from the damage caused to market efficiency by manipulation of the market and by misuse of information. The FSA enforces the market abuse regime in order to protect consumers, reduce financial crime and to maintain confidence in the UK financial system by demonstrating that high standards of market conduct are expected.

The Act gives the FSA criminal prosecution powers in relation to insider dealing and misleading statements and practices [these lie outside the remit of this presentation] and provides the FSA with powers to obtain injunctions and restitution in relation to cases of market abuse.

What is market abuse?

Section 118 of the Act defines market abuse as behaviour (whether by one person alone or by two persons jointly or in concert) –

(a) which occurs in relation to qualifying investments traded on a market to which this section applies;

(b) which is likely to be regarded by a regular user of that market who is aware of the behaviour as a failure on the part of the person or persons concerned to observe the standard of behaviour reasonably expected of a person in his or their position in relation to the market, and which satisfies any one or more of the following conditions:

(i) the behaviour is based on information which is not generally available to those using the market but which, if available to a regular user of the market, would be or would be likely to be regarded by him as relevant when deciding the terms on which transactions in investments of the kind in question should be effected;

(ii) the behaviour is likely to give a regular user of the market a false or misleading impression as to the supply of, or demand for, or as to the price or value of, investments of the kind in question;

(iii) a regular user of the market would, or would be likely to, regard the behaviour as behaviour which would or would be likely to distort the market in investments of the kind in question.

The Treasury may prescribe by order the markets to which this section applies and the investments that constitute ‘qualifying investments’.

By virtue of section 118 (5), the behaviour must either occur in the United Kingdom or must relate to qualifying investments traded on a market situated in the United Kingdom or “accessible electronically” from the United Kingdom.

Under the provisions of section 119 of the Act, the FSA has issued a ‘Code of Market Conduct’ containing guidance on activity constituting market abuse. The details of the code fall outside the ambit of this talk, but it is essential reading for an understanding of the type of behaviour that will be caught by the market abuse regime. It details the categories of Listing Rules made by the FSA in its capacity as the UK Listing Authority that will provide safe harbours from liability under the regime.

Sanctions for market abuse

The Act empowers the FSA to impose a fine (or in certain circumstances to ask the Court to consider imposing a fine) on a person who has engaged in market abuse. The FSA can instead choose to publish a statement that a person has engaged in market abuse.

Section 124 of the Act requires the FSA to issue a statement of its policy concerning:

(1) the imposition of penalties in market abuse cases;

(2) the amount of such penalties;

(3) the circumstances in which the FSA is to be expected to regard a person as:

(a) having a reasonable belief that his behaviour did not amount to market abuse; or

(b) having taken reasonable precautions and exercised due diligence to avoid engaging in market abuse.

By virtue of sections 123(1)(a) and (b), the FSA may impose a financial penalty where a person (‘B’):

(1) is engaging or has engaged in market abuse; or

(2) by taking or refraining from taking any action has required or encouraged another person or persons to engage in behaviour which, had it been engaged in by B, would amount to market abuse.

Section 123 (2) states that the FSA may not impose a penalty on a person if, having considered any representations made to it in response to a warning notice, there are reasonable grounds for it to be satisfied that:

(1) the person believed, on reasonable grounds, that his behaviour did not fall within section 123 (1) (a) or section 123 (1) (b) of the Act; or

(2) he took all reasonable precautions and exercised all due diligence to avoid behaving in a way which fell within section 123 (1) (a) or (b) of the Act.

Clearly in considering this section, the FSA must consider the extent to which the person concerned took reasonable steps to avoid engaging in market abuse, his level of knowledge and experience, the extent to which he followed established internal consultation procedures, took expert legal or other relevant advice, consulted the regulators (including the Takeover Panel) and followed any advice received.

Section 129 (1) of the Act provides that where the FSA applies to the Court under section 381 for an injunction restraining market abuse or under section 383 for an order for restitution in cases of market abuse, it may request the Court to consider whether the circumstances are such that a penalty should be imposed on the person concerned.

Section 123 (3) of the Act states that, if the FSA is entitled to impose a penalty on a person under section 123 (1), it may (instead of imposing such a penalty) publish a statement to the effect that the person has engaged in market abuse.

Factors relevant to determining whether to take action for market abuse

These are similar to other disciplinary cases against firms or approved persons, but include:

the nature and seriousness of any breach of the Code of Market Conduct or any failure to follow FSA guidance. The FSA will not take action against a person for behaviour that is described in the Code of Market Conduct as behaviour that in the FSA's opinion does not amount to market abuse, including behaviour that complies with the Takeover Code;

the extent to which the behaviour had an adverse impact on the market in question, the seriousness of that effect and the potential or anticipated impact of the behaviour on the market in question;

the amount of profit made or loss avoided and the extent and nature of any losses or other costs imposed on other users of the market as a result of the contravention;

the degree of co-operation the person has shown not only to the FSA but to other regulators. For example, paragraph 3(b) of the Introduction to the Takeover Code requires prompt co-operation from those to whom the Takeover Panel directs enquiries;

steps that the person concerned has taken to address the market abuse, whether on his own initiative or pursuant to the requirements of another regulatory authority and how promptly that person has taken those steps. This might include, for example, in the context of a take-over, any steps taken to correct a misleading statement or misleading impression or distortion of the market;

the degree of sophistication of the users of the market in question, the size and liquidity of the market and the susceptibility of the market to market abuse. For example, where the users of a market are generally not market professionals and they have suffered loss as a result of the abuse and that loss has not been promptly or adequately compensated for by the person concerned, this may be a factor favouring the imposition of a penalty;

the extent to which market abuse can be adequately addressed by other regulators. For example, where the behaviour of the person concerned is also, in the opinion of the Takeover Panel, a breach of that person’s responsibilities under the Takeover Code, the FSA would not expect to exercise its powers under the market abuse regime against that person;

in the context of a take-over bid, the FSA may consider that the exercise of its powers is likely to have an adverse impact on the timing or outcome of that bid. Therefore it would not be in the interests of financial markets or consumers to impose a penalty. If the FSA considers that the proposed exercise of its powers may have this effect, it will consult the Takeover Panel and give due weight to the Takeover Panel’s views.

In practice, conduct that may constitute market abuse may also contravene the rules of the relevant Recognised Investment Exchange, which may wish to bring action against a firm for breaches of its own rules. In these circumstances, the FSA will co-ordinate action. It is likely to give great weight to the views of the Takeover Panel. Where the behaviour said to constitute market abuse is also relevant to the Takeover Code or Substantial Acquisition Rules (”SARs”), the exercise of the Takeover Panel’s informal powers will often be sufficient to address the relevant concerns. The FSA can be expected to take action in circumstances where, for whatever reason, the Takeover Panel is unable to investigate or take action.

Conduct amounting to market abuse may also give rise to a criminal offence, such as insider dealing or creating a false or misleading impression as to the price or value of investments. In those cases, the FSA will have to decide which of a criminal prosecution or proceedings for market abuse is more appropriate. In practice, an important factor in deciding this will be the fact that market abuse only needs to be proved to the civil standard.

It should be noted that, under section 143 of the Act, the FSA has made rules endorsing the Takeover Code and the SARs. The effect of this is that, in certain circumstances and at the request of the Takeover Panel, the FSA may take enforcement action against a firm that breaches the Takeover Code or the SARs.

A summary of the FSA's restitution provisions

Introduction

Where a person has breached a requirement of the Act and either:

(1) that person has profited from the breach; or

(2) another person has suffered loss;

the FSA is capable of using its powers under the Act to seek redress for consumers.

The FSA has the power to:

(1) apply to the Court for an order for restitution (section 382);

(2) apply to the Court for an order for restitution in cases of market abuse (section 383);

(3) require restitution by a firm (section 384(1));

(4) require restitution where a person (whether authorised or not) has engaged in market abuse (section 384(2));

The FSA's general approach

Restitution redress powers assist the FSA in pursuing its regulatory objective of protecting consumers. However, the FSA will also consider other means by which persons might obtain redress and whether or not it would be more effective or cost effective to deploy those other methods. Instances in which the FSA would consider using its powers [against/in protection of] market professionals rather than consumers are likely to be more limited as they will be subject to a separate code.

The FSA's power to apply to Court for restitution (section 382)

The FSA's powers to apply to the Court for restitution are contained in section 382 of the Act and are outlined above.

Where the Court orders a person to pay restitution, any sum ordered to be paid is paid to the FSA and distributed by the FSA as the Court directs to a “qualifying person” (being “a person to whom the relevant profits are attributable or who has suffered loss or other adverse effect”).

The FSA's power to require restitution

This is an administrative power and is governed by section 384 of the Act. This power is exercisable without a Court order and is exercisable if the FSA is satisfied that a firm has contravened a relevant requirement or has knowingly been concerned in the contravention of such a requirement giving rise to profits to that firm or causing a person to suffer loss or otherwise be adversely affected. This also applies to instances of market abuse.

Where the FSA proposes to exercise its administrative power, it must give the person in relation to whom it proposes the exercise a warning notice. In the event that it decides to exercise its administrative power, it must give a person a decision notice. The FSA's policy and procedure in relation to warning notices and decision notices are set out in the decision making manual. Decision notices must state the amount payable, identify to whom the amount is to be paid and state how the payment or distribution is made. A person against whom the power is exercised may refer the matter to the Financial Services and Markets Tribunal. In any event, the FSA must give the person against whom its administrative power is exercised notice for payment in writing as specified within the timescale for payment to be made.

The obligation imposed by the exercise this administrative power is enforceable on application by the FSA by injunction to the High Court.

The FSA's criteria for determining whether to exercise its restitution powers

The merits of each particular case are to be considered, but the general factors which the FSA will consider before deciding to exercise any restitution powers may include (but are not limited to) the following:

(1) whether there are identifiable persons who have suffered quantifiable loss or otherwise adverse effects;

(2) the number of persons who have suffered loss and the extent of those losses;

(3) the costs that would be incurred by the FSA in securing redress and whether these costs are justified by the benefit to persons that would result from such action;

(4) the availability of redress to the Financial Ombudsman service or the Financial Services and Markets Compensation Scheme;

(5) whether persons who have suffered losses are in a position to bring civil proceedings on their own behalf;

(6) the availability of the FSA's power to obtain compulsory insolvency orders against the firm or an authorised person concerned;

(7) the conduct of the persons who have suffered loss.

The FSA's choice of powers

The FSA envisages that it will use administrative powers in the majority of cases.

The FSA will apply to the Court for an order for restitution where:

(1) it wishes to combine an application for an order for restitution with another Court action;

(2) it wishes to bring related Court proceedings against unauthorised persons;

(3) there is a danger that the assets of the firm may be dissipated (asset freezing injunction);

(4) it suspects that the firm may not comply with an administrative requirement.

Most cases where redress is obtained from unauthorised persons will be dealt with by way of an application to the Court, as most such cases will be market abuse related.

Determining the amount of restitution

Sections 382 and 383 of the Act provide that the Court may require a person to supply it with accounts or other information to help the Court:

(1) establish the amount of profits which may have accrued; or

(2) establish whether there are any persons who have suffered any losses; or

(3) determine how any amounts are to be paid.

An application by the FSA for restitution will not prevent a person from bringing a private action for restitution in relation to the same matter.

The FSA may obtain information relating to the profits and/or losses and appoint investigators under sections 167 or 168 of the Act. Policy and procedure in relation to the appointment of investigators is contained within the enforcement manual]. In appointing investigators, the FSA may consider using its powers under section 166 of the Act to require a firm to provide a report prepared by a skilled person to determine profits or losses and quantify any amount payable. [This is important, as the expense will presumably be borne by the firm rather than the FSA].

Other relevant powers

Pre-emptive powersexist for the FSA to obtain an injunction where it believes that the person is reasonably likely to contravene a requirement of the Act or engage in market abuse or is likely to continue committing acts of contravention or market abuse. [Section 381]

The FSA is not prevented from taking separate and parallel disciplinary action or from seeking criminal prosecution in relation to any breaches which give rise to an order for restitution. [Such disciplinary action may include imposing a financial penalty or making a public statement of misconduct or public censure].

Publication of successful applications to a Court for restitution or the exercise of the FSA's administrative powers is the norm as it is intended to protect and inform consumers and maintain market confidence. Where damage to market confidence or market integrity or damage to the interests of the consumer may arise, it may withhold publication. [This is a general discretion and not an exhaustive explanation].

Key features of appointments to the Financial Services and Markets Tribunal

Introduction

The Financial Services and Markets Tribunal (the "Tribunal") is established by the provisions of section 132 and 133 of the Act. Power is given to the Lord Chancellor to make detailed rules and any other such provisions as appear to be necessary or expedient for the conduct of proceedings before the Tribunal (these are contained in a statutory instrument and to be found through the FSA's website). Express provision in Act is made for Legal Assistance before the Tribunal. The provision for the funding of such assistance (section 134-136) recognises the principle under the Human Rights Act of a fair hearing under Article 6 of the European Convention on Human Rights.

Schedule 13 to the Act, although not limiting the Lord Chancellor’s powers, governs the essential structure of the Act. There are four parts to the Schedule: (i) General, (ii) The Tribunal, (iii) Constitution of the Tribunal and (iv) Tribunal Procedure.

The Tribunal is selected from two panels as follows:

(1) A Panel of Chairmen [para 3(1) of Schedule 13] and

(2) A Lay Panel [para 3(4) of Schedule 13].

Qualification to sit

A person is qualified for membership of the Panel of Chairmen by virtue of seven years general qualification within the meaning of section 71 of the Courts and Legal Services Act 1990 or membership of the Scottish or Northern Irish legal professions with similar experience. [Para 3(2)]

Qualification for the Lay Panel is within the discretion of the Lord Chancellor to appoint those persons “who appear to him to be qualified by experience or otherwise to deal with matters of the kind that may be referred to the Tribunal”. [Para 3(4)]

The President of the Tribunal

Under the terms of para 2 of Schedule 13 the President of the Tribunal is appointed by the Lord Chancellor from one of the members of the Panel of Chairmen to “preside over the discharge of the Tribunal’s functions”. There is also provision for the appointment of a Deputy President. Both must be lawyers of at least ten years standing in England, Wales, Scotland or Northern Ireland [Schedule 13, para 2(5)].

If the President or Deputy President ceases to be a member of the Panel of Chairmen, he also ceases to be President or Deputy President [Schedule 13, para 2(6)].

The functions of the President in his absence are performed by the Deputy President, or if both are unable to act another person appointed by the Lord Chancellor from the Panel of Chairmen [Schedule 13, para 2(7)].

Terms of office[Schedule 13, para 4]

The terms of appointment are unspecified and the Lord Chancellor may remove a member of either panel on the grounds of “incapacity or misbehaviour”. Resignation from either panel is by notice in writing to the Lord Chancellor, and a member of either panel is eligible for re-appointment if he ceases to hold office [Schedule 13, para 4(3)].

Remuneration and expenses[Schedule 13, para 5]

Remuneration and expenses are within the discretion of the Lord Chancellor for any member of the Tribunal and experts appointed to assist it.

Staff/secretariat[Schedule 13, para 6]

The Lord Chancellor, at the expense of the Lord Chancellor’s department, may appoint such staff for the Tribunal. Any expenses of the Tribunal are to be defrayed by the Lord Chancellor’s department.

Constitution of the Tribunal[Schedule 13, part 3, para 7]

On a reference to a Tribunal, persons eligible to act as members of the Tribunal are from the Panel of Chairmen and Lay Panel in accordance with arrangements yet to be prescribed by the President, referred to in Schedule 13 as “the standing arrangements” [Para 7(1]).

The “standing arrangements” must provide “for at least one member to be selected from the Panel of Chairmen” – this does not appear to preclude more than one person from the Panel of Chairmen sitting as part of a Tribunal. [Para 7(2)].

If any member of the Tribunal is unable to act then the Tribunal may continue to sit with its existing members, or if a matter is being dealt with by a single member of the Panel of Chairmen, another member from the same panel may be selected in accordance with the “standing arrangements”. [Para 7(3)].

The Tribunal can appoint experts to provide it with assistance on matters involving “a question of fact of special difficulty”. [Para 7(4)].

Tribunal procedure [Schedule 13, Part IV]

(1) The venue of the Tribunal is at such time and place as the Lord Chancellor may direct, [Schedule 13, para 8].

(2) Detailed rules have been made on such matters as the manner in which references are to be instituted, private hearings, representations, interlocutory matters, withdrawal of references and the delivery of judgements [Schedule 13, para 9].

(3) The President of the Tribunal may give practice directions to the Tribunal [Schedule 13, para 10].

(4) The Tribunal may:

summons persons to attend before it [Para 11.1];

take evidence on oath or require a declaration of truth [Para 11.2];

make it an offence to refuse to comply with a summons by the Tribunal or to give evidence or otherwise subvert the Tribunal proceedings [Para 11.3].

5. The decisions of the Tribunal may be taken by a majority and must be recorded as either unanimous decisions or as taken by a majority. There must be a Statement of Reasons for the decision and the parties must be informed of the decision as soon as is reasonably practicable. The Tribunal must also send a copy of its decision to the Treasury [Para 12].

Costs

The Tribunal may award costs against any party that has acted “vexatiously, frivolously or unreasonably”.

If the Tribunal considers that a decision of the FSA that was the subject of the reference was “unreasonable” it may order the FSA to pay the other party’s costs in whole or in part [Schedule 13, para 13].

Andrew Carnes
4-5 Gray’s Inn Square
Gray’s Inn
London WC1R 5AH


[1] Provides that the FSA's procedures for the giving of supervisory notices, warning notices and decision notices must be designed to secure that 'the decision which gives rise to the obligation to give any such notice is taken by a person not directly involved in establishing the evidence on which that decision is based'.

[2] Section 395 (3) provides that the procedure may permit a decision giving rise to an obligation to give a supervisory notice to be taken by a person involved in establishing the evidence on which the decision is based if:

(1) the FSA considers that it is necessary to protect the interests of consumers; and

(1) the person taking the decision is of a level of seniority laid down by the procedure.

[3] Subject to a right to seek an extension of time

[4] Parties can reject the mediator appointed by the mediation service provider and request another mediator from the panel.

[5] It will not be available (and is not appropriate) where the FSA seeks to vary permission, or where the proposed enforcement action arises from allegations of unfitness or impropriety.

[6] These can be found at section 11 of the enforcement manual.

[7] including identifying whether consumers have suffered loss and compensating them, taking internal disciplinary action against staff involved, addressing any systemic failures, and taking action to ensure that similar problems do not arise in future.

[8] The FSA will not take action against firms or persons for behaviour in line with current written guidance in the circumstances contemplated by the guidance.

 

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