Prepare for the era of enforcement

At the end of July we saw the first example of the Financial Services Authority disciplining a senior manager of a mortgage and general insurance firm for failing to carry out his duties as a director. Having experienced the initial period of grace during which the FSA allowed mortgage and general insurance firms some leeway to get themselves in order, this enforcement action against a director is a sign that a tougher stance is to be taken from now on.

As we have had little enforcement action other than Retail Mediation Activities Return failures in the mortgage and general insurance sector, it is a subject that is relatively little known and the process is not well understood. The section of the FSA’s Handbook that deals with enforcement is part of the regulatory processes section, which also contains the rules for authorisation and supervision.

Firms and individuals can be prevented from continuing to trade in a non-compliant way by a number of means including having their authorisation withdrawn, being prohibited from undertaking specific regulated activities or from operating in financial services altogether or being barred from regulated activity by an injunction.

Penalties can be imposed including the public censure of firms and individuals, the imposition of financial penalties, freezing of assets and the imposition of restitution orders. Finally, the FSA can prosecute firms and individuals who have undertaken regulated activities without authorisation.

The prescribed enforcement procedure must be followed at all times. Following a referral to the enforcement division a typical investigation would proceed as follows. First, a team of FSA investigators is appointed and normally a notice of appointment of investigators is sent to the firm or individual. Initial discussions will cover the scope of the investigation and the documents and individuals the investigators will need access to. Next, the investigation itself takes place, followed by a legal review of the case by a lawyer who has not been part of the investigation team.

If considered appropriate, a preliminary investigation report is then sent to the firm or individual who has 28 days to respond – or they may apply for extra time. Taking into consideration any response to the PIR, an investigation report and all the case papers are then submitted to the FSA’s Regulatory Decisions Committee if considered appropriate. Members of the RDC are appointed by and accountable to the FSA board and they represent the public interest.

If considered appropriate, the RDC will send out a warning notice to the firm or individual concerned detailing the FSA’s intention to take further action. They then have 28 days to make representations to the RDC (and may apply for more time), and have the right to access any material used in the decision-making process. After considering any representations, the RDC makes its decision and if appropriate issues a decision notice.

The firm or individual then has 28 days in which to make a referral to the Financial Services and Markets Tribunal. This tribunal is independent of the FSA and will consider the case afresh, normally in public. It decides what action the FSA should take, including the issuing of a notice of discontinuance if it believes the case has not been justified. If no referral is made to the tribunal following the decision notice, a final notice is issued to the firm or individual concerned and information is published about the case as appropriate.

At any stage, the enforcement process, once started, can be concluded in a number of ways. For example, a private warning may be issued at any time thus closing the investigation, the parties involved can seek settlement discussions, and if the investigators find there is no case to answer the case can be closed. There are discounts for early payment of any fines.

As always, it’s the principles that matter. In the case of the director who was issued with the statement of misconduct, it was for his failure to comply with the statements of principles five and six for approved persons. These two statements of principle are about the approved person ensuring that their firm is organised so that it can be controlled effectively and that they act with due skill, care and diligence in managing the business.

Readers who are approved persons might find it useful to revisit the seven statements of principle and the Code of Practice for Approved Persons. They can be found in the APER section of the FSA’s Handbook.

Bill Warren
director of compliance, Complete Mortgage & Loan Services