Briefings
Financial Services: FSA Disciplinary Action - What's Hot and How to Avoid it
Financial Services
Investment Funds
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| June 2003 |
The powers given to the FSA and how it proposes to use them have long been of concern to those in the industry. In a world where the FSA is under pressure and where investments have fallen, practitioners and commentators have been watching the position particularly carefully in recent times. The output for 2003 so far makes interesting reading. Firms need to appreciate what is taking place and ensure they minimise the chances of finding themselves in the firing line in the future.
What's New?
The FSA has issued 16 Final Notices this year (the Notice by which disciplinary action is made public). These are not in fact "real time" barometers as they reflect the results of processes started some months ago. Nevertheless, they do provide a guide to those matters that the FSA is interested in, and particularly, how it intends to deal with them.
The whole panoply of breaches is just as relevant as it has ever been. Compliance professionals might be particularly interested in the fine the FSA has just imposed on ABN Amro Equities (UK) Limited for £900,000 for market misconduct and serious compliance failures. In that case, as far as compliance is concerned, criticism for example was made of a failure to allocate adequate resources to compliance policies and procedures.
Whilst the range of breaches will continue to be of interest to the FSA, it is true to say that those marketing to retail investors are firmly in the FSA's sights. Prior to the ABN Amro matter, there were 6 fines imposed by the FSA this year. The fines were imposed at an average of over £500,000 each. Furthermore, each fine related to shortcomings regarding dealings with retail customers.
On the retail side, the two hot topics are currently endowment mis-selling and structured retail products, especially precipice bonds. In fact, so concerned was the FSA about precipice bonds and the risk to customers that it rushed through guidance earlier this year without going through any formal consultations.
Precautionary Action
What should you do if you think you may have a problem?
- Do not bury your head in the sand. If you think you may have a problem, you need to analyse it, establish whether there really is a problem and assess risk. Apart from any other considerations, the FSA may well give you credit for your action should regulatory issues emerge.
- When you do review the matter, consider carefully how best to review it. For example, if done in the correct way with lawyers, you may well be able to claim legal advice privilege for the work done such that the documents created in the investigation are not disclosable This can be very important, both in dealing with the FSA and in any subsequent litigation with third parties. You will also need to ensure that the process is tightly controlled so that documents (in the very loosest sense of the word, including for example any emails or even manuscript notes) are not inadvertently created which may be harmful and disclose able.
- You should assess the results objectively, thinking not only of the financial consequences, but also of the reputational consequences. This will lead to a careful consideration of whether, and if so, precisely what to report to the FSA. The way you report could be all important.
Clearly, it is far better to avoid problems happening in the first place. Quite what form that prevention should take will depend on the sector you are in and the nature of the problem. If marketing precipice bonds for example, you will need to make sure that you are familiar with all the relevant rules, the guidance (for example, Guidance note 7 of 2003) and other material that may be relevant, for example the FSA fact sheet that may be relevant to enclose with a mailing. On a systemic level, you need to ensure that you have a proper advertising approval process. Isolated slips are one thing, but systemic failures are far more problematic and clamped down on far more heavily.
Finally, if you are facing action from either the FSA or investors you need to understand the rules of engagement, the consequences, what to fight and what to concede, and when. Where reputation is all, such questions of judgement are paramount.