“The FSA holds senior management of regulated firms responsible for ensuring their firms are organised competently in order to meet their regulatory obligations. Failure by senior management to properly perform their roles poses a risk to the firm’s financial health, the interests of their clients and ultimately to the UK’s financial system”.

So said FSA Director of Enforcement, Margaret Cole, explaining the fine of £30k on David Whistance former Finance Director of W DeB MVL plc (Williams de Broe (WDM)). That decision and the more recent prohibition order imposed on Mrs Valerie Richards, a partner in a small IFA firm (Alexanders), suggest a possible change of policy, and a significant clampdown by the FSA against individual members of senior management who may not personally have been involved in wrong-doing. The prohibition order on Mrs Richards also tends to outlaw the frequent practice in small family partnerships of one partner having only a very limited role in the firm.

Mr Whistance - the finance director

In January, the FSA fined WDM £560k for widespread failings in its systems and controls resulting in poor accounting systems and inadequate client money protection. This was despite the fact that there was no evidence that any clients had suffered actual loss as a result of the firm’s failings. This fine was followed up by a fine of £30k imposed on WDM’s finance director personally. He was held to have failed to keep himself and the Board adequately informed as to the value of differences between cash balances and stock positions and failed to take reasonable steps to ensure the firm established and maintained adequate systems and controls.

He allowed the build-up of unreconciled items. When the firm’s financial records were ultimately sorted out to maintain its solvency, its parent company had to write-off inter-company loans of £58m. As finance director, Mr Whistance was personally culpable for the failure in the firm’s accounting procedures and records. There had been a number of reports by the firm’s internal and external auditors identifying the problems, but in spite of these the financial procedures were not improved.

Mrs Richards - the partner with a limited role

Alexanders arranged the transfer of approximately 650 individuals from deferred membership of a final salary occupation scheme to a group personal pension plan following a company take-over.

An FSA investigation established that the firm had failed to obtain sufficient personal and financial information about the clients and had adopted an unconventional and inappropriate methodology to assess their attitude to risk. A substantial number of clients were therefore exposed to the risk of significant losses.

Mrs Richards was a partner in the firm, and thus an FSA approved person. However, she was not involved with advising or monitoring the conduct of the pension transfer transaction. She had never been involved in a customer facing role and had no qualifications relating to the firm’s business. She told the FSA’s investigators that her role was largely limited to recording and paying the salesmen’s commission and paying the office bills. The FSA described this as being “unclear as to your responsibilities as an approved person”, and held that she had failed to adequately inform herself about the relevant transactions or take sufficient steps to ensure that they complied with relevant regulatory requirements. Accordingly, the FSA made a prohibition order, prohibiting her from undertaking any significant influence function in an approved firm.

Prohibition order or fine

In the case of approved persons, the FSA has a variety of possible sanctions, including private warnings; financial penalties; withdrawals of approval; or prohibition orders. The enforcement manual provides that prohibition orders will only be made in the more serious cases of lack of fitness and propriety (ENF8.5). The FSA should initially consider whether its statutory objectives can be adequately achieved by withdrawing approval or setting a financial penalty.

It is not clear from the history of enforcement decisions whether that distinction is followed in practice.

Differing views could be taken as to who was the more serious offender between Mr Whistance and Mrs Richards. In practice however, the distinction may matter little. A person whose approval has been withdrawn may find it difficult to persuade the FSA to grant him approved person status again, and equally a significant fine may make someone unemployable.

The FSA Register records that Mr Whistance ceased to be a director of WDM on 20 December 2005 and has not been an approved person for any controlled function since then.

Personal culpability

When the concept of an approved person was first created, there was much concern that individuals would be subject to personal disciplinary processes for failings within their firms. The FSA’s Enforcement Manual states that that is not the case: “The FSA will only take disciplinary action against an approved person where there is evidence of personal culpability on the part of that approved person … The FSA will not discipline approved persons on the basis of vicarious liability, provided appropriate delegation has taken place” (ENF11.5). However, the Whistance and Richards decisions show this distinction can easily be side-stepped. It seems that a senior director of a large company is not responsible for all of its operations, but is responsible for making sure there are appropriate procedures in place. In the Richards case, there was a clear apportionment of responsibilities whereby Mr Richards was responsible for the pension transfer business and Mrs Richards for the back office, but that did not stop the FSA disciplining Mrs Richards on the basis that she ought to have adequately informed herself of details of the business. Members of senior management should take heed.