Prudential PLC and The Prudential Assurance Company Ltd have received fines totalling £30m for failing to inform the FSA and the UKLA sufficiently early of plans to acquire AIA, a subsidiary of AIG. Prudential’s Group Chief Executive has also been censured for being knowingly concerned in the FSA breach.
The facts are detailed and the cases were plainly hard fought. Suffice it to say for present purposes that the sanctions arose out of a failure to deal with the FSA/UKLA in an open and co-operative manner when the Prudential was seeking to acquire the Asian subsidiary early in the year 2010. The complaint relates to the fact that Prudential did not inform the regulators of the proposed acquisition until after news of the planned deal had been leaked to the media on 27 February 2010.
The FSA accepted that the respondents did consider their obligations when forming their assessment regarding notification of the proposed deal. In a nutshell, the FSA however expected disclosure well before 27 February 2010.
Interestingly, the FSA concluded that Prudential wrongly allowed its judgement to be overly influenced by its concern about the risk of leaks, which it believed was a key risk to the proposed deal going ahead. Prudential even considered that the FSA itself could become one of a number of parties which might be the cause of a leak. These concerns meant Prudential failed to give due weight to the importance of complying with its regulatory notification obligations.
Even though the FSA found that the breaches were neither deliberate nor reckless, the fines for the company were very heavy. The FSA determined that, for failing to deal with them and the UKLA in an open and co-operative manner, Prudential PLC contravened Listing Principle 6 for which it received a fine of £14m fine. Further, it determined that the Prudential Assurance Company Ltd had breached Principle 11 for which it was fined £16m. In addition, Tidjane Thiam (Group Chief Executive) was found to be knowingly concerned in the breach of Principle 11 and was publicly censured.
The detailed reasons behind the findings are set out in the Final Notices and are beyond the scope of this publication. We confine ourselves to the following enforcement issues that readers may find of interest.
Interpreting how to be "open and co-operative"
Listing Principle 6 and FSA Principle 11 both impose a requirement to be open and co-operative. Principle 11 goes one step further and requires the firm to disclose anything of which the FSA would reasonably expect notice. Such broad principles create issues of uncertainty.
Prudential argued that these Principles were so broad and general as to require the FSA to construe them narrowly. They argued that a person must be able to reasonably predict at the time of the relevant omission whether the conduct would breach the relevant Principle. The FSA was having none of it. Rather unhelpfully, it found in essence that the requirements were clear and unambiguous, although necessarily broad, and that there was no necessity for a narrow construction. In similar vein, the FSA did not accept the argument that, in the absence of any clear guidance mandating notification at a particular point, the FSA needed to establish a clear reasonable necessity for regulatory purposes.
There is no hard edged division on when disclosure should be made. What is abundantly clear from the Final Notice is that the FSA will interpret the rules very widely. Firms and listed companies would do well to take a cautious line in considering their disclosure obligations.
Significance of the level of fines
The fines against the companies were very heavy. The companies argued that they were "unprecedented and grossly disproportionate". Further, they argued that they were flawed as a matter of law as they could not be to deter others from deliberately refraining to notify the FSA given that it was not alleged that the companies acted either act deliberately or recklessly2. Again, the FSA was having none of it. It found that the companies failed to give due weight to their regulatory obligations, and further that a deterrent effect was needed both in relation to the companies themselves and to others. The size of the fines shows how very seriously the FSA takes the issue of disclosure to it as regulator and to the UKLA.
Implications for individuals
In contrast to the heavy fines, Thiam received a censure. In some senses, the finding is somewhat illogical.
- the FSA found Thiam to be "knowingly concerned" in the Principle 11 breach, yet was clear that he was perfectly open with the Board. If that was the case, one would expect the Board all to be in the firing line, not one individual.
- If he was knowingly concerned with the breach, then it is difficult to reconcile the heavy fine for the companies with the relatively light sanction of public censure.
The sanction sits somewhat uneasily with the FSA's press release that the case sends a "clear message to all board members of their collective and individual responsibility". It is difficult to escape the conclusion that the FSA must have been disappointed by the sanction imposed, further that the pursuit of Thiam and the attendant press release illustrates the FSA's/FCA's increasing desire to hold individuals responsible.