InMay 2007, the Cabinet Office and the Better Regulation Executive issued a consultation on a draft Regulatory Enforcement and Sanctions Bill (the “Bill”). The Bill seeks to implement the recommendations of the 2005 Hampton Report (Reducing Administrative Burdens: effective inspection and enforcement) and the 2006 Macrory Review (Regulatory Justice: Making Sanctions Effective), and is intended to deliver a more effective, risk-based and proportionate enforcement system. The Bill applies to a broad range of regulators, including the FSA.
The Bill, which is in the Government’s programme for the next session, is divided into two parts. Part 1 establishes the Local Better Regulation Office, the objective of which will be to promote better communications between local and national regulators. Part 2 of the Bill, which is of particular interest, is intended to confer new enforcement powers (an “extended sanctioning toolkit”) on regulators in relation to relevant offences, that is, offences where a regulator may impose sanctions.With regard to the FSA, this would include a wide range of criminal offences such as those relating to breaches of the general prohibition, the financial promotion restriction and the money laundering regulations; insider dealing; and misleading statements and practices. The new sanctions, which are intended to reduce the burden on the criminal courts, may be used in combination with each other and will sit alongside existing sanctions available to regulators.
The extended sanctioning toolkit will include the following powers:
- The power to issue fixed monetary penalties.
- The power to impose discretionary requirements, for example, variable monetary penalties, steps to be taken to ensure that the incident of non-compliance will not continue or recur and steps to be taken to restore matters to how they would have been had the noncompliance not occurred.
- The power to issue notices for the cessation of activities which constitute an offence and give rise to a “significant risk of serious harm to human health, the environment or the financial interests of consumers”. The May 2007 consultation divided cessation notices into “temporary” and “permanent” cessation notices; temporary notices could be imposed for up to six months. However, the recently published Government response to the consultation proposes a single form of cessation notice which would “remain in place until such time as the business brings itself back into compliance”. Given the implications of cessation for businesses, the Government believes that compensation should be available, in particular, where a regulator has acted in serious default in imposing a cessation notice.
- The power to accept enforcement undertakings, that is, promises made by the non-compliant person to the regulator to take specific actions related to the noncompliance.
The new powers are intended to provide a quick and cost-effective way for regulators to address non-compliance. Accordingly, the procedures for exercising the powers will not involve the courts (although a court or tribunal may become involved subsequently if there is an appeal or a failure to comply with a sanction). The procedures vary a little depending on the power concerned; for example, there is a short procedure for fixed monetary penalties (the regulator need only issue a penalty notice) and a slightly longer procedure involving notices of intent, representations and final notices for discretionary requirements.
The FSA already has many of the powers in the new sanctions toolkit, for example, the powers to issue monetary penalties and impose requirements. In addition, the procedures for exercising the new powers are broadly similar to those for the FSA’s existing powers (although see the discussion on temporary cessation below).
What the FSA does not have is a general power to accept enforcement undertakings from non-compliant firms. The FSA may currently only formally request undertakings under the Unfair Terms in Consumer Contracts Regulations 1999 (although it does, in practice, accept undertakings from firms on an individual contractual basis). While the FSA has not yet publicly commented on the Bill, it may be interested in acquiring this new power. Secondary legislation made under the Bill may require regulators to publish details of undertakings; the publication of undertakings accepted by the FSA would provide firms with useful guidance.
It is worthwhile noting that although the FSA may order the temporary cessation of activities through the exercise of its own-initiative power under section 45 of FSMA, it has more often exercised this power in a supervisory, rather than enforcement, context. FSMA defines the statutory notice issued when this power is exercised as “supervisory”, but the Enforcement Guide confirms that the FSA will consider using the power in support of its enforcement function where it has serious concerns about the firm or the conduct of its business. We have seen a number of examples of firms in enforcement being invited by the FSA to suspend business voluntarily eg, Braemar Financial Planning Limited, Redcats (Brands) Limited, Berkeley Independent Advisers Limited and Cathedral Motor Company Limited. Because temporary cessation can have a significant impact on a firm’s business, it is a powerful enforcement tool, with a potentially significant deterrent effect. The Japanese FSA, for example, has frequently used its temporary cessation power to suspend firms’ activities for breach of regulatory requirements. The inclusion of the cessation power in the new sanctions toolkit may encourage the FSA to make greater use of the temporary cessation power in the enforcement context.
The existing FSMA own-initiative power can be exercised with immediate effect, but only where it is necessary to so do.While this may be the case where the interests of consumers or potential consumers are at risk, where the power is being used as a sanction formisconduct, a firm would usually be given the opportunity tomake representations. In either case, FSMA confers a right to refer the matter to the Tribunal. Although the Government has now proposed a single formof cessation notice, it is not clear whether the procedure would be that originally proposed for temporary cessation (the notice would be effective immediately on issue) or a slightly longer procedure involving notices of intention and final notices (in both cases, there is a right of appeal). It would be somewhat incongruous if the proposed new sanctioning powers had lower safeguards than those conferred under FSMA.
It is also important to note that although the FSA’s predecessor SROs had the power to suspend registered individuals, the FSA does not have the power to suspend the activities of approved persons under FSMA. In the Ackers final notice, the FSA noted that while the SFA (which had had the power to suspend firms and individuals) had considered a three year suspension appropriate, the FSA could only impose a fine or withdraw approval. If and to the extent that this power is conferred on the FSA as part of the new sanctions toolkit, this would be a significant change and provide an additional sanction to those currently available.
Whether the FSA acquires any of the powers set out in the Bill, and to what extent, remains uncertain at this stage. The new powers will not be available to a regulator until secondary legislation by the relevantMinister has been made awarding such powers (and the secondary legislation will not be made unless the Minister is satisfied that the relevant regulator carries out its enforcement activities in compliance with the Hampton Report).