In our Financial Services Series Issue 3, we identified a number of ways in which the FCA is maintaining and increasing the “credible deterrence” against regulatory misconduct through its use of sanctions. These include: the imposition of fines that really hurt and a focus on the responsibility of individuals and senior managers.

It is interesting to look at the Final Notice in relation to HomeServe Membership Limited (“HomeServe”) published on 12 February 2014 in this context.

HomeServe, an insurance intermediary which arranges and advises on home emergency and repair insurance cover was found to have breached three of the Regulator’s Principles for Business (Principle 3 – systems and controls; Principle 6 – acting in the interests of its customers; and Principle 7 – clear and fair communications with customers).

The FSA moved to a new penalty regime (set out in a new version of Chapter 6 of DEPP) on 6 March 2010. HomeServe’s misconduct took place over a six-year period spanning both the old and new penalty regimes.

The breaches included mis-sales and unclear/unfair sales communications with customers; failure to deal adequately with complaints; inadequate regulatory training for senior management; and target and bonus structures which incentivised staff inappropriately both in relation to sales and complaints handling.

"Penalties that hurt"

Under the old penalty regime, HomeServe was fined approximately £5 million for its failures over a period of five years and two months (14 January 2005 to 5 March 2010).

Under the new penalty regime, HomeServe was fined a further £25.5 million for failings over a period of one year and seven months (6 March 2010- to 27 October 2011). The fine for the later shorter period is considerably larger than for the earlier but longer period.

The conduct was not exactly the same throughout the entire six year period: the failings in relation to complaints handling took place from January 2010 and therefore fell mostly (though not exclusively) under the new penalty regime. However, all of the Principle 3 breaches (systems and controls) and all of the Principle 7 breaches (unfair/unclear communications with customers) took place under the old and new penalty regime.

It is becoming apparent that the new penalty regime is capable of producing a significantly larger penalty than the old. It also would have been open to the FCA to impose a penalty of double the amount which was eventually imposed had it chosen to impose a fine at a level of 20 per cent of HomeServe's profits, instead of the 10 per cent actually applied. Even so the penalty was very substantial indeed, totalling £30,647,400. The FCA confirmed that had it not been for the early settlement, HomeServe would be facing a financial penalty of £43,782,058.

Individuals/Senior management

It is difficult to form any definitive conclusion on this front.

The Final Notice makes it clear at some length that failings at the senior management level (including on the board) formed a significant part of the misconduct for which HomeServe has been fined: 

  • There was an overlap and a lack of clarity of responsibilities between the Board of HomeServe, the senior management team and the Compliance and Risk Committee.
  • Compliance reports were not discussed at all at Board meetings, or if they were discussed, they were not taken sufficiently seriously.
  • There was no dedicated compliance representation on the Board at all from September 2010 onwards.

Despite the heavy emphasis in the Final Notice on senior management, Risk and Compliance Committee and Board failings, it is noteworthy that, as far as we are aware, no particular individual(s) has been identified for regulatory enforcement action themselves.

Of course, it is possible that such action is in process and not yet publicised. On the other hand, it may simply be that there was a lack of evidence of individual responsibility in this case.

We expect the FCA to continue to look closely at the role of senior managers and individuals in misconduct in enforcement cases.