On 24 April 2012, the Upper Tribunal overturned an earlier decision by the FSA to fine Mr Pottage £100,000 for misconduct pursuant to section 66 of the Financial Services and Markets Act 2000 ("FSMA"). The Upper Tribunal did not consider the FSA had provided sufficient evidence to demonstrate that Mr Pottage's conduct had fallen "below that which would be reasonable in all the circumstances". This highlights a difference in approach between the FSA and the Upper Tribunal as to the standard to be applied in assessing reasonableness in such circumstances. Clearly the Upper Tribunal disagreed with the FSA's view as to what fell outside the scope of what is "reasonable". The willingness of the Tribunal to disagree with the FSA on significant matters such as this may encourage others to challenge the FSA's decisions in the same way.
Mr Pottage was the CEO for UBS AG and UBS Wealth Management (UK) Ltd (together "the Firm") during a period when, according to the FSA, the Firm had inadequate systems and controls in place to prevent employees of the Firm using client accounts to carry out unauthorised trades.
Following on from the FSA's decision to fine the Firm, the FSA took action against Mr Pottage personally as CEO holding controlled functions 3 and 8, for breaching APER Statement of Principle 7, which states that someone holding a significant influence function must take reasonable steps to ensure that the business of the firm for which he is responsible in his controlled function complies with the relevant requirements and standards of the regulatory system. The FSA decided in October 2010 to fine Mr Pottage £100,000.
In support of their decision, the FSA identified various flaws in the systems and controls of the Firm and stated that on being appointed as CEO in 2006, Mr Pottage should have identified that there were "serious flaws" in the existing governance and risk management frameworks in place at the Firm and conducted a "systematic overhaul". Mr Pottage did, eventually undertake such an exercise but the FSA stated that he should have commenced it earlier than he did.
The Upper Tribunal agreed with the FSA in that there were serious flaws in the design and operational effectiveness of the Firm's governance and risk management frameworks during Mr Pottage's tenure as CEO. However, it did not agree with the FSA that Mr Pottage had breached APER Statement of Principle 7. In order for a person to have breached a Statement of Principle, he must be personally culpable which either requires evidence of deliberate misconduct or that the person's standard of conduct has fallen below that which would be reasonable in all the circumstances. There was no allegation of deliberate misconduct and the Upper Tribunal was not satisfied on the evidence before it that Mr Pottage had failed to act reasonably in the circumstances.
The Upper Tribunal found that Mr Pottage had identified all the serious flaws highlighted by the FSA, had taken steps to remedy them and done so within a reasonable time frame. The Upper Tribunal disagreed with the FSA that Mr Pottage should have commissioned a "systematic overhaul" of systems and controls sooner than he did. They found that Mr Pottage had acted reasonably in attempting to resolve the individual problems before embarking on the resource intensive task of a systematic overhaul. Consequently, the Upper Tribunal ruled that Mr Pottage had not committed misconduct and directed that the FSA should take no action against Mr Pottage. The £100,000 fine previously imposed by the FSA has therefore been rescinded.
This matter serves to highlight that the holder of a significant influence function will not have committed misconduct simply because a regulatory failure has occurred "on his watch" in an area of the firm for which he is responsible. The individual will need to have failed to act reasonably in relation to the regulatory failure. In practice, this means not reacting appropriately to warning signs that controls are inadequate or ineffective and/or failing to exercise due reasonable care when assessing information, failing to reach a reasonable conclusion and acting on it.