A number of recent FSA proposals and decisions will make it even tougher at the top for senior managers within regulated firms and they will no longer be able to rely on indemnities from their firms to pay fines, nor can they be certain that their financial circumstances will be taken into account in setting the level of fine.

  • The FSA published a speech (on 12 October 2010) by FSA Manager of Governance Policy on the approved persons regime and significant influence functions (SIFs). She outlined the proposed changes including that published in the FSA’s September 2010 policy statement (PS10/15) which would mean that, from 1 May 2011, a new parent entity SIF controlled function (CF00) would be introduced.  

As currently described in PS10/15, it is not the job title held by a person within the parent entity that will determine whether they fall within the scope of the parent entity SIF controlled function, but rather the function exercised. An arrangement permitting the performance of the role by the person concerned can arise by conduct, custom and practice and does not need to be a formal delegation. This means that the parent entity SIF controlled function may apply where an individual has a direct, but informal, influence on a firm’s governing body that is sufficiently strong that their decisions or actions are regularly taken into account by the governing body.  

The text of the FSA speech and PS10/15 can be found here and here.  

  • The FSA policy statement on enhancing client asset protection (20 October 2010, PS10/16) includes the creation of a new CASS operational oversight function.  

For a copy of PS10/16 and Client Asset Sourcebook (Enhancement) Instrument click here and here.  

  • The FSA Consultation Paper (30 September 2010, CP10/21) on improving complaints handling includes a proposed requirement for firms to identify a senior individual responsible for complaints handling (also see below).  
  • The FSA Consultation Paper (14 October 2010, CP10/23) on its 2010 review of its Decision Procedure and Penalties manual (DEPP) and Enforcement Guide (EG) includes the proposal to impose a new rule in GEN that an authorised firm must not pay a financial penalty imposed on a present or former employee, director or partner of the firm or an affiliated company.  

Comments can be made on the proposals in CP10/23 until 14 December 2010. The FSA intends to publish a policy statement with final rules in January 2011. For a copy of the consultation paper click here.

Senior Management - more responsibility, fewer rights

Taken together, these developments confirm that senior managers and their insurers are going to become increasingly exposed to regulatory action as personal responsibilities are assigned to new areas within regulated businesses and their parent entities.

The new parent entity significant influence function (CF00) will mean those exercising effective control over a regulated firm from within a parent or holding company will have to become approved persons and will be accountable to the regulator as CF00s. Those who considered themselves many steps removed from the management of a regulated subsidiary will now have to take on additional regulatory responsibility to the extent their decisions affect the subsidiary.

The FSA’s complaints handling review found that firms that did not have a clearly identified and sufficiently senior individual responsible for complaints handling tended to generate worse outcomes for consumers. Consistent with the FSA’s perennial theme of senior management responsibility, the FSA proposes that a person who undertakes a ‘governing function’ (usually a director or equivalent) within the firm should take responsibility for complaints handling. Firms need not notify the FSA of the appointment but ought to be ready to identify the individual to the FOS upon request and that individual should be able to answer questions about the firm’s complaint management practices.

The complaints data provided to the FSA and firms’ self-reporting obligations mean problems revealed by complaints quickly come to the attention of the regulator. This in turn can quickly lead to enforcement investigations. Past FSA final notices contain numerous references to fines specifically relating to failures in complaints handling (well-known examples include: Friends Provident (2003), Allied Dunbar (2004), Abbey National (2005), Loans.co.uk and Guardian Assurance (2006) and Sesame (2007)).

The presence of a senior manager with personal responsibility for complaints handling will offer an easy target for future enquiries. For firms and, in particular, their D&O insurers, this will have significant implications for conflict management and the costs of defending not only the firm but the ‘complaints manager’. For obvious reasons, the personal involvement of individuals subject to enforcement investigation inevitably leads to a substantial increase in the time taken to complete enforcement investigations and the costs involved.

The FSA’s current focus on client money and assets will result in the introduction of a CASS oversight function. This too will make someone directly responsible for a firm’s CASS compliance and the inevitable target for investigation where CASS failings are suspected. Regardless of the official title, the CASS oversight functionary is bound to be an ‘officer’ (if not a Director) for the purposes of D&O insurance.

GEN6 has long outlawed insuring against FSA fines but it was unclear whether the FSA also intended that firms should not indemnify their staff against any fine. That has now been clarified by the clearly expressed intention to change the rules to make clear that firms cannot indemnify individuals for the fines that may be levied against them. Defence costs can still be insured or indemnified but any individual fined by the FSA must meet the fine themselves.

It used to be some consolation to such individuals that their financial circumstances would be taken into account and they would not be fined (or, at least, not heavily) if it would create undue financial hardship. However, even that final layer of protection is being peeled back. As noted below, the Upper Tribunal has confirmed the FSA’s right to ignore a plea of financial hardship in circumstances where the person has brought it on themselves. It is easy to see how that principle will be stretched to ensure that punitive fines are imposed in deserving cases.

Whilst D&O insurers will not be liable for any fines at all, they should certainly be concerned about the ever-increasing encroachment of FSA regulation into the boardroom and the added intensity with which Directors are likely to want to fight enforcement action when facing personal fines with no fallbacks.