In the FSA’s request for further enforcement powers, made in submissions to the Parliamentary Commission on Banking Standards (published on Monday), the regulator has specifically suggested the following should be added to the regulatory enforcement toolkit:
- taking personal enforcement action against non-approved persons employed by authorised firms;
- broadening the ability to take action against a director of a listed company for being knowingly concerned in a breach of the listing rules, so as to cover taking action where they knew or ought to have known of the breach;
- extending the limitation period for taking action against individuals beyond 3 years;
- introducing temporary prohibition orders so the regulator “can remove incumbent senior managers where they continue to pose a risk to the regulators’ objectives whilst action against them is ongoing”.
Taking personal enforcement action against non-approved persons employed by authorised firms
To date, liability to be disciplined by the regulator has been the corollary of the privilege of being an approved person – approved by the FSA to carry out a controlled function in relation to a regulated activity carried on by one’s authorised employer. The main body of the FSA’s submissions envisages at paragraph 25 that both the new regulators would over time review (and expand) the existing list of functions – which FSA acknowledges is already broad.
However, a much more significant expansion of the regulator’s current powers is being put on the slate – one which would enable the regulators to take enforcement action against employees of an authorised firm who have not undergone the approval process. Although the submissions suggest that the case for possible change along these lines is set out in the Appendix, the Appendix merely refers to “existing limitations in this area” without further explanation of what these might be.
Reference is made to LiBOR-setting elsewhere in the submissions: if the purported justification for this proposal is the need to regulate that activity, then we would strongly argue that the straightforward and proportionate legislative response is to make it a regulated activity, and to make involvement in LiBOR-setting a controlled function – as has already been suggested. That lacuna in the current framework is not a proper basis for the wholesale extension of enforcement powers to every individual employed in any capacity in an authorised firm.
There is no further detail about precisely what the FSA intends: one assumes that it is not envisaged that receptionists and post boys would be within the regulatory framework, but it is not clear what if any connection there would need to be between the employee’s functions and the carrying on of regulated activities, nor against what standards or rules their conduct would be measured. Is it envisaged that in-house lawyers become subject to regulatory supervision and if so, how would that impact on legal professional privilege and other professional obligations?
This proposal seems likely to revive the debate about whether disciplinary proceedings under the Financial Services and Markets Act 2000 (FSMA) are in fact “criminal proceedings” within the meaning of the European Convention on Human Rights (ECHR), given that they are punitive in nature and the financial penalties are unlimited. A significant expansion of the disciplinary regime – beyond the confines of persons who have submitted to the regulatory regime through application for individual approval – could, if not tied in to the performance of regulated activities, be sufficient to tip what has long been regarded as a somewhat finely balanced argument and make disciplinary proceedings “criminal” in ECHR terms. In that event, the full panoply of ECHR protections would apply, and the FSA would not be able to rely on compelled evidence from individuals in disciplinary cases against them.
Broadening the ability to take action against a director of a listed company for being knowingly concerned in a breach of the listing rules, so as to cover taking action where they knew or ought to have known of the breach
Another extension of liability, though less surprising given the growing focus on competence in the discharge of duties and uncertainty within the FSA about whether the “knowingly concerned” test requires more than mere knowledge of the facts giving rise to the breach. It does however introduce a level of uncertainty into the mix – if the available MI did not provide the relevant information, is the phrase “ought to have known” intended to encompass information the director would have known if he/she had the MI that the FSA (judging with the benefit of 20:20 hindsight) concludes should have been available to them? Several recent enforcement decisions – albeit in the regulated sector – criticise directors for failing to ensure they receive quality MI.
Extending the limitation period for taking action against individuals beyond 3 years
Currently, the FSA cannot take disciplinary action against an approved person for misconduct after the end of a period of 3 years beginning with the first day on which the Authority had information from which that misconduct could reasonably be inferred, unless a warning notice is given within that time. The original 2-year period provided for in 2000 was recently extended: when the 2010 Act was going through, the FSA asked for the limitation period to be extended to 4 years, and was given a 3-year period instead.
The justification for further latitude seems to be simply the fact that complex senior management cases, and getting information from overseas, take longer, although reading between the lines there is also some suggestion that the regulator may also believe that any limitation period should start only when it begins its investigation.
A period of 3 years between the date the regulator first becomes aware of an issue and the date by which a warning notice must be issued is not ungenerous. Since it can easily take several more years to get to a Tribunal hearing, extending the limitation period creates an increased risk of significant delay in getting to the point of a fair and impartial hearing, with the concomitant risk of unfairness increasing as memories fade. Although the FSA’s submission is somewhat coy about precisely what is being sought, one possibility which seems to be being mooted is that there should be no limitation period at all – the FSA refers to the fact that there is no comparable limitation for action against firms, or for market abuse cases, although the latter are treated as criminal rather than disciplinary and attract additional human rights protections accordingly.
Introducing temporary prohibition orders so the regulator “can remove incumbent senior managers where they continue to pose a risk to the regulators’ objectives whilst action against them is ongoing”
The FSA already has the power to suspend approval as a sanction for misconduct: this proposal would enable the regulator to impose a temporary prohibition on an individual without needing to have concluded enforcement action. The FSA concedes this would be a significant extension of its powers and does in this instance consider some possible safeguards: an appropriate threshold on the face of FSMA for the exercise of the power; the right for the individual to make representations to the regulator concerned; an immediate right to refer the matter to the Tribunal; and the power for the Tribunal to suspend the effect of the decision pending its determination of the reference.
However, a suspension of this nature would be a supervisory decision rather than a disciplinary matter under the new regime, which means that the Tribunal will not be able to substitute its decision for the regulator’s, and will be restricted to making findings as to the factual and legal matters that the FSA should (and should not) have taken into account.
All in all, but particularly in relation to the first and last of these, a somewhat worrying set of proposals for aggregation of power by the regulators, with little consideration of the safeguards that would be necessary to prevent their abuse.