Our angle on bribery, corruption and compliance in today's business world

  • FSA to donate fine receipts to charity - or is it ... ?

    Perhaps it is not altogether surprising, but something said by the Chancellor at his party conference was repeated last week in Parliament (Treasury Questions).  Answering a question, the Financial Secretary said (effectively repeating his boss' comments): "Some £35 million of those fines received [by the FSA] so far this year will be used to support armed forces charities".

    Ordinarily that would give rise to no legal commentary at all - except that, as things stand, there is no legal basis for the promise.  Under the current statute (the Financial Services and Markets Act 2000), the FSA is restricted in its application of fine receipts - essentially it has to apply them for the benefit of the regulated community.  The FSA's published policy on this (currently in Annex 4 to the latest Fees Policy Statement, PS12-11) operates a kind of polluter pays principle.  It doesn't have to do this, the wording of the statute could probably permit the use of the fine receipts to help fund the compensation scheme.  But it's a real struggle to see how a charitable donation (however worthy of attention) fits the statutory obligation on the FSA.

    To be fair, the Financial Secretary also noted that the House of Lords is due to debate changes to the legislation (the amendments are included in the marshalled list for today, as their Lordships didn't get to them last week) - under which fine receipts (after deducting costs of enforcement) would be paid into the public purse.  But that is not yet the law, and (theoretically) might not ever become the law.  So how did HM Treasury get comfortable with the Parliamentary answer in the form it was given in the formal answer in the House of Commons?

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  • A Momentary Lapse of Reasons? Quashing FSA Notices

    The FSA seems to be having a sticky patch with judicial reviews at the moment.  Late last year it was subject to judicial review for failure to deal properly with privileged material though subsequently successfully resisted the consequence of quashing the notice concerned, and most recently it had a decision notice quashed for failure to give reasons.


    The first two decisions related to the FSA's investigations into the failure of Keydata.  The FSA had issued a warning notice (setting out proposed enforcement penalties) against Stewart Ford, one of Keydata's directors, which made use of communications containing legal advice.  The liquidators of Keydata purported to waive privilege, but Ford asserted that this did not enable the FSA to rely on the communications concerned because the privilege was a joint one in favour of Keydata and its directors.  The court agreed in relation to two of the communications, highlighting the desirability for a legal adviser to be clear as to who is the client or clients.  The court told the FSA that it could not rely on the communications with joint privilege, and in a later judgment considered the consequences.  While the FSA was required to take some steps to destroy copies of the privileged communications, the court considered it disproportionate to quash the warning notice, or to require FSA staff to recuse themselves from continued involvement in the case.  The tone of the judgment suggests that the court thought Ford was trying to overplay the impact of his limited success on the privilege point – but there is nothing in the judgment that would suggest that the court was not prepared ever to quash a warning notice that extensively relied, wrongly, on privileged material.


    That the court is prepared to quash a notice has been confirmed very recently in R(C) v FSA, on 25 May.  In that case an individual had made extensive representations in response to a warning notice, without changing the FSA's mind.  However, the FSA had not dealt with the representations in any substantive way.  Indeed the decision notice following representations contained only one extra, and short, paragraph different to the warning notice in setting out the FSA's analysis of the matter.  The court considered the notice to be wholly inadequate to meet the FSA's statutory obligation to give reasons for its decision to take action.  The FSA was told that it had to explain why representations had been rejected – which is, after all, what the FSA says it will do in its own Handbook (see DEPP 3.2.24 G (1)).  The failure to give reasons in this case meant that the individual was not able to assess whether or not to take the matter to the Tribunal for a re-hearing, and the Tribunal would not have been in a position to address the failure to give reasons, so there was no available alternative remedy. 


    Although the FSA is clearly at risk of judicial review if it gets things badly wrong (as it always has been), the regulated community should not get carried away.  The court in C (and the tone of the judgment in Ford) suggests that the traditional deference to regulatory decisions by regulators and to the availability of the Tribunal will continue to limit the success of judicial reviews - nothing in the recent judgments undermines the deference to regulatory judgments and to the tribunal process being the ordinary course (per R(Davies) v FSA and R(Griggs) v FSA).

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  • Regulatory reform - more change, less thought?

    The Parliamentary bill which will reorganise the UK's financial services regulators is now in the middle of its latest legislative stages (which will complete "detailed" consideration by the elected House of Commons).  Among the amendments is a Government proposal relating to the move of consumer credit regulation to one of the successors to the FSA - the FCA (Financial Conduct Authority).

    Rather than moving the existing licensing regime across to the FCA, the Government proposes, through the Bill, to bring consumer credit within the wider regime for financial services generally.  On the face of the amendment put forward, this would apply the complexities and lengthy time-frames of the FSA's application process, and its rules and supervision practices, in place of the relatively streamlined one that exists at present.  Protestations that this is not inevitable are likely to be regarded with cynicism given the way the FSA has, in practice (as opposed to the high-level comments in its approach document), applied to the payment services industry.

    But that is not the full extent of the potential for unintended consequences - currently it would be a criminal offence for a small credit broker with only a consumer credit licence to start taking deposits (like a bank).  On the face of the Government amendment it will be a crime no longer - the consequences could be an unlimited fine, but no threat of gaol and no criminal record.  It is true that the same issue arose in theory when the FSMA replaced the preceding sectoral regulation, and the news has not filled with stories of IFA's doing this, nor with the bringing of insurance and mortgage brokers under the FSA's remit.  However, banks are in the business of lending (at least in ordinary times) as are consumer credit lenders. 

    While, for example, removing the threat of criminal proceedings from an FSA authorised mortgage lender making second charge loans to consumers without a licence, might attract little attention, it is far from clear that the policy makers have thought through their approach to the change of regulator for the converse.  We might hope that such matters will feature in the debate among our elected representatives.  Sadly, that is far from inevitable. 

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  • The death of predictability in regulation?

    The last few days have seen some interesting comments to Parliament from the Bank of England in the last few days, none of which do anything to convince readers that the new regulatory structure will provide the transparency, accountability or predictability that financial institutions need to function efficiently and plan for the future.

    First, there was the public exchange of letters with the Chairman of the Treasury Select Committee in which the Bank refused to provide copies of minutes to the MPs.  In the context of the Government's policy pronouncements about the importance of ensuring everyone knows who is in charge, a downright refusal to be accountable to the elected lawmakers of this country seems to beg for legislation to preclude such nose-thumbing for the future (and Alistair Darling seemed to hint at that too in his evidence to the Joint Committee scrutinising the draft legislation for the new regime).

    Then, from reports of yesterday's outing in front of the Joint Committee, it seems that the current Governor thinks that it is appropriate to call an institution in and tell them to change their business model because the regulator does not understand it - even though no rules have been broken - and possibly not to have rules at all.  That model (whatever protestations are made about its use) takes challenge too far.  Encouraging an institution to get to a position of being able to explain its business effectively, and pointing out that an inability to do so suggests inadequate understanding of itself, is undoubtedly a good check.  Telling them to change it because the regulator's staff don't understand it - possibly because of insufficient resource or experience - is not.

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  • UK Bribery: another scalp for the FSA

    Bribery offences in the UK are mostly policed by the Serious Fraud Office and, sometimes, the City of London Police, between whom there is a significant amount of cooperation.

    However there is another very powerful regulator in London, the Financial Services Authority (FSA). As you would expect, the FSA regulates financial firms and can impose significant penalties for non-compliance with the (vast) Financial Services and Markets Act and the (even vaster) FSA Handbook. The FSA has a much larger staff and budget than the SFO, whose budget has recently been cut and about whom there have long been mutterings about merger or disbandment (which I hope won't happen).

    Some of us have long suspected that the UK authorities would start to (informally) share the burden of anti-bribery work, with cases of clear criminality being reserved for the SFO and systems failures, at least among financial firms, being taken up by the FSA. This now looks to be happening.

    In 2009 the FSA imposed a £5.25 million ($8.5 million) fine on Aon for failure to have effective anti-bribery systems in place and failing to stop questionable payments to overseas parties. That decision can be found here.

    They have today followed this up by imposing a £6.895 million ($11.2 million) penalty on another large insurance broker, Willis. The Willis decision is here. According to Bloomberg, the SFO was aware of the case and happy for it to be dealt with by the FSA.

    High Standards

    In neither case did the FSA rely directly on anti-bribery law such as the Bribery Act or the previous Prevention of Corruption Acts. It didn't have to. Instead, the FSA could simply rely on its own business principles, in particular the very wide Principle 3, which says: “A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.” Like the books and records provisions of the FCPA, this can give regulators a very wide jurisdiction on which to hang an investigation or penalty in the field of ABC compliance.

    The essence of Willis's wrongdoing was failures of management, information, systems and controls in the company's relationships with overseas intermediaries who might have been paying bribes to win business. These are much like the issues which got Aon into trouble in 2009. What is especially telling in the Willis case is that the FSA obviously got into the nitty-gritty detail of how individual appointments were justified and examined by Willis. Plainly, it just isn't enough to have a set of forms which show that "we followed a process".

    In the Willis case, the FSA cites a failure to demonstrate a proper commercial rationale for the appointments, failure to do proper due diligence, lack of documentation and monitoring of appointees and lack of information getting to committees responsible for anti-corruption policies. As with so much in ABC enforcement, what matters is the substance, not the form, and a "see no evil" approach is heavily frowned on.


    The FSA recognised that Willis has cooperated with the investigation, which earned it a hefty 30% credit against the possible penalty. Also, since 2010 Willis seems to have taken a root and branch approach to improving ABC systems and controls, especially around appointing and monitoring overseas third parties, with lots more information being considered by a more robust and independent compliance function. A historic review of all past payments to overseas third parties (which must be costing a pretty penny) is also under way.

    So what have we learned? :

    a) If you are have a financial services business in the UK the FSA is now very, very interested in your ABC compliance programme;

    b) That programme needs to be fully functional, not just an exercise in form-filling;

    c) You can get leniency for past sins if you invest in training and external assurance now.

    I admit I like point c) the best, but it's true whether I happen to like it or not.

    I am pondering the role played by lawyers and advisers in corporate ethics more generally, especially in light of the scandals surrounding News Corporation where "legal advice" is regularly being cited as a justification by various parties.. I hope to write a bit more on this in the near future.

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  • Regulatory restructuring - the white paper has landed

    Finally, we have it. The Government's draft proposals for the legislation to reorganise the UK's financial regulatory system. The approach adopted is to revise the existing legislation – that is, to amend the Financial Services and Markets Act 2000 (FSMA). So much of the terminology and process learned over the last decade or so will still be useful (though may need some adaptation). But this approach means that the draft legislation is that much harder to follow, and that much harder to analyse to identify the impact on individual financial service firms. The 50 page policy sections of the White Paper obviously help, but can only give a high-level view of the 220 odd pages of draft primary legislation. And then there are the pieces of the jigsaw that are still missing (secondary legislation). Even so, the detail has begun to arrive so we can start to look for the devils.

    The White Paper still shows the roots of the political drives for regulatory change. The flavour remains that of the political will to change fundamentally the way in which banks are regulated. Others get occasional mentions – insurance companies finally get official recognition that they are not banks in the introduction of an insurance-specific objective for the Prudential Regulatory Authority (PRA). But it is hard work to find any real consideration of what the changes mean for what, numerically, are the vast majority of financial services firms in this country.

    To some extent the lack of specific mentions for the IFA community, and other intermediary firms reflects the more limited impact of the structural reforms on them. But thinking only about the renaming of the Financial Services Authority as the Financial Conduct Authority (FCA) severely underplays the hardwiring of the more aggressive regulatory approach that the Government wants and that is already evident.

    The draft legislation essentially reworks the constitutional requirements for the FSA under FSMA and delivers the FCA and PRA. It tinkers with the statutory objectives, but recycles the idea. The FCA is to have a strategic objective (protecting and enhancing confidence in the UK financial system) which is readily seen as a complement to the PRA's general objective of promoting the safety and soundness of those it regulates (bear in mind that the PRA is supplementing the macro-economic objective of the Financial Policy Committee's (FPC) financial stability strategy, originally given to the Bank of England by the last Government). On top the FCA has three "operational objectives" – consumer protection, integrity of the UK financial system, and "efficiency and choice" (aka competition).

    Likewise many of the processes and powers to be given to the PRA and the FCA are re-used and recycled FSA processes and powers. But they have been added to – at least in political terms. There is a new, explicit, power to get financial promotions stopped, and a new, explicit, power to ban or suspend financial products. These are touted as tools to enable the new regulators to prevent misselling scandals before consumers are affected rather than waiting until much later and requiring compensation review schemes. Laudable perhaps, but there is a serious risk that they will actually end up stifling innovation in the short term, and in the longer term they will undoubtedly be branded as failures when the next scandal hits (whether or not within the regulatory purview).

    Less laudable, I think, is the substantial reduction in the protection for regulated firms subjected to regulatory action. The potential publicising of giving warning notices has attracted much comment already – none of which has made any impact, so far as one can see – and there is little to add, except to note that there is not even an obligation on the regulator (in practice it is likely to be the FCA not the PRA) to give any publicity to the fact that a warning notice has gone away. If a serious allegation is made and cannot be sustained, basic fairness suggests that the regulator should own up. But there is a new twist too. The Government has announced that a minimum of 28 days for representations is far too long and this should be halved. Aside from the bald statement, no justification is given for this change – and in my experience even 28 days is not very long if the case has any degree of difficulty. It doesn't weigh well against the time the regulator usually takes in putting together its case, typically two years or more.

    With a multiplicity of regulators, the interplay between them will be important. Each of the two new regulators is typically obliged to consult with the other when there are overlapping responsibilities (so the PRA almost always has to consult with the FCA before taking action, but not always the other way around). The White Paper noted the suggestions made by those responding to the earlier consultation rounds that the PRA and FCA should establish a shared resource for some of their processes (approvals, change of control and authorisation included). The Government has refused to hard-wire this into the legislation, but has definitely left the door ajar for it to happen.

    Both the FCA and the PRA are potentially subject to direction from the FPC telling them to implement a "macro-economic measure" (though we still don't know what one is). In theory the FPC is not allowed to give a direction that relates to a specific institution, but it can specify a description, which if highly detailed might get close to the same thing. Also the PRA is to have a power to tell the FCA not to act if it considers the proposed action would threaten the stability of the UK financial system or would result in the failure of a PRA-regulated firm in a way that would adversely impact on the UK financial system. The Government has insisted that there is to be no hierarchy of importance between the two new regulators. But this one-way direction suggests that the PRA will, inevitably, be regarded as the more senior. The policy might seem clear – protecting stability is more important than protecting consumers or preventing financial crime. But perhaps the PRA will see things more subtly in due course and recognise that consumer protection, for example, is vital to financial stability. After all a major cue for action in the last crisis was the sight of consumers queuing outside Northern Rock branches.

    An important missing piece of the legislative framework, of course, is the precise split of firms between the FCA and the PRA (though PRA firms will, in practice, be jointly regulated – unlike the pre-FSMA regimes). Banks and insurance companies will know their destination, but investment firms will not have an easy time of it. The draft legislation leaves it for another day (for secondary legislation), but worse still the policy set out in the White Paper suggests that the PRA will, to some extent, be left to make it up as it goes along.

    Overall, the picture remains one in which the regulators will be expected to be more intrusive and less predictable. This is, of course, the exact opposite of the line when FSMA was making its way to the statute book – when politicians of all parties queued up to argue against an overbearing regulator. It may be only a matter of time before the political preference changes back. But in the meantime we are likely to have at least two overbearing regulators.

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  • New FSA Controlled Functions Delayed

    It is an easy development to overlook - the most obvious mention is towards the bottom of the FSA's homepage, linking to a brief statement (which does not appear either on the publications by date or the latest publications pages at the time I write this).  But the FSA has delayed the implementation of various new controlled functions - notably the controversial CF00 ("parent entity significant influence") function. 

    The introduction of these new controlled functions (i.e. roles which require FSA prior approval for the individuals carrying them out) was scheduled to come into effect on 1 May, but this has been postponed until a day to be fixed.  Firms will have two months' notice of the new live date, and would probably be unwise to put preparations on hold. 

    The FSA's reason for the delay is that they have not been able to implement the Online Notifications and Applications system.  It does seem ironic that the FSA legislates to require the firms it authorises to ensure that their systems and controls are adequate for the activities that a firm plans to do - and fines them for failing to do so.  Yet the FSA ploughs ahead with requirements causing significant work without ensuring that its own systems can cope.

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  • Could fines be used to help fund the compensation scheme?

    In the last few months a spate of financial services firm defaults have resulted in compensation levies that are much higher than before - and unusually extend beyond the sector specified by the FSCS/FSA as being the one in which the issue arose.  In particular the Keydata situation has resulted in very  significant levies and letters to the press.  The comments suggest that a very large burden is falling on firms who have not been involved in the kind of business concerned nor have they been firms in the spotlight because of FSA enforcement action against them.  Shouts of "it's not fair" do not always justify sympathy.  But I cannot help wondering whether it might be a more appropriate use of the tens of millions in fines to help fund the compensation scheme rather than provide a discount on future regulatory fees. 

    The FSA is under a statutory obligation to apply its fine income "for the benefit of authorised persons" (i.e. firms with FSA authorisation).  Parliament's intent was clear - and emphasised extensively in debate during the passage of the current Act. But the obligation is not to pay it to the peers of the miscreants.  That was simply the mechanism adopted at the outset.  To take an example - the £30 million or so paid by JP Morgan Chase will be applied to the credit of investment banks, none of whom will be in the immediate firing line to contribute to the compensation scheme for Keydata claims.  The sector was not in the front line of selling those investments either (which is the fundamental basis for contributions being required). 

    In the current political climate and attitudes toward investment bankers, perhaps the high profile fines would be better spent in supporting consumers who have lost out than providing (in all likelihood) immaterial reductions in the regulatory fees. It might also avoid the FSA attracting ill-informed comments about the use of fines to pay bonuses to its enforcement staff (the very thing that the statutory provision mentioned above was designed to preclude).

    I wonder if it will ever find favour in the political arena, or make its way into the UK's regulatory reforms.

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  • The FSA to be the guardian of the residential mortgage market

    Finally the government has published its response to the consultation on mortgage regulation which began in late 2009.  For any seasoned observer it is no surprise that it paves the way for a single body to oversee the regulation of all residential mortgages. The government's case for these reforms lies partly in a desire for ensuring consistent standards of consumer protection across all residential mortgages. One major concern for the government is that borrowers are a target for consumer detriment where their mortgage is part of a portfolio purchased by an entity not subject to FSA regulation.  


    Whilst the advantages outlined by the government seem credible, as always, the devil is in the detail and some important questions remain to be answered including the necessity for such reforms. For example, what impact will the proposed measures have on mortgage portfolios which operate under a non-UK ownership structure? What will the scope for regulation be for a lender who is based offshore? If no special measures are put into place can loan purchasers simply avoid UK regulation by moving the management of loans offshore?  


    It is important to bear in mind that borrowers who have their mortgages sold on to unregulated firms are already protected by legislation regarding consumer protection and unfair contract terms. Moreover, in practice, servicer firms are regulated, so as a matter of good practice when they enter a contract with the loan owner it is on terms ensuring compliance with relevant regulatory requirements. This has the effect of the borrower being protected in the same way if their mortgage ends up with an unregulated provider, as they did with their original regulated provider, which begs the question: aside from moving the regulation of residential mortgages under one roof, what do these proposals achieve?

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  • Too big to scare?

    I've seen the usual "too big to fail" question raised often - and less frequently one about "too big to save".  But a new one has occurred to me now that the FSA has closed its post mortem on RBS. The FSA has announced that no enforcement action would be taken against the bank or senior management, despite bad decisions being identified - not least the acquisition of ABN Amro.  The FSA also added that the competence of individuals at RBS would be taken into account if they seek to work at a senior level in the financial service industry again.

    I am intrigued by the repeated description of the investigation as a "supervisory investigation" supported by PricewaterhouseCoopers.  Why?  Because it suggests that the FSA's Enforcement Division was nowhere near the evidence gathering and decision making.  Given the profile and press coverage focused on why RBS failed (and on the quality of the supervision of the FSA), one might be forgiven for expecting the Enforcement team to have been at the forefront and looking for something more than failures in sanction-spotting controls and the undertaking given by Jonny Cameron

    The announcement came only shortly after the FSA was criticised in a Parliamentary debate about its failure to take effective action against senior management in big banks.  The particular criticism that caught my eye did not come from an MP with no experience of the sector, but rather from Steve Barclay MP, a former colleague of mine at the FSA who came to the House of Commons by way of Barclays!  His comments about senior executives at failed banks make an interesting lead-in to the FSA's conclusions.  The FSA may not have found sufficient evidence to justify regulatory action (and found none to support action for fraud or dishonesty), but one can't help wondering whether they really had the drains up to look.

    The FSA's usual internal processes involve an initial review by the supervision team, who then seek to refer the issues concerning them to the Enforcement Division for formal investigation, using the FSA's formidable investigation powers.  I can't help speculating whether Enforcement didn't want the job or whether Supervision didn't want to pass it on.  The answer may be neither of these, but still the public are bound to wonder whether Hector Sants' comment that firms should be afraid of the FSA was merely a good soundbite.

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