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  • 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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  • 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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  • 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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  • Is it worth complaining to the FOS?

    OK, this post is really about complaints where the losses are over £100,000.  Below that sum the Financial Ombudsman Service is a sensible option for consumers with claims against FSA authorised firms.  Above it, things are less clear.  Under the Financial Services and Markets Act and the FSA rules, the FOS can make an award which (if the consumer accepts it) is binding on the firm concerned and can be enforced like a court judgment - but this is subject to the £100,000 cap.  If the fair and reasonable outcome is that compensation should be above that in the eyes of the FOS it may only recommend payment of the excess.  A judgment in the High Court last week will call into question whether a recommendation has any utility at all.  In Andrews v SBJ Benefit Consultants, the court held that a FOS' final determination, accepted by the consumer, precluded any right to bring an action in the courts for the same matter - even if the FOS had made a recommendation that had not been followed. Of course, this brings some certainty for authorised firms (subject to any appeal reversing the court's view) - they can have confidence that a final FOS award really is that.

    However, perhaps such advantages will be short-lived.  It probably does not take too much imagination to think that consumers may put firms through a FOS process and then not accept a FOS determination if it does not suit (notably if the proposed award includes a recommendation).  Effectively the consumer gets a dry run and the possible advantage of a FOS view on the firm's standards of customer service.

    Additionally, it would be unwise to think that this case gives firms the opportunity to ignore FOS recommendations with impunity.  The FSA has "form", backed by the Tribunal.  In the 2008 Tribunal case involving Heather Moor & Edgecomb Ltd, the Tribunal backed FSA's action in cancelling the firm's authorisation.  The basis for the FSA's action was an unmet FOS award - an award for which the consumers concerned had lost their rights to enforcement through the courts.  The Tribunal agreed with the FSA that a FOS award generated a regulatory obligation (under FSA rules) to meet it, as well as the legally enforceable outcome.  The recommendation issue differs in one important respect - it does not even start out as a legally enforceable award.  However, if it is not too difficult to think that the FSA might approach the topic on the basis that a FOS recommendation ought to have some value to the customer.

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