FSA enforcement procedures
This article is based on UK law as at 1st April 2007, unless
otherwise stated.
Powers
When investigating cases the FSA has a number of statutory
powers to assist it.
It can obtain information that is relevant to its inquiry; it
can, in certain cases, call on the police to arrest suspects; and
it can, in certain cases, detain people for questioning. Those who
are seen to impede or obstruct its investigations can face stiff
penalties. In October 2003, FSA suspect Christopher Westcott was
given a 28-day suspended prison sentence by the High Court for
failing to co-operate with the authority’s inquiry. The FSA had
been investigating Westcott, suspected of selling funeral plans
without proper authorisation and using a number of aliases to do
so, since April 2002. His sentence was suspended only on the
condition that he subsequently complied with the FSA inquiry.
The FSA says that it will make it clear in each case whether it
is using its statutory powers or not. Where it is not, there is no
obligation to produce documents or to attend an interview or to
give answers when questioned.
Use of the statutory powers is, however, standard practice. In
most cases, parties will be compelled to produce documents and
answer questions in interview – even if they are willing to
co-operate voluntarily. Consistent use of its statutory powers is,
the FSA believes, fairer and more transparent and efficient for all
concerned. So finding oneself on the wrong end of the FSA’s use of
its powers of compulsion does not mean that you are suspected of
anything or viewed as being hostile; even innocent witnesses are
likely to be subject to this standard practice.
But the FSA is equally clear that ready co-operation in
attending an interview and answering questions may well result in a
more lenient penalty should misconduct be found. Where the
statutory powers are used, a failure to attend an interview, as
Westcott found, will be a contempt of court punishable by a fine,
imprisonment or both, as will a failure to answer questions or to
produce documents. There is, in effect, no right to silence. And
there is no equivalent to the US citizen’s right “to plead the
fifth” – that is, protect themselves against
self-incrimination.
The FSA’s powers are undoubtedly extensive, but it says it does
not want to waste them on trivial matters. Its stated intention is
to concentrate on the more important breaches rather than try to
pick up every minor transgression (see “review”, below).
Settlement
A party under investigation can, at any point, open settlement
discussions with the FSA and so spare themselves the time, expense
and bad publicity of further investigation. The FSA claims it gives
credit in deciding penalties for early co-operation and acceptance
of fault. In the Shell case (see case
notes), the fine of £17m would have been “significantly
higher”, the FSA said, had it not been for the company’s high
degree of cooperation. (Interestingly, Shell did not admit it was
at fault.)
Decisions and appeal
If, having made investigations, the FSA decides to pursue a
matter, it will take it in the first instance to its Regulatory
Decisions Committee (RDC). Staffed by current and recently retired
City practitioners as well as by lay members, the RDC oversees the
enforcement process; it examines cases and takes representations
from parties under investigation. If the firm or individual
concerned accepts the committee’s decision, it takes effect. If
there is no acceptance, and the FSA issues a decision notice, the
accused can refer the matter to the Financial Services and Markets
Tribunal, an independent body run, like the mainstream courts, by
the Department of Constitutional Affairs. Tribunal hearings are
conducted from scratch. They usually, however, take place in public
– a fact that may argue in favour of settling the case with the
FSA.
Review
Following criticisms levelled at the FSA by the Financial
Services and Markets Tribunal in the mortgage mis-selling case
brought against Legal and General, the authority launched a review
of enforcement processes in early 2005. That has led to
administrative reforms distancing the RDC from the rest of the
regulator’s enforcement function. The view at the FSA is that these
changes have led to greater transparency and to an increased
perception of the fairness of its processes. It remains to be seen
how optimistic a view that is.
There has also been a big reduction in the number of cases
brought by the FSA – from 600 in 2000 to 109 in 2006. The regulator
says it takes a risk-based approach and will now only pursue those
cases that are in line with its overall priorities and where it is
important to send out a message to the market or where breaches are
particularly serious.
Lessons to be learned
In reaching the decisions described in our case notes
sections (Breach of disclosure obligations:
case studies and Examples of market
abuse: case studies), the FSA drew the following
conclusions:
- in respect of new developments in its sphere
of activity, a listed company must first consider objectively the
importance of those developments to the business and then, with its
advisers (including its corporate brokers), objectively assess
whether they may lead to a substantial movement in the company’s
share price;
- in respect of a change in the performance of
the business, a listed company must first consider objectively
whether there has been such a change and then, with its advisers,
objectively assess the likely price sensitivity of the change;
- when looking at any change in its expectations of
its performance, a listed company must first assess
whether there has been a change in its subjective expectations
(given the relevant facts) and then, with its advisers, objectively
assess the likely price sensitivity of any change.
In addition, to minimise their exposure to, and the risk of,
personal liability, directors need to:
- make sure the company has a formal documented
process to ensure compliance with its obligations under
the Disclosure and Transparency Rules and the Listing Rules;
- regularly review compliance with those rules and rigorously
monitor changes to the company’s financial condition, performance
and its expectations of its performance;
- ensure the company and the board are aware of the
consensus of market expectations regarding the company’s
results and that they regularly ask whether the company’s
own expectations are in line with that consensus;
- keep under review announcements alreadymadeand documents
already published (such as audited accounts and previous trading
statements) and consider whether any later developments may be
material in the context of that information;
- ensure that executive directors elevate issues to the full
board without delay;
- make sure that all members of the board,
executive and non-executive, receive copies of the
monthlymanagementaccounts and details of any major developments in
the company’s sphere of activity;
- seek prompt advice from the company’s
corporate brokers, financial and other advisers as to whether any
information or matter is price sensitive.
