The Financial Services Authority’s (FSA) recent fine imposed on Rainbow Homeloans Limited (RHL), and the firm’s ceasing to trade in regulated activities, has no doubt focused hearts and minds in our sector firmly on the question, ‘What happens if we are getting it wrong, and how can we make sure that this does not happen to us?’
In the case of RHL, the FSA’s rules and principles were not being met across a number of requirements. The directors were not approved to perform their regulated function and they had not adequately monitored and controlled the business at all times. Instead, they had relied to an inappropriate extent on an external consultant for, ultimately, ensuring customers were treated fairly. In addition, there were serious failings in RHL’s sales process, with the firm failing to demonstrate product suitability, failing to provide relevant Key Facts Illustrations (KFIs) at the right time, and failing to handle complaints correctly.
I’m sure that, by now, the majority of compliance directors and managers will have revisited these areas of their own systems and made doubly sure that both their senior management controls and their sales process are in good order and comply with the rules. But, many may be unclear about how a firm reaches the Final Notice stage, and what stages the enforcement process goes through before the final sanctions are imposed and the matter is made public.
Enforcement
The section of the FSA’s handbook that deals with enforcement (ENF) is part of the Regulatory Processes section, which also contains the rules for authorisation and supervision, and it is a very lengthy and weighty document running to 21 separate sub-headings. However, help is at hand in the shape of a dedicated section of the FSA’s website, ‘Enforcing the Law’, which can be found under ‘Being Regulated’ within the ‘Doing Business with the FSA’ pages. In particular, a three-page information guide is downloadable, which sets out the issues and the process clearly and simply.
The FSA gains its disciplinary, criminal and civil enforcement powers under the Financial Services and Markets Act 2000 (FSMA), to take action against regulated and non-regulated firms and individuals that fail to meet the required standards. First of all, such firms and individuals can be prevented from continuing to trade in a non-compliant way by a number of means, including having their authorisation withdrawn; being prohibited (as an individual) from undertaking specific regulated activities or from operating in financial services altogether; or being barred from regulated activity by way of an injunction. Next, penalties can be imposed, including the public censure of firms and individuals; the imposition of financial penalties; freezing of assets; and the imposition of restitution orders. Finally, the FSA can prosecute firms and individuals who have undertaken regulated activities without authorisation.
Under the terms of the FSMA, a prescribed enforcement procedure must be followed and, at the same time, the terms of the Human Rights Act 1998 must be observed. Following a referral to the enforcement division, a typical investigation would follow these steps. Stage one is the appointment of FSA investigators and (if appropriate) a Notice of Appointment of Investigators is sent to the firm or individual. Initial discussions at this stage are intended to provide a clear idea of the scope of the investigation, how it will unfold, and the documents and individuals the investigators will need access to.
Before going on to the progression of stages following the initial discussions, we are reminded that the enforcement process, once started, can be concluded at any time in a number of ways. For example, a private warning may be issued at any time, thus closing the investigation; the parties involved can seek settlement discussions at any time; and, if the investigators find there is no case to answer, the investigation can be closed at any stage in the procedure.
After the appointment of investigators and scoping discussions have taken place, the next step is the investigation itself, which may include requests for documents and information together with interviews of subjects and witnesses. Following this, there is an internal legal review of the case by a lawyer who has not been part of the investigation team. If continued enforcement action is considered appropriate, then a Preliminary Investigation Report (PIR) is sent to the firm or individual who has 28 days to respond – or may apply for extra time. Taking into consideration any response to the PIR, an Investigation Report and all the case papers are submitted to the FSA’s Regulatory Decisions Committee (RDC) – if the investigations team believes that action is justified. Members of the RDC are appointed by and accountable to the FSA Board and they represent the public interest. FSA staff who handle cases before they are considered by the RDC will not be involved in its decision making.
Warnings and decisions
If the RDC decides it is appropriate, it will then send out a Warning Notice to the firm or individual concerned detailing the FSA’s intention to take further action. They then have 28 days to make representations to the RDC (and may apply for more time), and have the right to access any material used in the decision making process. After any written or oral representations have been considered, the RDC makes its decision and – if appropriate – issues a Decision Notice. The firm or individual then has 28 days in which to make a referral to the Financial Services and Markets Tribunal. This Tribunal is completely independent of the FSA and will consider the entire case afresh, normally in public. It decides what action the FSA should take, including the issuing of a Notice of Discontinuance, if it believes the case has not been justified. If no referral is made to the Tribunal following the Decision Notice, then a Final Notice is issued to the firm or individual concerned, and information is published about the case, as appropriate.
We are reminded that settlement is possible at any stage of the enforcement process, with new procedures for this in place since 20 October 2005. Since this date, increased separation and transparency between the Enforcement division and the RDC has been the objective, and towards this aim it has been possible for the settlement of cases without approval from the RDC. In these cases, a team of settlement decision makers, drawn from a pool of FSA directors, will be the ultimate decision makers in any settlement negotiations between Enforcement and the firm or individual. In this context, ‘settlement’ is not comparable to the settlement of a commercial dispute, but rather an early acceptance by the firm or individual of the terms of the FSA’s regulatory decision.
Where investigators have been appointed on or after 20 October 2005, a discount scheme for the early payment of financial penalties is in operation. Discounts vary according to the stage at which settlement is reached. Stage one attracts a discount of 30 per cent and is defined as the period from the start of the investigation to the point where sufficient understanding of the gravity of the misconduct has been gained and communicated, and a reasonable opportunity to reach agreement on the amount of penalty has been allowed. In the case of RHL, settlement was achieved in this period which enabled a £50,000 fine to be discounted to £35,000. Stage two is from the end of stage one to the expiry of the period for making written representations to the RDC (20 per cent discount), and stage three is from the end of stage two up to the issue of the Decision Notice (10 per cent discount).
All bases covered
If this seems a rather bureaucratic and protracted process, we have to remember that the FSA’s enforcement procedures must cover the largest financial institutions as well as the smallest authorised mortgage firm. They are in place not only to protect individual consumers from being treated unfairly, but also applied to ensure that the UK financial markets are not undermined by illegal conduct. For example, in April 2006 we saw Deutsche Bank being fined around £6.4 million for failing to observe proper standards of market conduct (Principle five) and failing to conduct its business with due skill, care and diligence (Principle two) – the same Principle as cited in RHL’s Final Notice. So, large or small, we are treated on equal terms under the FSA Enforcement processes – and the best way to avoid this happening is to uphold the principles in all your business dealings, and to be able to prove this is the case, if it is ever called into doubt.
