FSA continues tougher stance

With Financial Service Authority (FSA) fines almost tripling in the last year, Tony Watts examines recent trends in enforcement and actions, showing increasing toughness as part of the FSA’s "credible deterrence" strategy.

According to a recent report published by NERA Economic Consulting, "Aggregate fines assessed by the FSA rose to £98.6 million in the 2010/2011 fiscal year from £33.3 million in 2009/2010. The number of fines nearly doubled in 2010/11 as compared to the previous year, for both firms and individuals."

The Financial Services Authority (FSA) has a number of disciplinary powers over regulated financial services businesses in respect of breaches of its rules. These include the withdrawal or suspension of authorisation or fines.

It can also take action against individuals carrying out a "controlled function" within an FSA-authorised firm. Individuals can be fined or banned from doing these jobs in the future. In some cases the FSA can also prohibit individuals from performing any function in an FSA-authorised firm, whether they have worked in a regulated firm or not.

FSA decisions will usually be subject to an appeal to the Upper Tribunal (Tax and Chancery). The FSA also has wide powers to bring civil and criminal proceedings in the courts.

Recent actions against regulated firms

A number of regulated firms have received heavy fines recently. This has included situations where:

• firms lack the necessary internal controls;
• do not provide suitable advice to their clients, particularly in relation to complex investment products; or
• are generally not considered to have treated their customers fairly.

An important theme has been fair treatment of mortgage customers, particularly in the sub-prime and non-conforming markets. A recent example of FSA action in this area concerned Swift First Limited who was subject to a penalty of £630,000 on various grounds, including imposing excessive charges to customers in arrears and on redemption of their mortgages. Swift First Limited is understood to be paying more than £2m to customers who were overcharged.

In May 2011, Bank of Scotland was subject to a fine of £3.5million for its handling of customer complaints in some areas of its business. It is believed that compensation of more than £17m will be paid to customers. This follows action in respect of complaint handling against RBS/NatWest earlier in the year, resulting in a fine of £2.8m.

Action will not always relate to direct dealings with consumers and may reflect the importance FSA rules place on appropriate internal controls. In August 2011, Willis Limited (one of the largest insurance and re-insurance brokers in the country) was fined £6,895,000 for deficiencies in its anti-corruption systems and controls, where third parties were used to introduce overseas business.

Aon met a similar fate in January 2009 resulting in a fine of £5.25m. These cases underline that, for FSA-authorised firms, the Bribery Act 2010 may not be their only cause for concern in this area.

Recent action against individuals

Increasingly, the FSA is seeking prohibition orders against individuals in enforcement cases. This may be where there are concerns about an individual’s integrity but also where the FSA considers that the individual concerned lacks sufficient competence.

This is a draconian power and enforcement orders can be:

• full orders – banning individuals from performing any function in a regulated firm; or
• partial orders – for example, banning them from being the firm’s approved compliance officer.

In a recent case concerning market abuse by a metals trader, Jason Geddis v FSA, the FSA originally found that Mr Geddis was not fit and proper and made a prohibition order and imposed a fine of £25,000. The Upper Tribunal did not uphold this, as they did not agree with FSA’s interpretation of the facts. Instead, the Tribunal ordered that a public censure was the correct penalty.

The Upper Tribunal has also recently given an indication of the level of fine that can be imposed on individuals. In Graham Betton v FSA, it considered the case of a director of a firm involved in market abuse and the FSA had issued a prohibition order preventing him from working in the industry which had destroyed his earning capacity at the age of 60.

He had been motivated by fear of losing his position rather than by greed. The Upper Tribunal considered that in principle, his conduct justified a fine of £500,000 but, in view of his means, the right order was one which marked the seriousness of his conduct but did not force him into bankruptcy – £25,000.

Vigilance in relation to market abuse.

The FSA has wide powers in relation to conduct which interferes with, or distorts the proper functioning of financial markets. These include enforcement powers of its own including fines or censure, subject to appeal to the Upper Tribunal. These are not only exercisable against FSA-authorised persons. The FSA also has powers to bring civil and criminal cases in the courts in some circumstances.

In addition to the market abuse cases mentioned above, several recent cases involve layering and similar practices – broadly distorting prices by entering a large volume of orders which are not followed through but profiting from the impact on price.

Recent action against Swift Trade Inc resulted in a fine of £8m. It is worth noting that although the company was based in Canada, their actions impacted UK Markets and so they were subject to the market abuse jurisdiction.

Of particular importance is that FSA’s decision to make public the result of its action was upheld by the Upper Tribunal, even though there was to be a full appeal on the merits of the case . The FSA has only had the power to do this since 2010. Under further proposed changes, its successor (the Financial Conduct Authority) will be able to publish at an even earlier stage, when issuing a Warning Notice, before the person receiving the notice has been able properly to argue its case to the FSA.

The FSA continues to have recourse to the courts in market abuse cases as well as using its own enforcement powers. In two cases, involving Barnett Michael Alexander andSamuel Nathan Kahn, the FSA has obtained permanent injunctions from the High Court ordering the individuals concerned not to commit market abuse in the future.

The FSA also has powers of criminal prosecution in cases involving certain types of market abuse and in recent times has shown a greatly increased willingness to use these, particularly in relation to insider dealing.

Land banking and boiler room scams

The FSA has been willing to use its powers of criminal prosecution or to bring civil proceedings in the courts over other unauthorised activities.

Matheu Smith wrote about land banking scams in a recent issue of the newsletter and this remains a significant concern for the FSA, with at least six further cases in the pipeline. In June it obtained orders that Stephen Watkins t/a Consolidated Land pay £920,000 back to investors. That same month, it obtained winding-up orders against Plott UK, as well as a world-wide permanent injunction against a company believed to be a phoenix of Plott.

The FSA also continues to use its prosecution powers resulting in high-profile convictions for "boiler room" fraud – selling worthless and sometimes non-existent shares to investors, often using chains of offshore locations. The FSA obtained its first conviction in June (Griffiths) resulting in a sentence of two years’ imprisonment. In August, in collaboration with other agencies prosecutions led to a sentence of nine years’ imprisonment for Tomas Wilmot and sentences of five years’ imprisonment for his two sons.

Keystone lawyers in the Funds and Financial Services and Litigation teams have experience of FSA requirements, FSA investigations and enforcement proceedings and financial services litigation.