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The FSA wants further enforcement powers – take note

06 November 2012. Published by Ben Gold, Partner

In submissions to the Parliamentary Commission on Banking Standards (published today), the FSA has made a request for wider enforcement powers, which directors and officers and employees of regulated entities, and their insurers, should take notice of.

Whilst noting that "our enforcement powers are largely effective", the FSA has advised the Commission that it "may wish to consider the case for…the following changes":

  • The FSA having the ability to take disciplinary action against non-approved persons;
  • The FSA being able to take action against the directors of listed entities for breaches of the Listing Rules where the director should have known of the breach (currently the FSA has to prove actual knowledge on the part of the director);
  • Extending the limitation period for the FSA to bring enforcement action against approved persons (from three years).

Non-approved persons

The first of these suggested changes is perhaps the most significant.

Currently, the FSA can only take enforcement action against an 'approved person', ie individuals who have gone through an approval process and who the FSA has specifically approved of to carry out a controlled function in relation to a regulated activity of the organisation for whom that person works.  A current list of the controlled functions can be viewed here.

However, the FSA now seems to want the ability to take enforcement action against non-approved persons.

If given this power, the FSA will be able to cast the net far wider, in terms of bringing to account all of the employees of an institution that it considers are culpable for any given regulatory event or incident.

D&O insurers need to be aware of this, because FSA investigations and enforcement action is very costly to defend, and because it is becoming more and more common to include 'mere employees' (alongside FSA approved persons) within the definition of "insured" under D&O policies. 

In other words, FSA non-approved persons are often insureds under a D&O policy, so long as they are an employee of the organisation.

If the FSA gets this new power, one can therefore envisage that it will be D&O insurers that are expected to fund the defence of any non-approved persons that are made the subject of enforcement action. 

What is not clear is by what yardstick non-approved persons are to be judged by the FSA?  Is it being proposed that they be assessed against the current myriad of principals and rules that apply to approved persons?  One can hardly see it being done any other way, but at the same time it seems somewhat unfair that that should be the case in circumstances where the individuals concerned have not assumed the burden of going through the approval process in the first place.

Listing Rules

The Listing Rules apply to any company listed on a UK stock exchange subject to the oversight of the UK Listing Authority.  The rules pertain to, amongst other things, the content of prospectuses in respect of share offerings and the obligation to make announcements in respect of takeover bids.

Currently, the FSA can only take action against the director of a listed company for a breach of the rules if the director was 'knowingly concerned' with the contravention.  In the FSA's view, this is "too narrow" a test, and "positively disincentives directors from making enquiries to discover whether the listing rules are being complied with".

Under the FSA's proposal, the test should be amended, so that "enforcement action can be taken where a director "knew, or should have known" of the contravention". 

Should this change come into effect, in the event of a breach of the rules by the company, enforcement action by the regulator against the directors will be significantly more likely.