6 Civil Enforcement by Regulators

This chapter studies regulators’ extensive power of enforcement action. In broad summary, regulators may discipline authorised firms and approved persons through the imposition of financial penalties or through the issuance of ‘public censure’; and vary, cancel, or impose requirements upon a firm’s Part 4A permission to carry out a regulated activity. They may also prohibit an individual from being employed in connection with a regulated activity; require restitution of profits which have accrued to authorised persons contravening relevant requirements or persons engaged in market abuse, or of losses which have been suffered by others as a result of those breaches; and apply to court for injunctions and other orders against persons contravening relevant requirements or persons engaged in market abuse. Part 26 of the FSMA contains the procedural requirements that must be met before the relevant regulator may impose the sanctions and penalties. The chapter then considers the constitution and procedures of the Regulatory Decisions Committee, which has a central role in the regulatory function of the FCA.

4 Criminal Prosecutions by Regulators—Procedural Considerations

This chapter examines the role of the FCA and the PRA as prosecuting authorities and their right to bring criminal proceedings in pursuit of their regulatory objectives as enshrined in the Financial Services and Markets Act 2000 (FSMA). The FCA and the PRA are not the only agencies responsible for the prosecution of criminal offences in the financial services sector; the jurisdiction of the Serious Fraud Office (SFO) in particular often overlaps with that of the FCA and the two agencies can work in tandem. Meanwhile, although a discrete area of criminal practice, the regulators’ powers to administer a caution to an offender should not be overlooked—particularly in the context of ongoing investigations. Acceptance of a caution can provide an offender with a way of avoiding conviction and sanction whilst offering the prosecutor an ‘easy win’ without the need for costly court proceedings. The chapter then considers key procedural issues as well as the importance of evidence collection and deployment in financial services prosecutions.

8 Redress

This chapter explores alternative avenues that customers or investors may have for redress against firms. In the first instance, customers are expected to utilize firms’ internal complaints processes. If a customer is dissatisfied with the response he receives at the conclusion of the internal complaints process, the matter may be placed before the Financial Ombudsman Service (FOS). There are both advantages and disadvantages in pursuing a complaint to the FOS. The chapter then describes the Financial Services Compensation Scheme. The compensation scheme provides an important source of recovery for an ‘eligible claimant’ who has suffered loss through the act or omission of an authorised person who is unable to meet the resulting claim for compensation. The scheme therefore provides industry-funded insurance against the risk that a successful civil claim against an authorised person might otherwise prove to be worthless.

7 Civil Liability of Firms for Regulatory Breaches

This chapter focuses on the potential exposure of authorised firms to civil liability for breach of FCA rules at the suit of aggrieved investors and customers. Recent years have seen a great increase in such litigation, often in the context of so-called ‘mis-selling’ claims—in reality, a descriptive term applied to a variety of cases in which a customer or investor claims that a financial product sold to him was misrepresented, was unsuitable for his purposes, or has subsequently dropped in value outside some reasonable range of expectations. The detailed and technical nature of the rules imposed by the FCA in its Handbook provides fertile ground for litigation. However, breach of statutory duty is only one of a number of potential avenues of attack open to an aggrieved customer or investor; such claims are also often brought in respect of negligence, misrepresentation, and breach of contract. The chapter then looks at the FCA’s Business Standards sourcebooks and provides an explanation of one of the potential consequences of certain regulatory breaches: the unenforceability of agreements.

3 Investigations and Information Gathering

This chapter discusses the extensive powers of investigation of the FCA and the PRA. The regulators’ powers to gather information and to investigate the affairs of regulated—and, in some cases, non-regulated—firms are found in Part 11 of the FSMA. They include a power to require the authorised person or appointed representative to produce documents, or to produce a report upon the business by a ‘skilled person’, as well as a power to appoint an investigator to investigate the affairs of such a person. In addition, the FCA has further powers to gather information and appoint investigators under Schedule 5 of the Consumer Rights Act 2015 (CRA). Aside from the statutory provisions in Part 11 of the FSMA, the most important text for firms and practitioners is the FCA’s Enforcement Guide (EG). EG provides both a helpful summary of the relevant law in this area, but also guidance on the FCA’s approach to investigations and to the factors which will influence FCA decision making. The PRA also has its own investigations guidance set out in its Policy Statement. The two regulators have also agreed to a Memorandum of Understanding that covers, among other things, coordination in the context of investigation and enforcement action.

1 The UK Financial Regulators

This introductory chapter traces the evolution of the UK financial regulatory system and provides an overview of the UK financial regulators. Following the introduction of the Financial Services Act 1986, the Securities and Investments Board (SIB) was established as the primary UK financial regulatory authority. However, a series of scandals shook the sector in the 1990s and brought public confidence in the SIB into question. The era of self-regulation was over. The SIB was renamed the Financial Services Authority (FSA) in 1997 and, in December 2001, the FSA received a host of new powers through the commencement of the Financial Services and Markets Act 2000 (FSMA). Subsequently, the Financial Services Act 2012 significantly amended the FSMA, abolishing the FSA and creating in its place two new regulators: the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). However, the FCA and the PRA are not the only UK financial regulators. Since 2001, the Financial Ombudsman Service (FOS) has acted as an adjudicator in disputes between financial services firms and UK consumers. Other regulators with discrete or overlapping areas of responsibility include the Competition and Markets Authority (CMA), the Payment Systems Regulator (PSR), and the Panel on Takeovers and Mergers.

2 Regulation Through Authorisation and Approval

This chapter addresses the manner in which the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) control those operating within the financial services market in fulfilment of the statutory objectives set out in the previous chapter, by ensuring that appropriate standards of conduct and behaviour are met. What might loosely be described as a system of ‘licensing’ by the FCA and PRA is implemented at two levels. There is first the need for any firm conducting a regulated activity to be authorised by the relevant regulator. In granting such permission, and in their regulation of a firm following authorisation, the regulators adopt a system of prudential supervision and conduct of business regulation. The second level of regulation comes through the requirement for approval of individual members of the senior management within the firm, carrying out so-called ‘controlled functions’, which involves consideration of the status of ‘senior managers’ under Part V of the Financial Services and Markets Act 2000 (FSMA).

9 Independent Challenges to the Regulators

This concluding chapter assesses the routes by which the regulators’ actions and decisions may be independently challenged by a person adversely affected. Through the passage into law of the Tribunals, Courts and Enforcement Act 2007 (TCEA), the Upper Tribunal (Tax and Chancery Chamber) replaced the Financial Services and Markets Tribunal (FSMT) as the forum for hearing appeals arising out of decisions made by the regulators. The Tribunal may uphold the regulator’s decision or direct the regulator (within certain limits) to take different action. It may also make recommendations about the regulator’s provisions and procedures. The chapter then considers other potential grounds of challenge and complaint. These comprise the possibility of challenging the regulator on an application to the High Court for judicial review and a complaint to the independent Financial Regulators Complaints Commissioner.

5 Criminal Prosecutions by Regulators—The Offences

This chapter explores the main substantive financial services offences, their individual components and their distinguishing features. Specifically, it considers the criminal offences of insider dealing, making misleading statements or impressions (either in relation to benchmark arrangements or more generally), fraud, and money laundering. The commission of any one of these offences in England and Wales will risk prosecution by the appropriate regulator, the Secretary of State, or the Director of Public Prosecutions. However, there are a number of statutory defences that relate to each offence. The most commonly encountered specific defence is that of ‘due diligence’. The due diligence defence is formulated slightly differently between statutes, but generally it is a defence for the defendant to prove that he ‘took all reasonable precautions and exercised all due diligence to avoid commission of the offence by himself or by a person under his control’.