THE FINANCIAL SERVICES AUTHORITY:
INVESTIGATION AND ENFORCEMENT - AN OVERVIEW
Timothy Kendal and James Harrison1
1.
INTRODUCTION
1.1
The financial markets and areas of commerce which the Financial Services
Authority (“FSA”) regulates account for a significant percentage of the UK Gross
Domestic Product. The financial industries employ in the region of two million
people.
1.2
The sphere of activity which the FSA regulates is, therefore, enormous and
expanding. Now, mortgage companies and most insurers fall to be regulated by
the FSA.
1.3
The powers to enforce the regulations of the Financial Services and Markets Act
2000 are manifold. The means by which the FSA may seek to investigate and
enforce its regulations have enormous importance.
The FSA may deal with
breaches in the civil courts, by disciplinary action or criminal prosecution or by
taking no action at all.
1.4
The powers are diverse and focused upon the statutory objectives of the FSA.
1.5
The Financial Services and Markets Act 2000 (FSMA) sets out the regulatory
objectives of the FSA.

Maintaining confidence in the financial system (s.3 FSMA)
This article, based on a lecture given by Tim Kendal at the Society of Advanced Legal Studies in
October 2004, is intended as a basic guide to the enforcement powers and procedures of the
Financial Services Authority. Tim Kendal, a barrister and a Fellow of the Society of Advanced
Legal Studies, is a senior junior at 2 Bedford Row specialising in the defence of fraud and
financial crime. James Harrison, also a barrister at 2 Bedford Row, spent 6 months on
secondment to the FSA in 2004.
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1.6

Promoting public understanding of the financial system (s. 4 FSMA)

Securing the appropriate degree of protection for consumers (s. 5 FSMA)

Reducing the potential for and extent of financial crime (s. 6 FSMA)
These objectives are the guiding principles of the Act and inform the FSA as to its
approach to regulation, and the investigatory and disciplinary powers are all
aimed at achieving these goals.
1.7
Schedule 1 of FSMA imposes a statutory obligation on the FSA to monitor and
enforce the provisions of the Act.
1.8
To that end the FSA has been granted background and information gathering
powers, investigatory powers and disciplinary powers.
1.9
In relation to monitoring and enforcement, the principles setting out the FSA’s
approach to its role are set out in the FSA’s Enforcement Manual (available online
at www.fsa.gov.uk), which identifies:
(i)
a desire to maintain open and co-operative relationship between the FSA
and those it regulates;
(ii)
the wish to exercise the powers “transparently, proportionately and
consistent with publicly stated policy”;
(iii)
ensuring fair treatment by the FSA of those it regulates with the facility for
written or oral representation, and mediation where appropriate.
2.
INVESTIGATIVE POWERS
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2.1
Section 165 FSMA provides to the FSA a general power to require information
and documents from authorised persons2 and is the FSA’s basic power to require
information.
2.2
The power is exercised by the FSA or an officer of the FSA by written notice.
2.3
The FSA may reasonably require such information and/or documentation in
connection with the exercise of its functions under FSMA. The FSA may also
require an explanation of any document provided.
2.4
Firms3 must provide required material in a reasonable time which the FSA may
specify.
2.5
The FSA will use this power in support of both its supervisory and enforcement
functions.
2.6
Sections 167 and 168 FSMA provide two separate statutory powers to appoint
investigators.
Section 167 provides for the appointment of investigators to
conduct general investigations; section 168 provides for the appointment of
investigators to investigate a particular set of circumstances as defined by the
section.
2.7
In addition, by virtue of s. 166 FSMA, the FSA can require reports on Firms by
skilled persons.
2.8
The FSA can undertake investigations into collective investment schemes (s. 284
FSMA).
See Glossary of the FSA Handbook, available online at www.fsa.gov.uk, for the full definition of
“authorised persons”.
3
Defined by s. 32 FSMA 2000
2
3
2.9
By virtue of s. 169 FSMA, the FSA can mount investigations in support of foreign
investigations. The FSA co-operates regularly with overseas regulators, both in
obtaining on behalf of, and obtaining information from them. The FSA
participates actively in international forums such as IOSCO 4, and exchanges
information under the provisions of multilateral memoranda of understanding
and on an informal “regulator to regulator” basis.
3.
INVESTIGATIONS UNDER S.167 FSMA
3.1
If it appears to the FSA that there is good reason for doing so, the investigating
authority may appoint one or more competent persons to conduct an
investigation on its behalf into –
(i)
the nature, conduct or state of the business of an authorised person or of an
appointed representative; or
3.2
(ii)
a particular aspect of that business; or
(iii)
the ownership or control of an authorised person.
If the investigator thinks it necessary for the purposes of his investigation, he may
also investigate the business of a person who is or has at any relevant time been:
(i)
a member of the group of which the person under investigation is a part; or
(ii)
a partnership of which that person is a member;
but he must give the third party notice of the investigation.
4.
POWERS OF INVESTIGATORS UNDER S.167 FSMA
4.1
The powers of an investigator differ according to the provision under which an
investigation is commenced.
4
International Organisation of Securities Commissions
4
4.2
An investigator appointed under s. 167 FSMA has power to require, so far as is
reasonably relevant to the purposes of the investigation, a person who is subject of
the investigation or any person connected with the person under investigation to:
(i)
attend at a specified time and place and answer questions;
(ii)
provide such information as the investigator requires;
(iii)
produce at a specified time and place any specified document/s of a
specified description.
4.3
A person is considered to be connected with a person (“A”) under investigation if
he is a member of A’s group, a controller of A, a partnership of which A is a
member, or a person mentioned in Pts. 1 or 2 of Schedule 15 of FSMA (definitions
of various persons).
5.
INVESTIGATIONS UNDER S.168 FSMA
5.1
The FSA may appoint investigators if it appears that there are circumstances
suggesting specific breaches of the statutory provisions or Handbook Rules.
Section 168 FSMA envisages three types of breach resulting in the appointment of
s. 168 investigators – section 168(1), (2) or (4) investigations.
5.2
The type of breach is relevant to the scope of the investigator’s powers.
5.3
S.168(1) INVESTIGATIONS
5.3.1 An investigator may be appointed under section 168(1) FSMA where
circumstances suggest either:
(i)
Breach of insurance business regulations (s. 142 FSMA)
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
Treasury issued rules relating to insurance business and FSA rules relating
to Asset Identification.
(ii)
Offences under s. 177 FSMA

Failing to comply with a requirement imposed by this Part XI of FSMA; or

Falsifying, concealing, destroying documents relevant to an investigation or
permitting the same; or

Providing false information to an investigation or recklessly providing false
or misleading information in a material respect.
(iii) Offence under s.191 FSMA

Failing to comply with the duty to notify the FSA; or breaches of
requirements in relation to notices of control or warning notices (see
ss.191(1),(2),(3) and (4) FSMA.
(iv) Offence under s.346 FSMA

As an authorised person providing false/misleading information to an
auditor/actuary.
(v)
Offence under s.398 (1) FSMA

A person who, in purported compliance with any requirement imposed by
FSMA, knowingly or recklessly gives the FSA false or misleading
information in a material particular, commits an offence.
(vi) Offence under Schedule 4 FSMA (relating to Treaty provisions)
5.4
S.168(2) INVESTIGATIONS
5.4.1
An investigator may be appointed under section 168 (2) where circumstances
suggest:
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(i)
A breach of s. 21 FSMA

A person must not, in the course of business communicate an invitation or
inducement to engage in investment activity by falsely claiming to be authorised or
exempt.
(ii)
Offence under s. 397 FSMA

(iii)
Section 397 creates offences for dishonest/reckless market manipulation.
Offence under s. 52 Criminal Justice Act 1993

Having information as an insider, acquires/disposes of securities on a regulated
market and the securities are price-affected securities in relation to the information.
(iv)
Breach of the General Prohibition s. 19 FSMA

No person may carry on regulated activity in the UK or purport to do so unless he is
an authorised person/an exempt person.
(v)
Breach of s. 21 FSMA

A person must not, unless authorised to do so, in the course of business communicate
an invitation or inducement to engage in investment activity
(vi)
Breach of s. 238 FSMA

(vii)
Restrictions on promotion of collective investment schemes
Market Abuse in contravention of s. 118 FSMA

Behaviour by one person alone or two or more acting jointly or in concert:
(i)
which occurs in relation to qualifying investments traded on a market
(ii)
which is likely to be regarded by a regular user of that market who is aware
of the behaviour as a failure on the part of the person/persons concerned to
observe the standard of behaviour reasonably expected of a person in his or
their position in relation to the market
(iii)
and
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a. the behaviour is based on information not generally available to those
using the market but which, if available to a regular user of the market,
would or would be likely to be regarded by him as relevant when
deciding the terms on which transactions in investments of the kind in
question should be effected OR
b. the behaviour is likely to give a regular user of the market a false or
misleading impression as to the supply of, or demand for, or as to the
price or value of, investments of the kind in question OR
c. a regular user of the market would, or would be likely to, regard the
behaviour as behaviour which would, would be likely to, distort the
market in investments of the kind in question.
5.5
S. 168(4) INVESTIGATIONS
5.5.1 An investigator may be appointed under section 168(4) where circumstances
suggest:
(i)
Contravention of s. 20 FSMA

(ii)
Carrying on a regulated activity without the appropriate permission of the FSA.
A person may be guilty of an offence under prescribed re gulations
relating to money laundering.
(iii)
Contravention of an FSA rule by an authorised person.
(iv)
An individual was not a fit and proper person to perform functions in
relation to a regulated activity carried on by an authorised/exempt
person.
(v)
The performing/agreeing to perform a function in breach of a prohibition
order.
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(vi)
Authorised/exempt person failing to comply with s. 56(6) FSMA.

Failing to take reasonable care to ensure that no function of that firm, in relation to
regulated activity, is performed by a person prohibited from so doing.
(vii)
Authorised/exempt person failing to comply with s. 59 (1) or (2) FSMA

Failure by a Firm to take reasonable care to ensure that no person performs a
controlled function unless the FSA approves the performance of that controlled
function by that person.
(viii)
Not being a fit and proper person to perform a function in relation to
which permission has been granted by the FSA
(ix)
Misconduct under s. 66 FSMA

While an approved person, failing to comply with a statement of principle or being
knowingly concerned in a contravention by the authorised person of a requirement
imposed on that authorised person by or under FSMA.
6.
POWERS OF S. 168(1) AND S. 168(4) INVESTIGATORS
6.1
An investigator appointed under these provisions will be granted all the powers
of a s.167 investigator (see paragraph 4 above). However in addition, he will have
power to:

require any person to attend to answer questions or otherwise provide such
information as he may require for the purposes of the investigation where
satisfied it is necessary or expedient for the purposes of the investigation (s.
172 FSMA).
6.2
S.168(2) INVESTIGATORS
6.2.1
An investigator appointed under this provision will be granted all the powers of a
s.167 investigator. In addition, he will have power to:
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(i)
require any person to attend to answer questions or otherwise provide
such information as he may require for the purposes of the investigation
where satisfied it is necessary or expedient for the purposes of the
investigation; and
(ii)
require such a person to provide information, produce specified
documents and give the investigator all assistance in connection with the
investigation as he is reasonably able to give (ss. 172 and 173 FSMA).
7.
CONTROL OF INVESTIGATIONS
7.1
The FSA may, by direction to an investigator, control:
7.2
(i)
The scope of the investigation
(ii)
The period during which the investigation is conducted
(iii)
The conduct of the investigation
(iv)
The reporting of the investigation
A direction may:
(i)
Confine the investigation to particular matters
(ii)
Extend the investigation to additional matters
(iii)
Require the investigator to discontinue the investigation or to take only
such steps as are specified in the direction
(iv)
7.3
Require the investigator to make such interim reports as are required
If, in the opinion of the FSA, the change in scope or conduct of the investigation is
such that the person subject of the investigation is likely to be significantly
prejudiced by not being made aware of it, then that person must be given written
notice of the change (s. 170 FSMA)
8.
USE OF STATEMENTS OBTAINED IN INVESTIGATIONS
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8.1
There are three possible types of interview which might be conducted by the FSA:
(i)
voluntary interviews;
(ii)
compulsory interview; and
(iii)
interviews under caution in accordance with the Police and Criminal
Evidence Act 1984.
8.2
A statement made to an investigator by a person complying with a requirement
imposed by an investigator under FSMA ss. 171-173 and 175 can generally be used
as evidence in any proceedings (providing that the evidence complies with any
requirements governing the admissibility of evidence).
8.3
However , s. 174(2) FSMA provides that such a statement cannot generally be used
by the prosecution as evidence in criminal proceedings in which the person who
made the statement is charged with an offence.
Similarly, such a statement
cannot generally be used by the FSA in proceedings before the Financial Services
and Markets Tribunal relating to an action against a person under s. 123 FSMA
(market abuse).
This prohibition on the prosecution codifies the protection
enshrined in Article 6 of the European Convention on Human Rights (the
protection against self-incrimination). Importantly, this restriction only relates to
the prosecution. Any co-defendant to a criminal action would be free, where the
evidence is relevant, to deploy the material, for instance in cross-examination of
the witness. Further the prohibition applies against the prosecution only in so far
as the person himself makes no reference to the contents of the compulsory
statement.
8.4
However, this protection does not extend in the criminal or market abuse sphere
to statements and comments made voluntarily to the investigators.
9.
THE PRELIMINARY FINDINGS LETTER
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9.1
The FSA will normally send out such a preliminary findings letter to a firm or
person under investigation unless not practicable to do so, for instance in urgent
cases.
9.2
The letter sets out the facts as considered relevant by the FSA staff or appointed
investigator, and invites a response from the person concerned that those facts are
accurate and complete. The FSA will permit a reasonable period for a response normally 28 days. The FSA will take into account any such response, but is not
obliged to do so if the response is made outside the period. Where, following such
a letter, the FSA intend to take no further action the FSA should communicate that
decision promptly to the person concerned. Where the FSA determines that formal
disciplinary proceedings are not appropriate it may, nevertheless and if
appropriate, issue a private warning.
10.
THE CRITERIA FOR DISCIPLINARY ACTION
10.1
The FSA has set out in the Enforcement Manual a (non-exhaustive) list of factors
which it will take into account when deciding whether or not to take disciplinary
action, including:
(i)
The nature and seriousness of the suspected breach.

Was the breach deliberate or reckless?

What was duration of the breach?

Amount of benefit gained/loss avoided as a result of the breach.

Does the breach reveal serious/systemic weakness of management systems or
internal controls?

What is the impact on the orderliness of financial market?/Has public confidence
in the market been damaged?

What loss/risk is there to consumers?

What is the nature/extent of any financial crime attributable to the breach?

Any combination of smaller issues which together would justify disciplinary
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action.
(ii)
The conduct of the firm or the approved person after the breach.

How quickly/effectively/completely did the firm report the breach to the FSA?

What degree of co-operation given to the investigation?

What remedial steps has the firm already taken?

What is the likelihood of recurrence if no disciplinary action taken?
(iii)
The previous regulatory record of the firm or approved person.
(iv)
Guidance issued by the FSA.
(v)
Action taken by the FSA in previous similar cases.
(vi)
Action taken by other regulatory authorities.
11.
THE REGULATORY DECISIONS COMMITTEE
11.1
Nearly all decisions in the Enforcement context, in terms of disciplinary action, are
taken by the Regulatory Decisions Committee (RDC). The RDC is designed to be
(as far as possible) independent of FSA executive staff.
•
RDC membership is drawn from current and recently retired practitioners
with financial services industry skills and other suitable individuals
representing the public interest.
•
The RDC normally comprises the chairman/deputy chairman and two other
members.
•
It is possible for parties to make representations to the RDC, whether orally
or in writing. We certainly envisage a marked increase in the numbers of
those opting to make oral representations to the RDC.
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11.2
Following the decision in the much publicised Legal and General case, the FSA are
again considering the way in which regulatory decisions are made. This may lead
to an overhaul of the RDC and the way in which it works.
12.
DISCIPLINARY MEASURES AVAILABLE TO THE FSA
12.1
The two potential disciplinary measures available to the FSA are:
12.2
(i)
Public statements and censures (s. 205 FSMA); and
(ii)
Financial penalties (s. 206 FSMA)
The Enforcement Manual sets out the relevant factors for imposing penalties:
 Profit made/loss avoided
 The more serious the breach the more likely a financial penalty will be imposed
 Admission of breach and co-operation with the FSA
 Is there a poor disciplinary record – if really bad then fine as a deterrent
 What was the FSA approach in similar cases
 If insufficient assets to fine – will a lower fine or public statement suffice?
12.3
Where necessary, the FSA can take protective or remedial action instead of, or in
addition to, disciplinary measures. This can include:

Variation or cancellation of permission and in extreme cases, the withdrawal of
a firm’s authorisation.

Withdrawal of an individual’s status as an approved person.

Prohibition of an individual from performing regulated activities.
13.
THE FINANCIAL SERVICES AND MARKETS TRIBUNAL
13.1
The Tribunal (established by s. 132 FSMA) is independent of the FSA. Its function
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is to hear references to it from firms/individuals who wish to challenge FSA
decisions. References to the Tribunal must be made before the end of 28 days from
the date on which the decision notice is given (s. 133 FSMA). No action may be
taken by the FSA on its decision notice during the period in which the matter may
be referred to the Tribunal and, if referred, no action may be taken until the
determination of any such appeal (s. 133(9) FSMA).
13.2
The Tribunal is composed of a barrister/solicitor of at least seven years standing
together with members selected from a panel of persons appointed by the Lord
Chancellor who appear to him to be qualified by experience or otherwise to deal
with matters which might be referred to the Tribunal.
13.3
The Tribunal has full powers to require any person to attend to give evidence or
produce documents considered to be necessary. Failure to do so is an offence with
a maximum fine of £2,000. The alteration, suppression, concealment, destruction
of a document or a refusal to produce a document for the purposes of the Tribunal
is an offence, punishable by a fine or in some circumstances imprisonment.
13.4
Evidence may be taken on oath or by reading of statements where the statement
bears a declaration of truth. Hearings are in public, although arrangements may
be made for private hearings. The fact that hearings are in public was originally
thought to be a factor which would discourage appeals. That notwithstanding,
the work of the Tribunal increases year on year.
13.5
A party to a reference to the Tribunal may, with permission (of the Tribunal or of
the Court of Appeal) appeal on a point of law to the Court of Appeal.
14.
OBSERVATIONS ON THE REGIME SO FAR
14.1
The FSA has, over the last few years, discovered the wide range of its enforcement
powers and the huge discretion available in the disciplinary action which it might
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opt to take. It is still in its infancy.
14.2
The officers of the FSA engaged in Enforcement have been quick, in their public
pronouncements, to emphasise their views that those in the regulated community
should co-operate with the FSA in its Enforcement activity, pointing out:
(i)
the role of the FSA is administrative;
(ii)
the Enforcement regime requires the co-operation of those it regulates;
(iii)
the disciplinary actions taken by the FSA are administrative in nature; and
(iv)
the entire process should not be viewed by the regulated community as
litigation by another name.
14.3
However, the FSA has been confronted by a number of complaints. Those under
investigation criticise the length of time taken by the FSA investigating alleged
problems and/or taking disciplinary action arising out of investigations.
14.4
Further, it is clear from the decisions of the Financial Services and Markets
Tribunal that, more and more, those subject to enforcement proceedings are
challenging, with some considerable success, both the nature of the FSA’s fact
finding procedures and decisions, together with the level of punishment meted
out as a consequence.
14.5
It is highly probable that the regulated community will, and properly should,
increasingly feel emboldened to challenge and test the FSA in order that fairness,
transparency and proportionality prevail.
Taking the FSA to task in this way,
with the consequence of generating authoritative judicial guidelines, is in the best
interests of the regulated community, the consumers and, perhaps most
importantly of all, the FSA itself.
Tim Kendal,
James Harrison
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© May 2005
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