Financial services - Financial Services Authority - Regulation of financial services
Pottage v Financial Services Authority: Upper Tribunal (TCC) (Sir Stephen Oliver QC, Christopher Burbidge, Sandi O’Neill): 20 April 2012
Between September 2006 and 31 July 2007, the applicant had held controlled functions as the chief executive officer of the first and second interested parties (the firm).
On his appointment, he had conducted an initial assessment of the business. In July 2007, the applicant had decided to initiate a comprehensive review of the effectiveness of the control environment of risk assessment and reporting, and of governance across all of the parts of the business (the review).
The defendant Financial Services Authority (FSA) alleged that the applicant had failed to comply with principle 7 of the FSA’s statements of principle and code of practice for approved persons. That allegation was based on a number of serious flaws in the design and operational effectiveness of the governance and risk management framework in place in the firm’s business. It imposed a penalty of £100,000 on the applicant for misconduct pursuant to section 66 of the Financial Services and Markets Act 2000.
That was based on his failure to take reasonable steps in respect of his initial assessment and to perform a continuous process of monitoring that would have allowed him to appreciate, sooner than he had, that there had been such serious flaws calling for a systematic overhaul. The applicant referred the decision to the Upper Tribunal (Tax and Chancery Chamber) (the tribunal).
It fell to be determined: (i) whether there had been serious flaws in the business; (ii) whether the applicant had failed to take reasonable steps in respect of his initial assessment; (iii) whether the applicant had failed to perform a continuous process of monitoring; and (iv) whether the applicant was guilty of misconduct.
The tribunal ruled: (1) The FSA had established serious flaws with respect to a number of weaknesses in the operational risk framework, serious deficiencies in management information and a number of deficiencies in the compliance monitoring arrangements in place in the firm in 2007. However, it fell to be determined whether the FSA had made out its case of misconduct against the applicant (see  of the judgment).
(2) There was insufficient evidence to show that the applicant had failed to take reasonable steps to satisfy himself by way of an initial assessment at the outset of his appointment. There had been insufficient evidence apparent to him during the period of the initial assessment that there were flaws such that he had needed to ‘dig deeper’ in challenging his team. Nor had there been sufficient evidence apparent to him that should have called for the initiation of a major systematic overhaul on the scale eventually demanded by the review (see  of the judgment).
(3) The applicant’s failure to institute a systematic overhaul at a date earlier than when the review had been initiated was not beyond the bounds of reasonableness. The actions that the applicant had in fact taken prior to July 2007 to deal with the operational and compliance issues as they arose had been reasonable steps (see  of the judgment).
(4) The FSA had not established its case that the applicant had committed misconduct. It had not satisfied the tribunal from the evidence as a whole that the applicant’s standard of conduct had been below that which would be reasonable in all of the circumstances (see  of the judgment). The appropriate direction would be for the FSA to take no action against the applicant (see  of the judgment).
Guy Philips QC and Henry King (instructed by Stephenson Harwood) for the applicant; Andrew Hochhauser QC and Edward Brown for the FSA; David Mayhew and Nikunj Kiri (instructed by Herbert Smith) for the firm; Edward Sparrow (solicitor-advocate) of Ashurst for the third interested party.