Despite the Financial Services Authority’s (FSA) defeat in the Upper Tribunal in FSA v Pottage (23rd April, 2012), senior management responsibility remains a key pillar to the enforcement agenda.
Those hoping for a change in approach will be disappointed. Rather prophetically, the FSA’s biennial enforcement conference in July 2012 is entitled 'Credible Deterrence - here to stay' and, even before the Pottage decision was published, the outgoing chief executive of the FSA, Hector Sants, was taking a tough line. 'Ultimately', he said, 'firms fail because of decisions taken by their boards' and 'it is important regulators operate a credible enforcement regime for individual wrongdoing'.
However, despite the tough language, the reality is that FSA enforcement action against individuals has, to date, been mixed at best. While the FSA has achieved numerous successful enforcement outcomes against individuals, these have only been where there has been a direct personal failure. Far less successful has been the FSA’s failure to "get home" on an alleged failure on the part of a senior manager to oversee appropriately. Enforcement action in such cases tends to centre on alleged breaches of Principles 5, 6 and 7 of the FSA’s Code of Practice for Approved Persons (APER).
In Mr. Pottage’s case, the FSA sought to take action against Mr. Pottage personally as the chief executive of UBS AG and UBS Wealth Management (UK) Ltd for allegedly breaching APER 7 (skill care and diligence in managing the business). The facts were that a number of employees had used the firm’s client accounts to carry out unauthorised trades. In August 2009 the firm had, as part of a settlement, accepted that it was in breach of PRIN 2 and 3 (skill care and diligence and management and control) and had agreed to pay an £8m fine. The FSA’s case against Mr. Pottage was that there were inherent flaws in the firm’s systems and controls and that as chief executive, Mr. Pottage should have carried out a 'systematic overhaul' earlier than he did.
Rejecting the FSA’s case that Mr. Pottage was personally at fault, the Tribunal found that he had identified the serious flaws and had taken steps to remedy them within a reasonable time. There can be little doubt that the FSA hoped that the Upper Tribunal’s decision would send a clear message to senior managers as to the extent of their oversight responsibilities. Had the FSA been successful, senior managers would have been looking anxiously over their shoulders wherever there was corporate fault.
By its decision the Tribunal has asserted its independence from the FSA and given considerable comfort to senior managers, who might find themselves subject to unfair allegations that they are personally at fault. However, senior managers should not take too much succor from the Tribunal’s decision. The FSA failed in Pottage on the evidence, not because the Upper Tribunal disagreed that senior managers should not, as a matter of principle, be held accountable. The risk for senior mangers is that the FSA’s failure to establish a benchmark in Pottage is likely to encourage a similar case in the future, since, as a result of the Tribunal’s decision, there is a degree of uncertainty as to what the oversight responsibility entails and where the boundaries should properly lie. The FSA will be anxious to provide such certainty and clarity through enforcement action.
Going forward, senior managers will need to be alert to their oversight responsibilities and be able to demonstrate that they have understood the risks associated with the business areas for which they are responsible and have taken positive steps to mitigate the risk. The lesson to be learnt from Pottage is simple. The FSA is correct to take action for oversight failings, but only when there is the evidence against an individual to do so. Whether, amongst all the tough language, that is a lesson the FSA and its successor, the Financial Conduct Authority, is willing to learn remains to be seen.
Jason Mansell is a barrister at 7 Bedford Row Chambers, London, specialising in white-collar crime and Financial Services Authority litigation