These are interesting times for those registered (or planning to become registered) with the FSA for Significant Influence Functions (SIFs). In a single week, we have seen publication of two key documents – a long-waited decision by the Upper Tribunal for Financial Services and the farewell speech by Hector Sants, departing CEO of the FSA.
The tribunal decision is a seminal one for SIFs. John Pottage, the former CEO of UBS’s UK wealth management business, was challenging the £100,000 fine imposed on him by the FSA for breaching Principle 7 of the Principles for Approved Persons – failing to take reasonable steps to ensure compliance with the requirements and standards of the regulatory system. The focus was the design and operational effectiveness of the governance and risk management framework during the relevant period, namely part of 2006 and 2007. Similar failings had led to UBS itself being fined £8m for unauthorised trading on client accounts.
This is the first case of its type against a SIF at CEO level. The outcome is particularly important given that it comes in the wake of the FSA’s failure to take action against senior executives at Northern Rock, RBS and Bank of Scotland.
The issue under examination was the personal culpability of a SIF in relation to systems and controls failings, specifically whether the steps taken by John Pottage to identify and correct the failings were “reasonable”. The Tribunal found against the FSA, supporting John Pottage’s case that he had in fact acted reasonably.
It is important to note that the burden is on the FSA to show misconduct, and therefore personal culpability, on the part of the SIF. SIFs should therefore take careful note of the facts that the Tribunal relied upon in coming to their decision. The Tribunal found, for example, that it is “reasonable” to:
- Delegate to senior legal, risk and compliance staff; and
- Provide oversight and challenge only (as opposed to designing, creating and implementing controls personally) as long as this oversight is evidenced in the minutes of all relevant formal and informal meetings and any action points followed up promptly.
In addition, those taking up new SIF positions would be wise to conduct and document an assessment of the risks associated with the business for which they are responsible soon after their appointment. Although this requirement is not explicitly contained in the FSA rules, it was the timing of this type review, rather than the need for it, that was one of the central issues in this case.
But before SIFs breathe too big a sigh of relief, it is important to note that the facts of the case were set, and therefore judged, in the context of the pre-financial crisis regulatory environment. The regulatory environment has changed and continues to evolve. Hector Sants’ speech was therefore extremely timely given that it contains the most detailed account to date of the FSA’s (and its successors’) views on the standards required of SIFs, focusing in particular on governance, culture, the performance of boards and board directors and the operation of the SIF interview process.
These developments must also be judged against the backdrop of the FSA’s Report on the Failure of RBS which mooted the introduction of strict liability penalties for directors (we await the Treasury’s response on this) and the recent activation of bonus claw back provisions in the industry.
It is therefore more important than ever for SIFs to be aware of their duties and liabilities and fully prepared for any interaction with the FSA.
Eukleia Training offers a range of solutions for SIF training including elearning courses, instructor-led training and ARROW preparation workshops. For more information please click here to submit a trial request or contact us at email@example.com