Wednesday, 25 April 2012

The FSA's lost case.


The UK's financial sector watchdog, the Financial Services Authority or FSA, has lost its case against a former head of UBS Wealth Management UK, John Pottage. The FSA's original decision to fine Mr. Pottage £100,000 in 2009 for systems and controls failures was rebutted by the Upper Tribunal for Financial Services. Now, this is good news! But before my euphoria takes me over, let's analyse the case.

It strikes me that the main argument used by the FSA to support that Mr. Pottage is guilty of "misconduct", was that he inadequately supervised the business on the basis that "he should have instigated a 'root and branch' review of UBS's operations and compliance procedures sooner". In particular, the FSA argues the following:

"The [FSA] considers that as CEO, and being responsible for the operation and management of the Executive Committees, [Mr Pottage] should have performed an adequate Initial Assessment. He failed to do so. As a result, he failed to identify the need for the Systematic Overhaul." Mr Pottage had been "too accepting of the assurances he received that there were no fundamental deficiencies with the design and operational effectiveness of the 30 governance and risk management frameworks". Mr Pottage "should have questioned more vigorously the assumption that the frameworks were fit for purpose and that they had been implemented properly locally."

The legal basis for the FSA's action is found in Sections 66(1) and 66(2) of the Financial Services and Markets Act and, more specifically, in the Principle 7 of the statements of principle for approved persons in the FSA's Handbook which states that: "an approved person performing a significant influence function must take reasonable steps to ensure that the business of the firm for which he is responsible in his controlled function complies with the relevant requirements and standards of the regulatory system." The crucial element is therefore whether Mr. Pottage took reasonable steps to ensure that appropriate systems and controls were properly implemented in the business. 

Mr. Pottage, as admitted by the FSA, had had meetings with members of the Management Committee, with senior staff in Legal, Risk and Compliance, with the COO, with his predecessor and with the Firm's Business Unit Head. Therefore, considering that Mr. Potter took some steps to understand the business circumstances, its risks and the work in place to address them, it seems that the FSA's expectations go too far and the argument wielded ("should have questioned more vigorously") sounds very weak if not childish (and certainly by that logic the FSA should also be prosecuting its own senior managers who have presided over catastrophic failures in recent years). Yet, we have seen lately a growing number of cases where the FSA's decisions and arguments to prosecute firms and individuals are increasingly based on what the FSA believes the individual should have done (and did not do) instead of whether the individual or firm actually did do something wrong. I must admit, that this reasoning is recognised by the current legal framework. However, instead of being fully based on facts, this kind of argumentation is prone to be dominated by presumptions, opinions, interpretations and hindsight. Accordingly, it could potentially give too much leeway to the FSA and its apparatus.

So, as I said earlier, this ruling is certainly good news for people who believe that the public sector should be restrained and should be able to exert coercion on individuals only to the extent permitted by the legal framework. Of course, I am slightly biased, but in all seriousness, the UK needs more rulings like this. In the UK's system of regulation and supervision, where an almost almighty regulator is beefing up its "credible deterrence" strategy to the point of taking it almost to the extreme, this is a much needed evidence that the checks and balances structure works and is good news for those who believe in the rule of law and the presumption of innocence. Furthermore, such punch in the face to the FSA will hopefully help to hold down the FSA so that it will need to think twice before pursuing a similar case again.

P.S:
Unfortunately, perhaps I am being delusional. The reality points in the opposite direction and the FSA keeps on looking for its high profile cases in his exercise of washing its image with the UK public. For example, just today, Hector Sants, the soon-to-leave chief executive of the FSA, has made it clear in a final speech that "tougher action is needed on senior management". People like, me who works in the industry, know very well how the pressure is, slowly but steadily, mounting on senior management and board members, including NEDs. The aim, it seems to me, is to ensure that board members and senior managers get involved and are knowledgeable of the day-to-day running of the business as if they were doing it themselves. Obviously, everyone agrees that board members and senior executives need to know, and understand, what is going on in their business, but practically it seems near impossible to do both roles. That is the reason why honest delegation and supervision together with appropriate flows of key information are the crucial tools for senior managers and board members. The day-to-day is left to managers and employees down the chain.

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