UK: How Not to Prejudice Your Future Job Prospects!

Senior managers performing a "controlled function" in organisations whose activities are regulated by the Financial Services Authority ("FSA") have to be individually approved by the FSA to perform that function. Recent FSA orders in relation to former directors of insurance companies demonstrate how the FSA can make orders which may have the effect of preventing the individuals working in the financial services sector again.

A list of controlled functions can be found in paragraph 10.4.5 of the Supervision (SUP) section of the FSA’s Handbook, and extends beyond all directors to include (amongst others) those responsible for oversight of compliance, for money laundering reporting, for underwriting, for finance and for risk assessment.

The cases decided to date relate to circumstances occurring before the new regime of the Financial Services and Markets Act 2000 was implemented. Full details of the conduct complained of, and of the FSA’s conclusions, are published on the FSA’s website and therefore available to any prospective employer or other person such as journalists, friends and colleagues to see. The FSA has substantial resources devoted to enforcement and from time to time will consider it needs to make examples of people in order to preserve public confidence in the financial services regime and to protect the public. Often the individuals concerned will feel unable to contest the proceedings effectively because they do not have the resources to finance a proper defence through to the conclusion of the FSA’s investigations. In the first five months of this year over 30 Final Notices were published on the FSA website, some against regulated companies, others against individuals.

To become an approved person an individual must satisfy the fit and proper test for approved persons described in the section of the FSA’s Handbook entitled The Fit and Proper Test for Approved Persons (FIT). There are three main assessment criteria: (i) the person’s honesty, integrity and reputation; (ii) their competence and capability; and (iii) their financial soundness.

The section of the FSA Handbook entitled Statements of Principle and Code of Practice for Approved Persons (APER) contains statements of principle with which an approved person must comply four of which are universally applicable and the remaining three of which apply to those holding "significant influence" functions. The basic principles are that an approved person must act with integrity in carrying out his controlled function; that he must act with due skill, care and diligence in carrying out his controlled function; that he must observe proper standards of market conduct in carrying out his controlled function; and that he must deal with the FSA and other regulators in an open and co-operative way and must disclose appropriately any information of which the FSA would reasonably expect notice.

In Yoshiaki Yamazaki and five others the FSA issued a prohibition order against three of the individuals concerned prohibiting them from performing any function in relation to any regulated activity carried on by any authorised person. The other three individuals were made the subject of prohibition orders prohibiting them from performing any function involving the exercise of management authority over any other person in relation to any regulated business carried on by any authorised person. These orders, unlike most prison sentences, do not have any limitation as to time. Note that the orders extend to any regulated business, so they extend to work for any other organisation regulated by the FSA such as a bank, friendly society, credit union, insurance intermediary, mortgage lender or mortgage adviser.

The Yamazaki case related to Chiyoda Fire & Marine Insurance (Europe) Ltd ("CE"). CE was authorised as an insurance company in the UK. In 1999 CE was making significant losses. In an attempt to improve CE’s results for the 1999 year, CE entered into arrangements which were structured as reinsurance contracts (allowing the amounts received to be treated in CE’s accounts as revenue thus reducing its losses for the year substantially) when the substance of the arrangements were held by the FSA, in reality, to have been a loan and therefore should have been a balance sheet item. The directors concerned had concealed the fact that these contracts were in substance loan arrangements both from their auditors and in accounting returns made to the FSA in the knowledge that the auditors would not have approved the accounts had they known. The FSA concluded that this conduct demonstrated a fundamental lack of honesty and integrity, thus justifying the prohibition orders.

Following the Chiyoda case there has been another FSA decision, involving Christopher Headdon, a former director of Equitable Life, which has received wide publicity but is a much less detailed decision than the Yamazaki case.

These cases demonstrate the fact that under the new regulatory regime, the FSA expects an open dialogue with the management of the organisations which they regulate and will not hesitate to make an example of people whose conduct they consider does not make them fit and proper. Lessons from these cases include:

• don’t backdate documents or do anything else to mislead the FSA as to the sequence of events;
• don’t only give half the story to the FSA – give them all material facts and documents to give them the full picture of what is going on;
• don’t document transactions whose substance takes one form, with documents whose form is very different;
• address problems, don’t sweep them under the carpet;
• consider whether the facts of a situation give rise to a need to initiate contact with the FSA. eg because the position or prospects of the company may be different to that the FSA is likely to expect or a rule breach is detected;
• if you are invited to be a counterparty to an unusual transaction or a transaction with unusual terms consider whether to question its rationale before entering into it – otherwise you may be subject to disciplinary proceedings by the FSA or (if the FSA has no jurisdiction over you) the subject of adverse publicity. If the FSA is of the opinion that any decision relates to matters which are prejudicial to a third party, they give that third party an opportunity to comment on the draft decision (‘‘a warning notice’’), which, when published will refer to that third party as having been sent a copy of that warning notice.