DEPP 6.2 Deciding whether to take action

The FCA4 will consider the full circumstances of each case when determining whether or not to take action for a financial penalty or public censure. Set out below is a list of factors that may be relevant for this purpose. The list is not exhaustive: not all of these factors may be applicable in a particular case, and there may be other factors, not listed, that are relevant.

1. (1)

   The nature, seriousness and impact of the suspected breach, including:

   1. (a)

      whether the breach was deliberate or reckless;

   2. (b)

      the duration and frequency of the breach;

   3. (c)

      the amount of any benefit gained or loss avoided as a result of the breach;

   4. (d)

      whether the breach reveals serious or systemic weaknesses of the management systems or internal controls relating to all or part of a person's business;

   5. (e)

      the impact or potential impact of the breach on the orderliness of markets including whether confidence in those markets has been damaged or put at risk;

   6. (f)

      the loss or risk of loss caused to consumers or other market users;

   7. (g)

      the nature and extent of any financial crime facilitated, occasioned or otherwise attributable to the breach; and

   8. (h)

      whether there are a number of smaller issues, which individually may not justify disciplinary action, but which do so when taken collectively.

2. (2)

   The conduct of the person after the breach, including the following:

   1. (a)

      how quickly, effectively and completely the person brought the breach to the attention of the FCA4 or another relevant regulatory authority;

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   2. (b)

      the degree of co-operation the person showed during the investigation of the breach;

   3. (c)

      any remedial steps the person has taken in respect of the breach;

   4. (d)

      the likelihood that the same type of breach (whether on the part of the person under investigation or others) will recur if no action is taken;

   5. (e)

      whether the person concerned has complied with any requirements or rulings of another regulatory authority relating to his behaviour (for example, where relevant, those of the Takeover Panel or an RIE); and

   6. (f)

      the nature and extent of any false or inaccurate information given by the person and whether the information appears to have been given in an attempt to knowingly mislead the FCA4.

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3. (3)

   The previous disciplinary record and compliance history of the person including:

   1. (a)

      whether the FCA4 (or any previous regulator) has taken any previous disciplinary action resulting in adverse findings against the person;

      4
   2. (b)

      whether the person has previously undertaken not to do a particular act or engage in particular behaviour;

   3. (c)

      whether the FCA4 (or any previous regulator) has previously taken protective action in respect of a firm, using its own initiative powers, by means of a variation of a Part 4A permission4 or otherwise, or has previously requested the firm to take remedial action, and the extent to which such action has been taken; and

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   4. (d)

      the general compliance history of the person, including whether the FCA4 (or any previous regulator) has previously issued the person with a private warning.

      4
4. (4)

   FCA guidance4and other published materials:

   The FCA4 will not take action against a person for behaviour that it considers to be in line with guidance, other materials published by the FCA in support of the Handbook or FCA4-confirmed Industry Guidance which were current at the time of the behaviour in question. (The manner in which guidance and other published materials may otherwise be relevant to an enforcement case is described in EG 2.)

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5. (5)

   Action taken by the FSA or FCA4 in previous similar cases.

6. (6)

   Action taken by other domestic or international regulatory authorities:

   Where other regulatory authorities propose to take action in respect of the breach which is under consideration by the FCA4, or one similar to it, the FCA4 will consider whether the other authority's action would be adequate to address the FCA's4 concerns, or whether it would be appropriate for the FCA4 to take its own action.

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When deciding whether to take action for market abuse7, the FCA4 may consider the following additional factors:

1. (1)

   The degree of sophistication of the users of the market in question, the size and liquidity of the market, and the susceptibility of the market to market abuse.

2. (2)

   The impact, having regard to the nature of the behaviour, that any financial penalty or public censure may have on the financial markets or on the interests of consumers:

   1. (a)

      a penalty may show that high standards of market conduct are being enforced in the financial markets, and may bolster market confidence;

   2. (b)

      a penalty may protect the interests of consumers by deterring future market abuse and improving standards of conduct in a market;

   3. (c)

      in the context of a takeover bid, the FCA4 may consider that the impact of the use of its powers is likely to have an adverse effect on the timing or outcome of that bid, and therefore it would not be in the interests of financial markets or consumers to take action for market abuse during the takeover bid. If the FCA4 considers that the proposed use of its powers may have that effect, it will consult the Takeover Panel and give due weight to its views.

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2The factors to which the FCA4 will have regard when deciding whether to impose a penalty under regulation 34 of the RCB Regulations are set out in RCB 4.2.3 G.

The FCA's4 rules on systems and controls against money laundering are set out in SYSC 3.2 and SYSC 6.3. The FCA4, when considering whether to take action for a financial penalty or censure in respect of a breach of those rules, will have regard to whether a firm has followed relevant provisions in the Guidance for the UK financial sector issued by the Joint Money Laundering Steering Group.

Disciplinary action against senior managers of firms and other individuals is one of the FCA’s key tools in deterring firms and individuals from committing breaches.6

In some cases it may not be appropriate to take disciplinary measures against a firm for the actions of an individual6 (an example might be where the firm can show that it took all reasonable steps to prevent the breach). In other cases, it may be appropriate for the FCA4 to take action against both the firm and the individual6. For example, a firm may have breached the rule requiring it to take reasonable care to establish and maintain such systems and controls as are appropriate to its business (SYSC 3.1.1 R or SYSC 4.1.10R or article 21(5) of the MiFID Org Regulation (as applied in accordance with SYSC 1 Annex 1 2.8AR, SYSC 1 Annex 1 3.2-AR, SYSC 1 Annex 1 3.2-BR, SYSC 1 Annex 1 3.2CR and SYSC 1 Annex 1 3.3R10), and an individual6 may have taken advantage of those deficiencies to front run orders or misappropriate assets.

In addition to the general factors outlined in DEPP 6.2.1 G, there are some additional considerations that may be relevant when deciding whether to take action against an individual under6 section 66 of the Act. This list of those considerations is non-exhaustive. Not all considerations below may be relevant in every case, and there may be other considerations, not listed, that are relevant.

1. (1)

   The individual's6 position and responsibilities. The FCA4 may take into account the responsibility of those exercising significant influence functions or designated senior management functions6 in the firm for the conduct of the firm. The more senior the individual6 responsible for the misconduct, the more seriously the FCA4 is likely to view the misconduct, and therefore the more likely it is to take action against the individual6.

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2. (2)

   Whether the most appropriate regulatory response would be6 disciplinary action against the firm, the individual or both6.

3. (3)

   Whether disciplinary action would be a proportionate response to the nature and seriousness of the misconduct by the individual6.

6DEPP 6.2.6BG to DEPP 6.2.9G apply to action taken by the FCA under section 66 of the Act, except for action taken by virtue of section 66A(5). DEPP 6.2.9-AG to DEPP 6.2.9-FG apply only to action taken by virtue of section 66A(5).9

6The FCA may take disciplinary action against an individual where there is evidence of personal culpability on the part of that individual. Personal culpability arises if the individual’s behaviour was deliberate or below the standard which would be reasonable in all the circumstances at the time of the conduct concerned.

The FCA will not discipline individuals6 on the basis of vicarious liability (that is, holding them responsible for the acts of others), provided appropriate delegation and supervision has taken place (see APER 4.6.13G, APER 4.6.14G, COCON 4.1.8G and COCON 4.2.17G to COCON 4.2.24G6). In particular, disciplinary action will not be taken against an approved person performing a significant influence function or a senior conduct rules staff member6 simply because a regulatory failure has occurred in an area of business for which they are6 responsible. The FCA will consider that an approved person performing a significant influence function may have breached Statements of Principle 5 to 7, or that a senior conduct rules staff member may have breached rules SC1/SI1 to SC4/SI4 in COCON 2.26, only if their conduct was below the standard which would be reasonable in all the circumstances at the time of the conduct concerned (see also APER 3.1.8AG and COCON 3.1.6G6).

An individual6 will not be in breach if they have6 exercised due and reasonable care when assessing the information available to them, have6 reached a reasonable conclusion and have6 acted on it.

Where disciplinary action is taken against an individual6 the onus will be on the FCA4 to show that the individual6 has been guilty of misconduct.

9The FCA is able to take action against an SMF manager under section 66A(5) of the Act where:

1. (1)

   there has been (or continues to be) a contravention of a relevant requirement by the SMF manager’s firm;

2. (2)

   at the time of the contravention, the SMF manager was responsible for the management of any of the firm’s activities in relation to which the contravention occurred; and

3. (3)

   the SMF manager did not take such steps as a person in their position could reasonably be expected to take to avoid the contravention by the firm occurring (or continuing).

In such an action, an SMF manager is not bound by a finding of the RDC, a court or a tribunal, which he or she was not privy nor party to.

9When deciding whether to take action further to section 66A(5) of the Act, the FCA will follow the approach in DEPP 6.2.1G and DEPP 6.2.6G.

9When determining, for the purposes of section 66A(5) of the Act, whether an SMF manager was responsible for the management of any of the firm’s activities in relation to which a contravention of a relevant requirement by the firm occurred, the FCA will consider the full circumstances of each case. A list of considerations that may be relevant for this purpose is set out below. This list is not exhaustive.

1. (1)

   The SMF manager’s statement of responsibilities, including whether the SMF manager was performing an executive or non-executive role.

2. (2)

   The firm’s management responsibilities map.

3. (3)

   How the firm operated, and how responsibilities were allocated in the firm in practice.

4. (4)

   The SMF manager’s actual role and responsibilities in the firm, to be determined by reference to, among other things, minutes of meetings, emails, regulatory interviews, telephone recordings and organisational charts.

5. (5)

   The relationship between the SMF manager’s responsibilities and the responsibilities of other SMF managers in the firm (including any joint responsibilities or matrix management structures).

9Under section 66A(5)(d) of the Act, such steps as a person in the position of the SMF manager could reasonably be expected to take to avoid the firm’s contravention of a relevant requirement occurring (or continuing) are:

1. (1)

   such steps as a competent SMF manager would have taken:

   1. (a)

      at that time;

   2. (b)

      in that specific individual’s position;

   3. (c)

      with that individual’s role and responsibilities; and

   4. (d)

      in all the circumstances.

9When determining under section 66A(5)(d) of the Act whether or not an SMF manager has taken such steps as a person in their position could reasonably be expected to take to avoid the contravention of a relevant requirement by the firm occurring (or continuing), additional considerations to which the FCA would expect to have regard include, but are not limited to:

1. (1)

   the role and responsibilities of the SMF manager (for example, such steps as an SMF manager in a non-executive role could reasonably be expected to take may differ, depending on the circumstances, from those reasonably expected of an SMF manager in an executive role: see, for example, the guidance on the role and responsibilities of non-executive directors for relevant authorised persons in COCON 1 Annex 1G);

2. (2)

   whether the SMF manager exercised reasonable care when considering the information available to them;

3. (3)

   whether the SMF manager reached a reasonable conclusion on which to act;

4. (4)

   the nature, scale and complexity of the firm’s business;

5. (5)

   the knowledge the SMF manager had, or should have had, of regulatory concerns, if any, relating to their role and responsibilities;

6. (6)

   whether the SMF manager (where they were aware of, or should have been aware of, actual or suspected issues that involved possible breaches by their firm of relevant requirements relating to their role and responsibilities) took reasonable steps to ensure that the issues were dealt with in a timely and appropriate manner;

7. (7)

   whether the SMF manager acted in accordance with their statutory, common law and other legal obligations, including, but not limited to, those set out in the Companies Act 2006, the Handbook (including COCON), and, if the firm was listed on the London Stock Exchange, the UK Corporate Governance Code and related guidance;

8. (8)

   whether the SMF manager took reasonable steps to ensure that any delegation of their responsibilities, where this was itself reasonable, was to an appropriate person with the necessary capacity, competence, knowledge, seniority and skill, and whether the SMF manager took reasonable steps to oversee the discharge of the delegated responsibility effectively;

9. (9)

   whether the SMF manager took reasonable steps to ensure that the reporting lines, whether in the UK or overseas, in relation to the firm’s activities for which they were responsible, were clear to staff and operated effectively;

10. (10)

    whether the SMF manager took reasonable steps to satisfy themselves, on reasonable grounds, that, for the activities for which they were responsible, the firm had appropriate policies and procedures for reviewing the competence, knowledge, skills and performance of each individual member of staff to assess their suitability to fulfil their duties;

11. (11)

    whether the SMF manager took reasonable steps (including in relation to SYSC 4.9) to assess, on taking up each of their responsibilities, and monitor, where reasonable, the governance, operational and risk management arrangements in place for the firm’s activities for which they were responsible (including, where appropriate, corroborating, challenging and considering the wider implications of the information available to them), and whether they took reasonable steps to deal with any actual or suspected issues identified as a result in a timely and appropriate manner;

12. (12)

    whether the SMF manager took reasonable steps to ensure an orderly transition when another SMF manager under their oversight or responsibility was replaced in the performance of that function by someone else;

13. (13)

    whether the SMF manager took reasonable steps to ensure an orderly transition when they were replaced in the performance of their function by someone else;

14. (14)

    whether the SMF manager failed to take reasonable steps to understand and inform themselves about the firm’s activities for which they were responsible, including, but not limited to, whether they:

    1. (a)

       failed to ensure adequate reporting or seek an adequate explanation of issues within a business area, whether from people within that business area, or elsewhere within or outside the firm, if they were not an expert in that area; or

    2. (b)

       failed to maintain an appropriate level of understanding about an issue or a responsibility that they delegated to an individual or individuals; or

    3. (c)

       failed to obtain independent, expert opinion where appropriate from within or outside the firm as appropriate; or

    4. (d)

       permitted the expansion or restructuring of the business without reasonably assessing the potential risks; or

    5. (e)

       inadequately monitored highly profitable transactions, business practices, unusual transactions, or individuals who contributed significantly to the profitability of a business area or who had significant influence over the operation of a business area;

15. (15)

    whether the SMF manager took reasonable steps to ensure that, where they were involved in a collective decision affecting the firm’s activities for which they were responsible, and it was reasonable for the decision to be taken collectively, they informed themselves of the relevant matters before taking part in the decision, and exercised reasonable care, skill and diligence in contributing to it;

16. (16)

    whether the SMF manager took reasonable steps to follow the firm’s procedures, where this was itself appropriate;

17. (17)

    how long the SMF manager had been in role with their responsibilities and whether there was an orderly transition and handover when they took up the role and responsibilities;

18. (18)

    whether the SMF manager took reasonable steps to implement (either personally or through a compliance department or other departments) adequate and appropriate systems and controls to comply with the relevant requirements and standards of the regulatory system for the activities of the firm.

Where action is taken against an SMF manager under section 66A(5) of the Act the onus will be on the FCA to show that the SMF manager has been guilty of misconduct.

3In addition to the general factors outlined in DEPP 6.2.1 G, there are some additional considerations that the FCA4 will have regard to when deciding whether to take action against a person that performs a controlled function without approval contrary to section 63A of the Act.

1. (1)

   The conduct of the person. The FCA4 will take into consideration whether, while performing controlled functions without approval, the person committed misconduct in respect of which, if he had been approved, the FCA4 could have taken action pursuant to section 66 of the Act and, if so, the seriousness of that misconduct.

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2. (2)

   The extent to which the person could reasonably be expected to have known that they were6 performing a controlled function without approval. The circumstances in which the FCA4 would expect to be satisfied that a person could reasonably be expected to have known that they were6 performing a controlled function without approval include:

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   1. (a)

      the person had previously performed a similar role at the same or another firm for which he had been approved;

   2. (b)

      the person's firm or another firm had previously applied for approval for the person to perform the same or a similar controlled function;

   3. (c)

      the person's seniority or experience was such that he could reasonably be expected to have known that he was performing a controlled function without approval; and

   4. (d)

      the person's firm had clearly apportioned responsibilities so that the person's role, and the responsibilities associated with it, were clear;6

   5. (e)

      the person’s approval was subject to a condition or was granted for a limited period, and they failed to act in accordance with that condition or time limitation. 6

3. (3)

   The length of the period during which the person performed a controlled function without approval.

4. (4)

   Whether the person is an individual.

5. (5)

   The appropriateness of taking action against the person instead of, or in addition to, taking action against an authorised person. In assessing this, the FCA4 will take into consideration the extent of the culpability of an authorised person for the person performing a controlled function without approval. For example, a relevant factor may be that an authorised person decided that the person did not need to obtain approval and it was reasonable for the person to rely on the authorised person's judgment.

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6. (6)

   The person's position and responsibilities. The more senior the person that performs a controlled function without approval, the more seriously the FCA4 is likely to view his behaviour, and therefore the more likely it is to take action against the person.

   4

The primary responsibility for ensuring compliance with Part VI of the Act, the Part 6 rules, the prospectus rules or a provision otherwise made in accordance with the Prospectus Directive or a requirement imposed under such provision rests with the persons identified in section 91(1) and section 91(1A) (Penalties for breach of Part 6 rules) of the Act respectively. Normally therefore, any disciplinary action taken by the FCA4 for contraventions of these obligations will in the first instance be against those persons.

However, in the case of a contravention by a person referred to in section 91(1)(a) or section 91(1)(b) or section 91(1A) of the Act ("P"), where the FCA4 considers that another person who was at the material time a director of P was knowingly concerned in the contravention, theFCA4 may take disciplinary action against that person. In circumstances where the FCA4 does not consider it appropriate to seek a disciplinary sanction against P (notwithstanding a breach of relevant requirements by such person), the FCA4 may nonetheless seek a disciplinary sanction against any other person who was at the material time a director of P and was knowingly concerned in the contravention.

In deciding whether to take action, the FCA4 will consider the full circumstances of each case. Factors that may be relevant for this purpose include, but are not limited to, the factors at DEPP 6.2.1 G.

The Principles are set out in PRIN 2.1.1 R. The Principles are a general statement of the fundamental obligations of firms under the regulatory system. The Principles derive their authority from the FCA's4 rule-making powers set out in section 137A4(General rule-making power) of the Act. A breach of a Principle will make a firm liable to disciplinary action. Where the FCA4 considers this is appropriate, it will discipline a firm on the basis of the Principles alone.

In determining whether a Principle has been breached, it is necessary to look to the standard of conduct required by the Principle in question at the time. Under each of the Principles, the onus will be on the FCA4 to show that a firm has been at fault in some way.

The Listing Principles and Premium Listing Principles5 are set out in LR 7. The Listing Principles set out in LR 7.2.1 R5 are a general statement of the fundamental obligations of all5 listed companies. In addition to the Listing Principles, the Premium Listing Principles set out in LR 7.2.1A R are a general statement of the fundamental obligations of all listed companies with a premium listing of equity shares. The Listing Principles and Premium Listing Principles5 derive their authority from the FCA's4 rule making powers set out in section 73A(1) (Part 6 Rules) of the Act. A breach of a Listing Principle or, if applicable, a Premium Listing Principle,5 will make a listed company liable to disciplinary action by the FCA4.

In determining whether a Listing Principle or Premium Listing Principle5 has been broken, it is necessary to look to the standard of conduct required by the Listing Principle or Premium Listing Principle5 in question. Under each of the Listing Principles and Premium Listing Principles5, the onus will be on the FCA4 to show that a listed company has been at fault in some way. This requirement will differ depending upon the relevant5 Listing Principle or Premium Listing Principle5.

In certain cases, it may be appropriate to discipline a listed company on the basis of the a Listing Principle or, if applicable, a Premium Listing Principle,5 alone. Examples include the following:

1. (1)

   where there is no detailed listing rule5 which prohibits the behaviour in question, but the behaviour clearly contravenes a Listing Principle or, if applicable, a Premium Listing Principle;5

   5
2. (2)

   where a listed company has committed a number of breaches of detailed rules5 which individually may not merit disciplinary action, but the cumulative effect of which indicates the breach of a Listing Principle or, if applicable, a Premium Listing Principle.5

   5

Some types of breach may potentially result not only in action by the FCA4, but also action by other domestic or overseas regulatory authorities or enforcement agencies.

When deciding how to proceed in such cases, the FCA4 will examine the circumstances of the case, and consider, in the light of the relevant investigation, disciplinary and enforcement powers, whether it is appropriate for the FCA4 or another authority to take action to address the breach. The FCA4 will have regard to all the circumstances of the case including whether the other authority has adequate powers to address the breach in question.

In some cases, it may be appropriate for both the FCA4and another authority to be involved, and for both to take action in a particular case arising from the same facts. For example, a breach of RIE rules may be so serious as to justify the FCA4 varying or cancelling the firm's Part IV permission, or withdrawing approval from approved persons, as well as action taken by the RIE. In such cases, the FCA4 will work with the relevant authority to ensure that cases are dealt with efficiently and fairly, under operating arrangements in place (if any) between the FCA4 and the relevant authority.

In relation to behaviour7 which may have happened or be happening in the context of a takeover bid, the FCA4 will refer to the Takeover Panel and give due weight to its views. Where the Takeover Code has procedures for complaint about any behaviour, the FCA4 expects parties to exhaust those procedures. The FCA4 will not, save in exceptional circumstances, take action under any of section 123 (FCA's4power to impose penalties), section 123A (Power to prohibit individuals from managing or dealing), section 123B (Suspending permission to carry on regulated activities etc.),7 section 129 (Power of court to impose penalties), section 381 (Injunctions), sections 383 or 384 (Restitution) in respect of behaviour7 to which the Takeover Code is relevant before the conclusion of the procedures available under the Takeover Code.

The FCA4 will not take action against a person over behaviour7 which does not amount to market abuse. Behaviour is less likely to amount to market abuse where it7 (a) conforms with the Takeover Code or rules of an RIE and (b) falls within the terms of MAR 1.10.4G to 1.10.6G7 which state7 that behaviour7 so conforming is unlikely to, of itself,7 amount to market abuse. The FCA4 will seek the Takeover Panel's or relevant RIE's views on whether behaviour7 complies with the Takeover Code or RIE rules and will attach considerable weight to its views.

If any of the circumstances in DEPP 6.2.26 G apply, and the FCA4 considers that the use of its disciplinary powers under section 123 or section 129, or of its injunctive powers under section 381 or of its powers relating to restitution under section 383 or 384 is appropriate, it will not take action during an offer to which the Takeover Code applies except in the circumstances set out in DEPP 6.2.27 G.

In any case where the FCA4 considers that the use of its powers under any of sections 123, 123A, 123B,7 129, 381, 383 or 384 of the Act may be appropriate, if that use may affect the timetable or outcome of a takeover bid or where it is appropriate in the context of any exercise by the Takeover Panel of its powers and authority, the FCA4 will consult the Takeover Panel before using any of those powers.

Where the behaviour7 of a person which amounts to market abuse is behaviour7 to which the Takeover Code is relevant, the use of the Takeover Panel's powers will often be sufficient to address the relevant concerns. In cases where this is not so, the FCA4 will need to consider whether it is appropriate to use any of its own powers under the market abuse regime. The principal circumstances in which the FCA4 is likely to consider such exercise are:

1. (1)

   where the behaviour7 falls within the prohibition in article 14 of the Market Abuse Regulation7;

2. (2)

   where the FCA's4 approach in previous similar cases (which may have happened otherwise than in the context of a takeover bid) suggests that a sanction7 should be imposed;

   4
3. (3)

   where the behaviour8 extends to securities or a class of securities which may be outside the Takeover Panel's jurisdiction;

4. (4)

   where the behaviour8 threatens or has threatened the stability of the financial system; and

5. (5)

   where for any other reason the Takeover Panel asks the FCA4 to consider the use of any of its powers referred to in DEPP 6.2.22 G.

   4

The exceptional circumstances in which the FCA4 will consider the use of powers during a takeover bid are listed in DEPP 6.2.26G (1), DEPP 6.2.26G (3) and DEPP 6.2.26G (4), and, depending on the circumstances, DEPP 6.2.26G (5).