1. (1)

   This chapter applies to firms and approved persons.

2. (2)

   ENF 11.3 also applies to any person, whether regulated or not.

This chapter describes the FSA's general approach to the discipline of firms and approved persons. It describes the FSA's policy on private warnings, explains the criteria which the FSA will use in determining whether to take disciplinary action, and describes some particular aspects of enforcement policy on approved persons, the enforcement of the Principles, the FSA's approach where disciplinary action may also be taken by other authorities, and a particular aspect of enforcement policy relating to breaches of the money laundering rules. The FSA's approach to discipline when it is performing functions as the competent authority under Part VI of the Act is dealt with in ENF 21.1

Disciplinary measures are one of the regulatory tools available to the FSA. They are not the only tool, and it may be appropriate to address many instances of non-compliance without recourse to disciplinary action. However, the effective and proportionate use of the FSA's powers to enforce the requirements of the Act, the rules and the Statements of Principle will play an important role in buttressing the FSA's pursuit of its regulatory objectives. The imposition of disciplinary measures (that is, financial penalties, public censures and public statements) shows that regulatory standards are being upheld and helps to maintain market confidence, promote public awareness of regulatory standards and deter financial crime. An increased public awareness of regulatory standards also contributes to the protection of consumers.

The disciplinary measures available to the FSA under Part V (Performance of Regulated Activities) and Part XIV (Disciplinary Measures) of the Act are:

1. (1)

   public statements and public censures (described in ENF 12); and

2. (2)

   financial penalties (described in ENF 13).

ENF 11 Annex 1 G and ENF 11 Annex 2 G contain diagrams describing how these disciplinary measures may apply to firms and approved persons respectively.

Other measures are available to the FSA where it considers it is necessary to take protective or remedial action, (rather than disciplinary action) or where a firm's continuing ability to meet the threshold conditions or where an approved person's fitness and propriety to perform the controlled functions to which his approval relates, is called into question. These include:

1. (1)

   the variation or cancellation of permission and the withdrawal of a firm'sauthorisation (described in ENF 3 and ENF 5);

2. (2)

   the withdrawal of an individual's status as an approved person (described in ENF 7); and

3. (3)

   the prohibition of an individual from performing a specified function in relation to a regulated activity (described in ENF 8).

Additional considerations apply in determining whether to take enforcement action for market abuse cases (section 123 of the Act (Power to impose penalties in cases of market abuse)). These are described in ENF 14 (Sanctions for market abuse). The Act also gives the FSA criminal prosecution powers in relation to insider dealing and misleading statements and practices offences. These are described in ENF 15 (Prosecution of criminal offences).

In certain cases, despite having concerns regarding the behaviour of a firm or approved person, the FSA may decide that it is not appropriate, having regard to all the circumstances of the case, to bring formal disciplinary action. In these types of case, the FSA considers that it will be helpful for a firm or approved person to be made aware that they came close to being subject to formal disciplinary action, and may to that end, if appropriate, give a private warning. (It is, of course, open to the FSA not to give a private warning if it does not consider that one is necessary.)

Examples of circumstances where the FSA will tend to give a private warning rather than take formal disciplinary action include where the matter giving cause for concern is minor in nature or degree, or where the firm or approved person has taken full and immediate remedial action. However, these circumstances on their own will not determine the course of action taken by the FSA.

Generally, the FSA would expect to use private warnings in the context of firms and approved persons. However, the FSA may also issue private warnings in circumstances where the persons involved may not necessarily be authorised. For example, private warnings may be issued in potential cases of market abuse (see ENF 14), cases where the FSA considered making a prohibition order (see ENF 8) or a disapplication order (see ENF 18).

In relation to firms and approvedpersons, a private warning will state that:

1. (1)

   the FSA has had cause for concern arising from the conduct of a firm or approvedperson, although no determination that a firm has contravened a requirement, or that an approved personhas been guilty of misconduct, has been made by the FSA;

2. (2)

   the FSA does not at present intend to take formal disciplinary action, having regard to all the circumstances of the case;

3. (3)

   the private warning will form part of the firm's or approved person's compliance history, and may be taken into account in deciding whether the FSA brings disciplinary action against the firm or approved person in the future; and

4. (4)

   the FSA requires the firm or approved person to acknowledge receipt of the warning letter and invites the firm or approved person to comment on the private warning if they wish to do so.

Where the FSA gives a private warning to an approved person, it may if appropriate inform the approved person'sfirm (or employer, if different).

Private warnings, together with any comments received in response, will form part of the firm's or approved person's compliance history. As such they may influence the FSA's decision whether to commence disciplinary action in relation to future breaches. However, where disciplinary action is commenced in those circumstances earlier, private warnings will not be relied upon in determining whether a breach has taken place, or in determining the level of sanction, if any, to be imposed.

Where the FSA is assessing the relevance of private warnings in determining whether to commence disciplinary action, the age of a private warning will be taken into consideration. However, a long-standing private warning may still be relevant.

Private warnings may be considered cumulatively, although they relate to separate areas of a firm's business, where the concerns which gave rise to those warnings are considered to be indicative of a firm's compliance culture. Similarly, private warnings issued to different subsidiaries of the same parent company may be considered cumulatively where the concerns which gave rise to those warnings relate to a common management team.

As well as private warnings, it is also open to the FSA to indicate to a firm in ordinary correspondence that the FSA has concerns about a particular aspect of the way it conducts its regulated activities. This correspondence may, for example, have arisen from a supervision visit. This correspondence will also form part of a firm's compliance history.

In determining whether to take disciplinary action in respect of conduct appearing to the FSA to be a breach, the FSA will consider the full circumstances of each case. A number of factors may be relevant for this purpose. The following list is not exhaustive: not all of these factors may be relevant in a particular case, and there may be other factors that are relevant.

1. (1)

   The nature and seriousness of the suspected breach

   1. (a)

      whether the breach was deliberate or reckless;

   2. (b)

      the duration and frequency of the breach (including, in relation to a firm, when the breach was identified by those exercising significant influence functions in the firm);

   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 firm's business;

   5. (e)

      the impact of the breach on the orderliness of financial markets, including whether public confidence in those markets has been damaged;

   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 firm or the approved person after the breach

   1. (a)

      how quickly, effectively and completely the firm or approved person brought the breach to the attentions of the FSA or another relevant regulatory authority;

   2. (b)

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

   3. (c)

      any remedial steps the firm or approved person has taken since the breach was identified, including: identifying whether consumers have suffered loss and compensating them; taking disciplinary action against staff involved (where appropriate); addressing any systemic failures; and taking action designed to ensure that similar problems do not arise in future; and

   4. (d)

      the likelihood that the same type of contravention (whether on the part of the firm or approved person concerned or others) will recur if no disciplinary action is taken.

3. (3)

   The previous regulatory record of the firm or approved person

   1. (a)

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

   2. (b)

      whether the firm or approved person has previously given any undertakings to the FSA (or any previous regulator) not to do a particular actor engage in particular behaviour;

   3. (c)

      whether the FSA (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 IV permission (see ENF 3) or otherwise, or has previously requested the firm to take remedial action, and the extent to which such action has been taken; and

   4. (d)

      the general compliance history of the firm or approved person, such as previous private warnings or the type of correspondence referred to in ENF 11.3.9 G.

4. (4)

   Guidance given by the FSA

   The FSA will take into account whether any guidance has been issued relating to the behaviour in question and if so the extent to which the firm or approved person has sought to follow that guidance: see the Reader's Guide part of the Handbook.

5. (5)

   Action taken by the FSA in previous similar cases

   The FSA will take account of action which it has taken previously in cases where the breach has been the same or similar.

6. (6)

   Action taken by other regulatory authorities

   Where other regulatory authorities propose to take action in respect of the breach which is under consideration by the FSA, or one similar to it, the FSA will consider whether their action would be adequate to address the FSA's concerns, or whether it would be appropriate for the FSA to take its own action (see ENF 11.8).

The primary responsibility for ensuring compliance with a firm's regulatory obligations rests with the firm itself. Normally, therefore, the FSA's main focus, in considering whether disciplinary action is appropriate, will be on the firm rather than on approved persons.

However, in some cases, it will not be appropriate to take disciplinary measures against a firm for the actions of an approved person (for example, if the firm can show that it took all reasonable steps to prevent the breach). In other cases, it may be appropriate for the FSA to take action against both the firm and the approved person. 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), and an approved person may have taken advantage of those deficiencies to front run orders or misappropriate assets.

The FSA will, however, only take disciplinary action against an approved person where there is evidence of personal culpability on the part of that approved person. Personal culpability arises where the behaviour was deliberate or where the approved person's standard of behaviour was below that which would be reasonable in all the circumstances.

Section 66 of the Act (Disciplinary powers) contains specific provisions stating when the FSA may take action against an approved person (see ENF 11.5.7 G and ENF 11.5.8 G). In accordance with section 64 of the Act (Conduct: statements and codes), the FSA has issued Statements of PrincipleAPER 2) about the conduct it expects of approved persons and a Code of Practice for Approved PersonsAPER 3 and APER 4) to help determine whether an approved person's conduct complies with the Statements of Principle.

The Code of Practice for Approved Persons sets out descriptions of conduct which, in the FSA's opinion, do not comply with the relevant Statements of Principle. Account will be taken of the context in which a course of conduct was undertaken, including the precise circumstances of the individual case, the characteristics of the particular controlled function and the behaviour to be expected in that function (see APER 3.1).

1. (1)

   The FSA will consider whether disciplinary action against an approved person, rather than action against the firm, would be appropriate, taking into account the responsibility of those exercising significant influence functions in the firm for the conduct of the firm. The FSA will also consider whether to take disciplinary action against an approved person for an act of misconduct, if he was knowingly concerned in a breach of a rule by the firm, or if he has failed to comply with one of the Statements of Principle.

2. (2)

   However, the FSA will not discipline approved persons on the basis of vicarious liability (that is, holding them responsible for the acts of others), provided appropriate delegation has taken place (see APER 4.6.13 G and APER 4.6.14 G). In particular, disciplinary action will not be taken against an approved person performing a significant influence function simply because a regulatory failure has occurred in an area of business for which he is responsible. The FSA will consider that an approved person performing a significant influence function may have breached Statements of Principle 5 to 7 (see ENF 11.5.10 G) only if his conduct was below the standard which would be reasonable in all the circumstances (see also APER 3.1.8 G).

3. (3)

   An approved person will not be in breach if he has exercised due and reasonable care when assessing information, has reached a reasonable conclusion and has acted on it.

Section 66(1) of the Act provides that the FSA may take action against an approved person where it appears to the FSA that he is guilty of misconduct and if the FSA is satisfied in all the circumstances that it is appropriate to take action against him.

Section 66(2) of the Act provides that a person is guilty of misconduct if, while an approved person:

1. (1)

   he has failed to comply with a Statement of Principle issued under section 64; or

2. (2)

   he has been knowingly concerned in a contravention by the relevant firm of a requirement imposed on it by or under the Act.

In determining whether an approved person's conduct complies with a Statement of Principle, the FSA will take into account in particular the extent to which the approved person has complied with the Code of Practice for Approved Persons.

The Statements of Principle and the Code of Practice for Approved Persons are set out in APER 2, APER 3 and APER 4. They are divided into two sections:

1. (1)

   Statements of Principle 1 to 4 apply to the conduct of all approved persons; and

2. (2)

   Statements of Principle 5 to 7 apply only to the conduct of those approved persons performing a significant influence function.

In assessing whether it is appropriate to take disciplinary action against an approved person, the FSA may consider the following, amongst other factors:

1. (1)

   whether action against the firm rather than the approved person would be a more appropriate regulatory response; and

2. (2)

   whether disciplinary action would be a proportionate response to the nature and seriousness of the breach by the approved person.

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

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 FSA's rule-making powers set out in section 138 of the Act (General rule-making power). A breach of a Principle will make a firm liable to disciplinary action.

In determining whether a Principle has been broken, it is necessary to look to the standard of conduct required by the Principle in question. Under each of the Principles, the onus will be on the FSA to show that a firm has been at fault in some way. This requirement will differ depending upon the Principle: for example, under Principle 1, the FSA must show that a firm has failed to conduct its business with integrity; under Principle 2, the FSA must prove that the firm has failed to Act with due skill, care and diligence in the conduct of its business.

In certain cases it may be appropriate to discipline a firm on the basis of the Principles alone. Examples include the following:

1. (1)

   where there is no detailed rule which prohibits the behaviour in question, but the behaviour clearly contravenes a Principle;

2. (2)

   where a firm has committed a number of breaches of detailed rules which individually may not merit disciplinary action, but the cumulative effect of which indicates the breach of a Principle.

In a number of circumstances the regulatory system requires a firm to take reasonable care in relation to particular behaviour. For example, Principle 3 requires a firm to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems, and SYSC 3.1.1 R (taken with SYSC 3.1.2 G) requires a firm to take reasonable care to establish and maintain such systems and controls as are appropriate to the nature, scale and complexity of its business.

In considering whether a firm has taken reasonable care, the FSA will consider all the circumstances of the case, and regards the following as particularly relevant:

1. (1)

   what information the firm knew at the time of the behaviour, and what information they ought to have known in all the circumstances;

2. (2)

   what steps the firm took to comply with the rule, and what steps they ought to have taken in all the circumstances; and

3. (3)

   the standards of the regulatory system that applied at the time of the behaviour.

Similar considerations will apply to those in ENF 11.7.2 G in considering whether an approved person took reasonable care or reasonable steps in relation to particular behaviour.

Some types of breach committed by firms and approved persons may potentially result not only in disciplinary action by the FSA, but also action by other regulatory authorities. These authorities could include, for example, the RIEs, the designated professional bodies, and the Society, as well as overseas authorities (action concerning criminal offences and liaison with other prosecuting authorities is dealt with separately in ENF 15).

A firm's breach on a prescribed market, for example, could lead to the FSA considering whether the firm has engaged in behaviour which falls within the market abuse provisions of the Act (section 123); the same breach could also constitute a breach by the firm of a rule of the relevant RIE. The FSA would also consider whether to take disciplinary action against an approved person for an act of misconduct if he was knowingly concerned in a breach of a rule by the firm, or if he had failed to comply with one of the Statements of Principle (see ENF 11.5). ENF 14 contains further guidance on market abuse cases which may involve not only potential action by the FSA, but also potential action by other regulatory authorities.

The FSA is developing operating arrangements with each of the relevant UK authorities concerning cases where more than one regulatory authority may have an interest. These arrangements will ensure that the FSA and the other authorities approach the cases in a co-ordinated, effective and efficient manner, and that those who are the subject of investigations or potential disciplinary action are treated fairly. Similarly, the FSA is involved in contributing to a number of international initiatives to enhance effective enforcement action where overseas authorities also have an interest.

1. (1)

   The FSA will examine the circumstances of each case, and consider, in the light of the relevant investigation, disciplinary and enforcement powers, whether it is appropriate for the FSA or another authority to take action to address the breach.

2. (2)

   It may be appropriate for both the FSA and the other authority or authorities to be involved, and for both to take action, in a particular case arising from the same facts. For example, it may be appropriate for the FSA to take disciplinary action against an approved person, and for another authority to take separate action against the firm.

3. (3)

   In other cases, it may be appropriate for both the FSA and another authority to take action against a firm or an approved person in relation to the same conduct. For example, a breach of RIE rules may be so serious as to justify the FSA varying or cancelling the firm'sPart IV permission, or withdrawing approval from approved persons, as well as action taken by the RIE.

Similar considerations will apply where an overseas authority is involved. If the conduct constitutes a breach of the relevant UK provisions, as well as constituting a breach of the laws of the overseas jurisdiction, both the FSA and the overseas authority will have an interest in taking action to protect their regulatory standards.

The FSA's money laundering rules are set out in SYSC 3.21. The FSA, when considering whether to take disciplinary action in respect of a breach of those rules, will have regard to whether a firm has followed relevant provisions in the Joint Money Laundering Steering Group's Guidance Notes for the Financial Sector.

Disciplinary action - Firms

Disciplinary action - approved persons