This chapter provides guidance on the FSA's use of its enforcement powers in relation to:

1. (1)

   AUTs;

2. (2)

   ICVCs; and

3. (3)

   recognised schemes.

The purpose of this chapter is to explain the FSA's powers in relation to the collective investment schemes listed at ENF 16.1.1 G (1) to ENF 16.1.1 G (3) and to provide guidance on how the FSA intends to exercise these powers. The effective use of these powers will help the FSA in pursuing its regulatory objectives of protecting consumers, maintaining market confidence and reducing financial crime.

Sections 242 to 261 of the Act contain provisions relating to AUTs. These include the following enforcement powers:

1. (1)

   a power for the FSA to revoke authorisation of an AUT otherwise than by consent (section 254);

2. (2)

   a power for the FSA to give directions (section 257); and

3. (3)

   a power for the FSA to apply to court for the removal of a manager or trustee or the winding up of an AUT (section 258).

While the grounds upon which the powers under sections 254 and 257 may be used are broadly similar, there are certain material differences. These provisions are therefore set out separately in ENF 16.2.3 G to ENF 16.2.4 G and ENF 16.2.5 G to ENF 16.2.7 G respectively.

1. (1)

   The FSA's power to revoke authorisation of an AUT otherwise than by consent is in section 254 (Revocation of authorisation order otherwise than by consent).

2. (2)

   Section 254(1) states that 'An authorisation order may be revoked by an order made by the FSA if it appears to the FSA that:

   1. (a)

      one or more of the requirements for the making of the order are no longer satisfied;

   2. (b)

      the manager or trustee of the scheme concerned has contravened a requirement imposed on him by or under this Act;

   3. (c)

      the manager or trustee of the scheme has, in purported compliance with any such requirement, knowingly or recklessly given the FSA information which is false or misleading in a material particular;

   4. (d)

      no regulated activity is being carried on in relation to the scheme and the period of that inactivity began at least twelve months earlier; or

   5. (e)

      none of paragraphs (a) to (d) applies, but it is desirable to revoke the authorisation order in order to protect the interests of participants or potential participants in the scheme'.

For the purposes of section 254(1)(e), the FSA may, under subsection 254(2), take into account 'any matter relating to- (a) the scheme; (b) the manager or trustee; (c) any person employed by or associated with the manager or trustee in connection with the scheme; (d) any director of the manager or trustee; (e) any person exercising influence over the manager or trustee; (f) any body corporate in the same group as the manager or trustee; (g) any director of any such body corporate; (h) any person exercising influence over any such body corporate'.

1. (1)

   Section 257(1) (Directions) contains a power for the FSA to give directions to the manager and trustee of an AUT.

2. (2)

   Section 257(1) states that 'The FSA may give a direction under this section if it appears to the FSA that:

   1. (a)

      one or more of the requirements for the making of an authorisation order are no longer satisfied;

   2. (b)

      the manager or trustee of an AUT has contravened, or is likely to contravene, a requirement imposed on him by or under this Act;

   3. (c)

      the manager or trustee of such a scheme has, in purported compliance with any such requirement, knowingly or recklessly given the FSA information which is false or misleading in a material particular; or

   4. (d)

      none of paragraphs (a) to (c) applies, but it is desirable to give a direction in order to protect the interests of participants or potential participants in such a scheme'.

1. (1)

   The types of directions the FSA may give under section 257 are explained in section 257(2).

2. (2)

   Section 257(2) states that 'A direction under this section may:

   1. (a)

      require the manager of the scheme to cease the issue or redemption, or both the issue and redemption, of units under the scheme;

   2. (b)

      require the manager and trustee of the scheme to wind it up'.

Subsection 257(6) states that 'The FSA may, either on its own initiative or on the application of the manager or trustee of the scheme concerned, revoke or vary a direction given under this section if it appears to the FSA: (a) in the case of revocation, that it is no longer necessary for the direction to take effect or continue in force; (b) in the case of variation, that the direction should take effect or continue in force in a different form'.

1. (1)

   Section 258(1) (Applications to the court) states that 'If the FSA could give a direction under section 257, it may also apply to the court for an order:

   1. (a)

      removing the manager or the trustee, or both the manager and the trustee, of the scheme; and

   2. (b)

      replacing the person or persons removed with a suitable person or persons nominated by the FSA'.

2. (2)

   The types of direction the FSA may give under section 257 are explained in section 257(2) (see ENF 16.2.6 G (2)).

Section 258(2) states that the FSA may nominate a person for the purposes of section 258(1)(b) only if it is satisfied that, if the order was made, the requirements of sections 243 (4) to (7) would be complied with (these requirements include, for example, that the manager and trustee are bodies corporate which are independent of each other). If it appears to the FSA that there is no person it can nominate for these purposes, it may apply to the court under section 258(3) for an order:

1. (1)

   removing the manager or the trustee, or both the manager and the trustee, of the scheme; and

2. (2)

   appointing an authorised person to wind up the scheme'.

The FSA will consider all the relevant circumstances of each case when it decides whether it is appropriate to use one or more of its powers under these sections of the Act. The FSA may take a number of factors into account when it decides whether to use the powers. The following list is not exhaustive; not all these factors may be relevant in a particular case and there may be other factors that are relevant.

1. (1)

   The seriousness of the breach or likely breach by a manager or trustee of a requirement imposed by or under the Act. The following may be relevant:

   1. (a)

      the extent to which the breach was deliberate or reckless;

   2. (b)

      the extent of loss, or risk of loss, caused to existing, past or potential participants in the AUT as a result of the breach;

   3. (c)

      whether the breach highlights serious or systemic weaknesses in the management or control of either the AUT or the property subject to the scheme;

   4. (d)

      whether there are grounds for believing a breach is likely to be continued or repeated;

   5. (e)

      the length of time over which the breach happened; and

   6. (f)

      whether existing and/or past participants in the AUT have been misled in a material way, for example about the investment objectives or policy of the scheme or the level of investment risk.

2. (2)

   The consequences of a failure to satisfy a requirement for the making of an order authorising an AUT. The FSA will expect the non-compliance to be resolved as soon as possible. Important factors are likely to be whether existing and/or past participants have suffered loss due to the non-compliance and whether remedial steps will be taken to satisfy all the requirements of the order.

3. (3)

   Whether it is necessary to suspend the issue and redemption of units to protect the interests of existing or potential participants in the AUT. For example, this may be necessary if:

   1. (a)

      information suggests the current price of units under the AUT may not accurately reflect the value of the property subject to the scheme; or

   2. (b)

      the property subject to the scheme cannot be valued accurately.

4. (4)

   The effect on the interests of participants within the scheme of the use of either or both of its powers under sections 254 and 257. However, the FSA will also consider the interests of past and potential participants.

5. (5)

   Whether the FSA's concerns can be resolved by taking enforcement action against the manager and/or trustee of the AUT. In some instances, the FSA may consider it appropriate to deal with a breach by a manager or trustee by taking direct enforcement action against the manager and/or trustee without using its powers under sections 254, 257, or 258. In other instances, the FSA may combine direct enforcement action against a trustee and/or manager with the use of one or more of the powers under sections 254, 257 and 258.

6. (6)

   Whether there is information to suggest that a trustee or manager has knowingly or recklessly given the FSA false information. Giving false information is likely to cause very serious concerns, particularly if it shows there is a risk of loss to the property subject to the scheme or that participants' interests have been or may be affected in some other way.

7. (7)

   The conduct of the manager or trustee in relation to, and following the identification of, the issue, for example:

   1. (a)

      whether the manager or trustee discovered the issue or problem affecting the AUT and brought it to the FSA's attention promptly;

   2. (b)

      the degree to which the manager or trustee is willing to cooperate with the FSA's investigation and to take protective steps, for example by suspending the issue and redemption of units in the AUT;

   3. (c)

      whether the manager or trustee has compensated past and existing participants who have suffered loss.

8. (8)

   The compliance history of the trustee or manager, including whether the FSA has previously taken disciplinary action against the trustee or manager in relation to the AUT or any other collective investment scheme.

9. (9)

   Whether there is information to suggest that the AUT is being used for criminal purposes and/or that the manager or trustee is itself involved in financial crime.

The FSA may use its powers under sections 254, 257 and 258 individually, together, and as well as direct enforcement action against a trustee or manager in their capacity as firms.

Where the FSA has a concern about an AUT that must be dealt with urgently, it will generally use its power to give directions under section 257 in the first instance (see ENF 16.2.5 G to ENF 16.2.7 G).

The following are examples of situations where the FSA may consider it appropriate to seek a court order under section 258 (see ENF 16.2.8 G) to remove the manager or trustee:

1. (1)

   where there are grounds for concern over the behaviour of the manager or trustee in respect of the management of the scheme or of its assets;

2. (2)

   where a manager or trustee has breached a requirement imposed on him under the Act or has knowingly or recklessly given the FSA false information.

The FSA appreciates the effect this action may have on the reputation of a manager or trustee and will use the power only where this is proportionate in all the circumstances of the case.

The FSA recognises that participants in an AUT have a direct financial interest in the property subject to the scheme. It follows that in cases where it considers it appropriate to use its section 254 power to revoke an authorisation order, the FSA will generally first require the manager or trustee to wind up the AUT (or seek a court order for the appointment of a firm to wind up the AUT).

Regulations for setting up, running and regulating ICVCs are contained in The Open-endedInvestmentCompanies Regulations 2001 (SI 2001/1228). The regulations include the following enforcement powers:

1. (1)

   a power for the FSA to revoke authorisation of an ICVC (regulation 23);

2. (2)

   a power for the FSA to give directions (regulation 25); and

3. (3)

   a power for the FSA to apply to court for the removal of any director of an ICVC or its depositary (regulation 26).

The grounds upon which the FSA may use its powers under regulations 23, 25 and 26 respectively are broadly similar to those upon which it may use its equivalent enforcement powers in relation to AUTs (see ENF 16.2.1 G to ENF 16.2.9 G).

The FSA's normal disciplinary powers applicable to firms, including the powers to publish a public censure (see ENF 12) and to impose financial penalties (see ENF 13), are also available in relation to ICVCs.

The factors the FSA may take into account when it decides whether to use one or more of these powers include, but are not limited to, factors which are broadly similar to those in ENF 16.2.10 G in the context of AUTs. However, the relevant conduct will, of course, be that of the ICVC, the director or directors of the ICVC and its depositary (another difference is that the FSA is also able to take disciplinary action against the ICVC itself - see ENF 16.3.3 G). When choosing which powers to use, the FSA will adopt an approach which is broadly similar to that described in ENF 16.2.11 G to ENF 16.2.14 G.

Sections 264 to 283 of the Act relate to recognised schemes. These provisions contain the following enforcement powers:

1. (1)

   the FSA's power under section 267 to suspend promotion of a scheme constituted in another EEA State and recognised under section 264 (Schemes constituted in other EEA States);

2. (2)

   the FSA's power under section 279 to revoke recognition of:

   1. (a)

      a scheme recognised under section 270 (Schemes authorised in designated countries or territories); and

   2. (b)

      a scheme individually recognised under section 272 (Individually recognised overseas schemes);

3. (3)

   the FSA's power under section 281 to give directions in respect of the schemes identified in ENF 16.4.1 G (2).

The FSA has power under section 267 of the Act (Power of Authority to suspend promotion of scheme) to suspend promotion of a scheme that is constituted in another EEA State and recognised under section 264. The power applies if it appears to the FSA that the operator of that scheme has communicated an invitation or inducement in relation to the scheme in a manner contrary to the financial promotion rules. Under section 267(3), the suspension may last for a set period, until a certain event has happened or until certain conditions have been met. Under sections 267(4) and (5) the FSA may, either on its own initiative or on the application of the operator of the scheme concerned, vary or revoke a direction suspending the scheme.

When it decides whether a suspension order under section 267 is appropriate, the FSA will consider all the relevant circumstances. General factors that the FSA may consider include, but are not limited to:

1. (1)

   the seriousness of the breach of financial promotion rules by the operator (the matters listed at ENF 16.2.10 G (1)(a) to ENF 16.2.10 G (1)(f) may be relevant in this context); and

2. (2)

   the conduct of the operator after the breach was discovered including whether the operator has compensated past and existing participants who have suffered loss.

In addition to or instead of suspending the promotion of a scheme recognised under section 264, the FSA may ask the competent authorities of the EEA State in which the scheme is constituted who are responsible for the authorisation of collective investment schemes, to take such action in respect of the scheme and/or its operator as will resolve the FSA's concerns. Also, Schedule 5 to the Act (Persons Concerned in Collective investment Schemes) states that a person who for the time being is an operator, trustee or depositary of a scheme recognised under section 264 of the Act is an authorised person. So, it will also be open to the FSA to take direct enforcement action against those persons.

1. (1)

   Section 279 of the Act (Revocation of recognition) relates to schemes recognised under sections 270 and 272. Section 270 sets out the requirements for the recognition of a collective investment scheme which is not recognised under section 264 but which is managed and authorised in a country or territory designated for the purposes of section 270. Section 272 sets out the requirements for the recognition of a collective investment scheme which is managed in a country or territory outside the United Kingdom and does not meet the requirements for recognition under section 264 or 270.

2. (2)

   Section 279 states that 'The FSA may direct that a scheme is to cease to be recognised by virtue of section 270 or revoke an order under section 272 if it appears to the FSA:-

   1. (a)

      that the operator, trustee or depositary of the scheme has contravened a requirement imposed on him by or under this Act;

   2. (b)

      that the operator, trustee or depositary of the scheme has, in purported compliance with any such requirement, knowingly or recklessly given the FSA information which is false or misleading in a material particular;

   3. (c)

      in the case of an order under section 272, that one or more of the requirements for the making of the order are no longer satisfied; or

   4. (d)

      that none of paragraphs (a) to (c) applies, but it is undesirable in the interests of the participants or potential participants that the scheme should continue to be recognised'.

Under section 281of the Act (Directions), the FSA can suspend the recognition of a scheme recognised under section 270 or section 272 for a set period, until a certain event happens or until certain conditions are met. The grounds upon which the FSA may give a direction under section 281 are broadly similar to those for the use of its power under section 279 (see ENF 16.4.5 G). The section 281 power may, however, also be used if it appears to the FSA that the operator, trustee or depositary of a scheme recognised under section 270 or 272 is likely to breach a requirement imposed on him under the Act.

The FSA will consider all the relevant circumstances of each case when it decides whether it is appropriate to use its powers under sections 279 and 281. The general factors which the FSA may consider include, but are not limited to, those set out in ENF 16.2.10 G (1) to ENF 16.2.10 G (9) (the conduct of the operator of the scheme and of the trustee or depositary will also, of course, be taken into account in relation to each of these factors).

As well as or instead of using these powers, the FSA may ask the relevant regulatory body of the country or territory in which the scheme is authorised to take such action in respect of the scheme and/or its operator, trustee or depositary as will resolve the FSA's concerns.

ENF 16 Annex 1 G lists the procedures the FSA must follow when using the powers discussed in this chapter.

More information on the procedures the FSA will follow when issuing statutory notices and when deciding to use its powers to apply to court is contained in DEC

Section 238 of the Act (Restrictions on promotion) prohibits a firm from communicating an invitation or inducement to participate in a collective investment scheme unless an exemption applies (the exemptions include the collective investment schemes listed in ENF 16.1.1 G (1) to ENF 16.1.1 G (3)). In addition, section 240 (Restriction on approval of promotion) prohibits a firm from approving the content of a communication relating to a collective investment scheme if the firm itself would be prohibited from making the communication by section 238. The FSA has a range of powers for taking remedial, protective and disciplinary action against a firm over breaches of these prohibitions. These include the powers discussed in ENF 3 (Variation of Part IV permission on the FSA's own-initiative), ENF 5 (Cancellation of Part IV permission on the FSA's own initiative), ENF 6 (Injunctions), ENF 9 (Restitution and redress), ENF 10 (Insolvency proceedings and orders against debt avoidance), ENF 11 (Discipline of authorised firms and approved persons: The FSA's general approach), ENF 12 (Discipline of authorised firms and approved persons: Public censures and public statements) and ENF 13 (Discipline of authorised firms and approved persons: Financial penalties).

Unauthorised persons are generally prohibited by sections 19 (The general prohibition) and 21 (Restrictions on financial promotion) of the Act from being involved in either the management or promotion of collective investment schemes. The FSA's civil and regulatory powers for dealing with breaches of these prohibitions include those discussed in ENF 6, ENF 9 and ENF 10. An unauthorised person who breaches the prohibitions in sections 19 or 21 will also be guilty of a criminal offence under the Act. The FSA's power to prosecute criminal offences is discussed in ENF 15 (Prosecution of criminal offences).

The FSA's investigation powers in connection with AUTs, ICVCs, recognised schemes and other collective investment schemes are discussed in ENF 2 (Information gathering and investigation powers).