ENF 3.5 The FSA's policy on exercising its own-initiative power

This section sets out the FSA's policy on how it will exercise its own-initiative power to vary Part IV permission. It is arranged as follows:

1. (1)

   ENF 3.5.2 G to ENF 3.5.13 G set out the FSA's policy for exercising its power under section 45 of the Act (Variation etc on FSA's own initiative) and outline its general approach and its approach in urgent cases;

2. (2)

   ENF 3.5.14 G to ENF 3.5.26 G set out the FSA's policy on exercising its power under section 47 of the Act (Exercise of power in support of overseas regulator) in support of overseas regulators;

3. (3)

   ENF 3.5.27 G and ENF 3.5.28 G set out additional considerations that the FSA may or must have regard to when it considers using its own-initiative power.

SUP 7.3 (Criteria for varying a firm's permission) gives additional guidance on the FSA's policy for using its own-initiative power to vary Part IV permission in support of its supervision activities.

When it considers how it should deal with a concern about a firm, the FSA will have regard to its regulatory objectives and the range of regulatory tools that are available to it. It will also have regard to:

1. (1)

   the responsibilities of a firm's management to deal with concerns about the firm or about the way its business is being or has been run; and

2. (2)

   the principle that a restriction imposed on a firm should be proportionate to the objectives the FSA is seeking to achieve.

The FSA will proceed on the basis that a firm (together with its directors and senior management) is primarily responsible for ensuring the firm conducts its business in compliance with the Act and the Principles and the rules. In the context of its enforcement activities, the FSA will take formal action affecting the conduct of a firm's commercial business only if that business is being conducted in such a way that the FSA judges it necessary to act in order to secure compliance with those requirements and/or address the consequences of non-compliance. In the context of its supervision activities, the FSA may take formal action in the circumstances described in SUP 7.3 including where:

1. (1)

   the FSA determines that a firm's management, business or internal controls give rise to risks that are not fully captured by the FSA's rules; or

2. (2)

   a firm becomes or is to become involved in new products or selling practices which present risks not captured by existing requirements; or

3. (3)

   there has been a change in a firm's structure, controllers, activities or strategy which generates uncertainty or creates unusual or exceptional risks.

In the course of its supervision and monitoring of a firm, the FSA may make it clear that it expects the firm to take certain steps to ensure it continues to meet regulatory requirements. These steps might include the correction of financial, conduct of business or control weaknesses.

The FSA envisages that firms will normally take the steps referred to in ENF 3.5.4 G without the need for it to use its own-initiative powers. In the vast majority of cases the FSA will seek to agree with a firm those steps the firm must take to address the FSA's concerns.

Where the FSA considers that it cannot rely on a firm taking effective action, or if the firm fails to comply with the FSA's reasonable request for it to take remedial steps, the FSA will consider exercising its formal powers under section 45 of the Act. This may include instances where the FSA is concerned that the consequences of a firm not taking the desired steps may be serious and:

1. (1)

   the firm appears unwilling or unable to take adequate and timely steps to address the FSA's concerns; or

2. (2)

   the imposition of a formal statutory requirement may assist the firm to take steps which would otherwise be difficult because of legal obligations owed to third parties.

Section 45 of the Act empowers the FSA to vary, or alternatively to cancel, a firm'sPart IV permission. The same statutory grounds apply to the exercise of both those powers. They are set out in section 45(1) Cases A to C (see ENF 3.3.2 G).

Circumstances in which the FSA will consider varying a firm'sPart IV permission in support of its enforcement function include those where it has serious concerns about a firm, or about the way its business is being or has been conducted, but the concerns are not such as to suggest it should cancel the firm'sPart IV permission (see ENF 5). Examples of these circumstances are where:

1. (1)

   under Case A (see ENF 3.3.2 G (1)), the firm appears to be failing, or appears likely to fail, to satisfy the threshold conditions relating to one or more, or all, of its regulated activities, because for instance:

   1. (a)

      the firm's material and financial resources appear inadequate for the scale or type of regulated activity it is carrying on; or

   2. (b)

      the firm appears not to be a fit and proper person to carry on a regulated activity because:

      1. (i)

         it has not conducted its business in compliance with high standards which may include putting itself at risk of being used for the purposes of financial crime or being otherwise involved in such crime

      2. (ii)

         it has not been managed competently and prudently and has not exercised due skill, care, and diligence in carrying on one or more, or all, of its regulated activities;

      3. (iii)

         it has breached requirements imposed on it by or under the Act (including the Principles and the rules) and the breaches are material in number or in individual seriousness;

2. (2)

   under Case C (see ENF 3.3.2 G (3)), it appears that the interests of consumers are at risk because the firm appears to have breached any of Principles 6 to 10 (see PRIN 2.1.1 R) to such an extent that it is desirable that limitations, restrictions, or prohibitions are placed on the firm's regulated activity.

Under section 53(2) of the Act (Exercise of own-initiative power: procedure) the FSA may exercise its own-initiative power so that a variation of permission takes effect:

1. (1)

   immediately under section 53(2)(a); or

2. (2)

   on a specified date under section 53(2)(b); or

3. (3)

   when the matter is no longer open to review under section 53(2)(c).

If the FSA decides to impose the variation so that it takes effect immediately or on a specified date, it must state so in the supervisory notice that it is required to give to the firm concerned (see DEC 3). Under section 53(3) the FSA may only do this if it reasonably considers it necessary for the variation to take effect immediately (or on the date specified), having regard to the ground on which it is exercising its own-initiative power.

The FSA will consider exercising its own-initiative power as a matter of urgency under section 53 of the Act where:

1. (1)

   the information available to it indicates serious concerns about the firm or its business that need to be addressed immediately; and

2. (2)

   circumstances indicate that it is appropriate to use statutory powers immediately to require and/or prohibit certain actions by the firm in order to ensure the firm addresses these concerns.

It is not possible to provide an exhaustive list of the situations that will give rise to such serious concerns, but they are likely to include one or more of the following characteristics:

1. (1)

   information indicating significant loss, risk of loss or other adverse effects for consumers, where action is necessary to protect their interests;

2. (2)

   information indicating that a firm's conduct has put it at risk of being used for the purposes of financial crime, or of being otherwise involved in crime;

3. (3)

   evidence that the firm has submitted to the FSA inaccurate or misleading information so that the FSA becomes seriously concerned about the firm's ability to meet its regulatory obligations;

4. (4)

   Circumstances suggesting a serious problem within a firm or with a firm's controllers that calls into question the firm's ability to continue to meet the threshold conditions.

Whether the urgent exercise of the FSA'sown-initiative power is an appropriate response to serious concerns of this kind will depend on a number of factors. Set out below is a list of factors the FSA may consider. The list is not exhaustive. The FSA will consider the full circumstances of each case when it decides whether urgent variation of Part IV permission is needed:

1. (1)

   the extent of any loss, or risk of loss, or other adverse effect on consumers.The more serious the loss or potential loss or other adverse effect, the more likely it is that the FSA's urgent exercise of own-initiative powers will be appropriate, to protect the consumers' interests.

2. (2)

   the extent to which customer assets appear to be at risk. Urgent exercise of the FSA's own-initiative power may be appropriate where the information available to the FSA suggests that customer assets held by, or to the order of, the firm may be at risk.

3. (3)

   the nature and extent of any false or inaccurate information provided by the firm.Whether false or inaccurate information warrants the FSA's urgent exercise of its own-initiative powers will depend on matters such as:

   1. (a)

      the impact of the information on the FSA's view of the firm's compliance with the regulatory requirements to which it is subject, the firm's suitability to conduct regulated activities, or the likelihood that the firm's business may be being used in connection with financial crime;

   2. (b)

      whether the information appears to have been provided in an attempt knowingly to mislead the FSA, rather than through inadvertence;

   3. (c)

      whether the matters to which false or inaccurate information relates indicate there is a risk to customer assets or to the other interests of the firm's actual or potential customers.

4. (4)

   the seriousness of any suspected breach of the requirements of the legislation or the rules and the steps that need to be taken to correct that breach.

5. (5)

   the financial resources of the firm. Serious concerns may arise where it appears the firm may be required to pay significant amounts of compensation to consumers. In those cases, the extent to which the firm has the financial resources to do so will affect the FSA's decision about whether exercise of the FSA's own-initiative power is appropriate to preserve the firm's assets, in the interests of the consumers. The FSA will take account of any insurance cover held by the firm. It will also consider the likelihood of the firm's assets being dissipated without the FSA's intervention, and whether the exercise of the FSA's power to petition for the winding up of the firm is more appropriate than the use of its own-initiative power (see ENF 10).

6. (6)

   the risk that the firm's business may be used or has been used to facilitate financial crime, including money laundering. The information available to the FSA, including information supplied by other law enforcement agencies, may suggest the firm is being used for, or is itself involved in, financial crime. Where this appears to be the case, and the firm appears to be failing to meet the threshold conditions or has put its customers' interests at risk, the FSA's urgent use of it's own-initiative powers may well be appropriate.

7. (7)

   the risk that the firm's conduct or business presents to the financial system and to confidence in the financial system.

8. (8)

   the firm's conduct.The FSA will take into account:

   1. (a)

      whether the firm identified the issue (and if so whether this was by chance or as a result of the firm's normal controls and monitoring);

   2. (b)

      whether the firm brought the issue promptly to the FSA's attention;

   3. (c)

      the firm's past history, management ethos and compliance culture;

   4. (d)

      steps that the firm has taken or is taking to address the issue.

9. (9)

   the impact that use of the FSA's own-initiative powers will have on the firm's business and on its customers. The FSA will take into account the (sometimes significant) impact that a variation of permission may have on a firm's business and on its customers' interests, including the effect of variation on the firm's reputation and on market confidence. The FSA will need to be satisfied that the impact of any use of the own-initiative power is likely to be proportionate to the concerns being addressed, in the context of the overall aim of achieving its regulatory objectives.

Section 47 empowers the FSA to vary, or alternatively to cancel, a firm'sPart IV permission, in support of an overseas regulator. The same statutory grounds apply to the exercise of both powers (see ENF 3.3.3 G). In both cases, the FSA may exercise the power at the request, or for the purpose of assisting a regulator who is:

1. (1)

   outside the United Kingdom; and

2. (2)

   of a kind prescribed in regulations to be made by the Treasury.

Sections 47(3), (4) and (5) set out matters the FSA may, or must, take into account when it considers whether to exercise the powers (see ENF 3.3.5 G to ENF 3.3.7 G).

In certain circumstances, in support of an overseas regulator, the FSA may need to consider whether to seek to vary a firm'sPart IV permission, or to cancel it. Circumstances in which the FSA may consider varying or cancelling a firm'sPart IV permission in support of an overseas regulator are set out in ENF 3.4.6.

As with cancellation of Part IV permission, the circumstances in which the FSA may consider varying a firm'sPart IV permission in support of an overseas regulator, depend on whether the FSA is required to consider exercising the power in order to comply with a Community obligation.

Under section 47(3), if a relevant overseas regulator acting under prescribed provisions has made a request to the FSA for the exercise of its own-initiative power, the FSA must consider whether it must exercise the power in order to comply with a Community obligation.

Some relevant Community obligations which the FSA may need to consider are those under the following Directives:

1. (1)

   the Banking Consultation Directive;1

2. (2)

   the Insurance Directives;1

3. (3)

   the Investment Services Directive;1

4. (4)

   the Insurance Mediation Directive.1

Each of these Directives imposes general obligations on the relevant EEAcompetent authority to cooperate and collaborate closely in discharging their functions under the Directives relating to the authorisation ('registration' in the case of IMD insurance intermediaries and IMD reinsurance intermediaries) and supervision of credit institutions, insurance undertakings, investment firms, IMD insurance intermediaries and IMD reinsurance intermediaries and supervision of credit institutions, insurance undertakings, investment firms, IMD insurance intermediary and IMD reinsurance intermediaries. 1

The FSA views this cooperation and collaboration as essential to effective regulation of the international market in financial services. It will therefore exercise its own-initiative power wherever:

1. (1)

   an EEA Competent authority requests it to do so; and

2. (2)

   it is satisfied that the use of the power is appropriate (having regard to the considerations set out at ENF 3.5.2 G to ENF 3.5.8 G) to enforce effectively the regulatory requirements imposed under the Single Market Directives or other Community obligations.

The FSA will actively consider any other requests for assistance from relevant overseas regulators (that is requests in relation to which it is not obliged to Act under a Community obligation). Section 47(4) applies in these circumstances. It sets out matters the FSA may take into account when it decides whether to vary or cancel a firm'sPart IV permission in support of the overseas regulator (see ENF 3.3.6 G).

Where section 47(4) applies and the FSA is considering whether to vary a firm'sPart IV permission, it may take account of all the factors described in ENF 3.5.14 G to ENF 3.5.22 G, but may give particular weight to:

1. (1)

   The matters set out in paragraphs (c) and (d) of section 47(4) (seriousness, importance to persons in the United Kingdom, and the public interest); and

2. (2)

   any specific request made to it by the overseas regulator to vary, rather than cancel, the firm'sPart IV permission.

The FSA will give careful consideration to whether the relevant authority's concerns would provide grounds for the FSA to exercise its own-initiative power if they related to a UK firm. It is not necessary for the FSA to be satisfied that the overseas provisions being enforced mirror precisely those which apply to UK firms. However, the FSA will not assist in the enforcement of regulatory requirements or other provisions that appear to extend significantly beyond the purposes of UK regulatory provisions.

Similarly, the FSA will not need to be satisfied that precisely the same assistance would be provided to the United Kingdom in precisely the same situation. However, it will wish to be confident that the relevant authorities in the jurisdiction concerned would have powers available to them to provide broadly similar assistance in aid of UK authorities, and would be willing properly to consider exercising those powers.

Under section 47(5), the FSA may decide not to exercise its own-initiative power, in response to a request, unless the regulator concerned undertakes to make whatever contribution towards the cost of its exercise the FSA considers appropriate.

Under section 49 of the Act (Persons connected with an applicant), when it decides whether to vary a Part IV permission the FSA may have regard to any person appearing to it to be in a relevant relationship with a firm. Where the FSA is considering varying the Part IV permission of a firm that is connected to an EEA firm, it must consult the EEA firm's Home State regulator. A firm is connected with an EEA firm if:

1. (1)

   it is a subsidiary undertaking of the EEA firm; or

2. (2)

   the firm and the EEA firm are subsidiary undertakings of the same parent undertaking.

Section 50 of the Act (FSA's duty to consider other permissions etc) applies where the firm is an EEA firm, a Treaty firm or a firm authorised as a result of paragraph 1(1) of Schedule 5 (Persons Concerned in Collective Investment Schemes), which has an additional Part IV permission. Under section 50(2), if the FSA is considering whether, and if so how, to exercise its own-initiative power in relation to the firm's additional Part IV permission it must take into account:

1. (1)

   the Home State authorisation of the firm concerned;

2. (2)

   any relevant directive; and

3. (3)

   relevant provisions of the Treaty.