ENF 9.6 Criteria for determining whether to exercise powers to obtain restitution

The FSA will consider the relevant circumstances of each case when deciding whether it is appropriate to exercise its powers to seek or obtain restitution under sections 382, 383 or 384 of the Act. The factors which the FSA will consider may include, but are not limited to, those set out in ENF 9.6.2 G-ENF 9.6.15 G.

The FSA will consider whether quantifiable profits have been made which are owed to identifiable persons. In certain circumstances it may be difficult to prove that the conduct in question has resulted in the person concerned making a profit. It may also be difficult to find out how much profit and to whom the profits are owed. In these cases it may not be appropriate for the FSA to use its powers to obtain restitution.

The FSA will consider whether there are identifiable persons who can be shown to have suffered quantifiable losses or other adverse effects. In certain circumstances it may be difficult to establish the number and identity of those who have suffered loss as a result of the conduct in question. It may also prove difficult in those cases to establish the amount of that loss and whether the losses have arisen as a result of the conduct in question. In these cases it may not be appropriate for the FSA to use its powers to obtain restitution.

The FSA will consider the number of persons who have suffered loss or other adverse effects and the extent of those losses or adverse effects. Where the breach of a relevant requirement by a person, whether authorised or not, results in significant losses, or losses to a large number of persons which collectively are significant, it may be appropriate for the FSA to use its powers to obtain restitution on their behalf. The FSA anticipates that many individual losses resulting from breaches by firms may be more efficiently and effectively redressed by consumers pursuing their claims directly with the firm concerned or through the Financial Ombudsman Service or the compensation scheme where the firm has ceased trading (see ENF 9.6.6 G). However, where a large number of persons have been affected or the losses are substantial it may be more appropriate for the FSA to seek restitution from a firm. In those cases the FSA may consider combining an action seeking restitution from a firm or unauthorised person with disciplinary action or a criminal prosecution.

The FSA will consider thecost of securing redress and whether these are justified by the benefit to persons that would result from that action. The FSA will consider the costs of exercising its powers to obtain restitution and, in particular, the costs of any application to the court for an order for restitution, together with the size of any sums that might be recovered as a result. The costs of the action will, to a certain extent, depend on the nature and location of assets from which restitution may be made. In certain circumstances it may be possible for the FSA to recover the costs of exercising its power to apply to the court for an order for restitution, or a proportion of them, from the party against whom a restitution order is sought.

The FSA will consider the availability of redress through the Financial Ombudsman Service or the compensation scheme. This will be relevant where the loss has resulted from the conduct of a firm. It will not be relevant where losses have resulted from the conduct of unauthorised persons operating in breach of the general prohibition. The Financial Ombudsman Service and the compensation scheme (where the firm has ceased trading) may be a more efficient and effective method of redress in many cases. The Financial Ombudsman Service provides a way for some consumers to obtain redress The compensation scheme may provide redress for some consumers and businesses. The FSA's power to obtain restitution is not intended to duplicate the functions of the Ombudsman or compensation schemes in those cases. However, in certain cases (see ENF 9.6.2 G) it will be more appropriate for the FSA to pursue restitution. Further details of these schemes are set out in COMP.

The FSA will consider the availability of redress through another regulatory authority. Where another regulatory authority, such as the Takeover Panel, is in a position to require appropriate redress, the FSA will not generally exercise its own powers to do so (see ENF 14.9 (Action involving other UK regulatory authorities)). If the FSA does consider that action is appropriate and the matters in question have happened in the context of a takeover bid, the FSA will only take action during the bid in the circumstances set out in ENF 14.9.6 G if the person concerned has responsibilities under the Takeover Code. If another regulatory body has required redress and a person has not met that requirement, the FSA will take this into account and (subject to all other relevant factors and circumstances) may consider it appropriate to take action to ensure that such redress is provided.

The FSA will consider whether persons who have suffered losses are able to bring their own civil proceedings. In certain circumstances it may be appropriate for persons to bring their own civil proceedings to recover losses. This might be the case where the person who has suffered loss is a market counterparty and so may be expected to have a high degree of financial experience and knowledge. When considering whether this might be a more appropriate method of obtaining redress, the FSA will consider the costs to the person of bringing that action and the likelihood of success in relation to the size of any sums that may be recovered.

The FSA will consider the solvency of the firm or unauthorised person concerned. Where the solvency of the firm or unauthorised person would be placed at risk by the payment of restitution, the FSA will consider whether it is appropriate to seek restitution. In those cases the FSA may consider obtaining a compulsory insolvency order against the firm or unauthorised person rather than restitution (see ENF 9.6.10 G). When considering these options, the FSA may also take account of the position of other creditors who may be prejudiced if the assets of the firm or unauthorised person are used to pay restitution payments prior to insolvency.

1. (1)

   The FSA will consider the availability of its power to obtain a compulsory insolvency order against the firm or unauthorised person concerned or to apply to the court for the appointment of a receiver. In certain circumstances it may be appropriate for the FSA to obtain an administration order, winding-up order or bankruptcy order against a firm or unauthorised person carrying out regulated activities in breach of the general prohibition.

   1. (a)

      Administration orders: the FSA may apply for an administration order against a firm or an unauthorised person operating in breach of the general prohibition. An administrative order places the assets of a firm or unauthorised person under the management of an administrator and may result in the assets of the company being realised to pay creditors. The FSA's procedures in relation to the exercise of its powers to apply for administration orders are set out in ENF 10 (Insolvency proceedings and orders against debt avoidance).

   2. (b)

      Winding-up orders: the FSA may apply for a winding-up order against a firm or an unauthorised person operating in breach of the general prohibition. A winding-up order places the assets of the firm or unauthorised person under the control of a liquidator who will apply them to repay creditors. The FSA's procedures in relation to the exercise of its powers to apply for winding-up orders are set out in ENF 10.

   3. (c)

      Bankruptcy orders: the FSA may apply for a bankruptcy order against an individual who is, or has been, an authorised person, or who is carrying on a regulated activity, in breach of the general prohibition. The making of a bankruptcy order places the assets of the individual under the control of a trustee who will use them to repay creditors. The FSA's procedures in relation to the exercise of its powers to apply for bankruptcy orders are set out in ENF 10.

   4. (d)

      Appointment of receivers: the FSA may apply to the court for the appointment of a receiver on behalf of the debenture holders or other creditors of a person where there is a risk that creditor or debentureholder's assets will be dissipated.

2. (2)

   The FSA may decide to exercise its power to obtain a compulsory insolvency order or to apply for the appointment of a receiver rather than to exercise its powers to obtain restitution. This could happen if it has particular concerns about a person's conduct, or financial position and, in particular, whether it is solvent (though the appointment by the court of a receiver is not conditional on the insolvency of the person concerned). The FSA may also consider the cost of compulsory insolvency orders which will be paid out of the assets of the firm, or of the unauthorised person concerned, compared to the cost of seeking restitution. In the case of unauthorised persons operating in breach of the general prohibition, a decision to apply for a compulsory insolvency order rather than restitution will depend on all the circumstances of the case. In particular, the FSA may consider the significance of the unauthorised activities compared to the whole of the business; the nature and conduct of the activities carried on in breach of the general prohibition; and the number and nature of the claims against the person or firm concerned. The FSA's powers to apply for compulsory insolvency orders are set out in ENF 10.

The FSA will consider the conduct of the persons who have suffered loss. As part of its regulatory objectives of increasing consumer awareness of the financial system and protecting consumers, the FSA is required to publicise information about the authorised status of persons and is empowered to give information and guidance about the regulation of financial services. This information should help consumers avoid suffering losses. When the FSA considers whether to obtain restitution on behalf of persons, it will consider the extent to which those persons may have contributed to their own loss or failed to take reasonable steps to protect their own interests.

The FSA will consider the context of the conduct in question. In any case where the FSA believes that any exercise of its powers under section 383 (Restitution orders in cases of market abuse) or 384 (Power of FSA to require restitution) of the Act may affect the timetable or outcome of a takeover bid, it will consult the Takeover Panel before taking any steps to exercise such powers, and will give due weight to its views.

Where the FSA is considering applying to court for a restitution order in relation to market abuse under section 383, it will also consider whether the court would be prevented from making that order by section 383(3). The court cannot make a restitution order against a person under section 383(3) if it is satisfied that one or both of the conditions set out in section 383(3)(a) and (b) are fulfilled (see ENF 9.4.6 G).

A similar provision to section 383(3) applies where the FSA proposes to exercise its power to require restitution in relation to market abuse under section 384(2). In those cases, the FSA cannot exercise its power where, following representations made to it in response to a warning notice, there are reasonable grounds for it to be satisfied that one or both of the conditions set out in section 384(4)(a) and (b) are fulfilled (see ENF 9.5.4 G).

The conditions set out in section 383(3)(a) and (b) and section 384(4)(a) and (b) are the same as those that apply to penalties for market abuse and the FSA will take the same factors into account when considering whether the conditions have been met. ENF 14.4 (Factors relevant to determining whether to take action in market abuse cases) lists those factors.