UK financial regulatory changes sharpen accountability of senior managers

March 18, 2011

By Susannah Hammond

LONDON, March 18 (Complinet) The new UK financial regulatory architecture is taking shape. The new bodies, their responsibilities and reporting lines are currently being consulted on and seem likely to be fairly close to the structures which will be in place by the end of 2012.

The regulatory philosophy which will underpin the new architecture has already been trailed as being more of the same intrusive and intensive approach to supervision. But it is also clear that senior managers of regulated firms will faced increased scrutiny as the regulators focus on individual accountability.

All regulated financial services firms in the UK will be regulated in one way or another by the proposed new Financial Conduct Authority, whose remit is likely to cover:

— Supervision (including prudential supervision) of all firms not regulated by the Prudential Regulatory Authority, including most investment firms.

— Consumer protection in financial services (this will include taking a stronger role in competition matters).

— Regulating the provision of consumer credit.

— Regulating conduct in financial services generally, including in relation to firms authorised and supervised by the PRA.

— Regulating market conduct, including taking action to impose civil penalties for market abuse and pursuing criminal prosecutions.

— Regulating investment exchanges and providers of trading facilities.

— Primary market regulation (including listing).

As part of the same consultation it has been proposed that both the FCA and the PCA will have the power to publish details of enforcement actions at the warning notice stage, subject to the following safeguards:

— While the expectation is that the regulator will disclose the existence of a warning notice, it will have discretion rather than a duty to publish the fact that a notice has been issued, or information about the notice.

— The expectation that the authority would consider the potential effect of disclosure of information about a warning notice on the person subject to that warning notice (or indeed its own objectives) when considering whether to disclose information.

— Where the regulator decides to take no further action after it has made public the fact that enforcement has commenced, it will be required to publish the fact that it has issued a “notice of discontinuance”.

— The inference is that final notices will continue to be published as previously under the FSA.


The new head of the FCA will be Martin Wheatley, who is due to join the Financial Services Authority in September 2011, having served as chief executive of the Hong Kong Securities and Futures Commission for five years. While at the SFC Wheatley oversaw a transformation of the commission’s supervisory stance on enforcement, and in particular the pursuit of individuals where wrongdoing had been discovered.

In the past the Hong Kong marketplace had something of a reputation for overlooking possible cases of market abuse but now, after five years with Wheatley at the helm, any such fears have been dispelled. The Hong Kong commission has not traditionally published as much detail on enforcements as, say, the FSA but the brief summaries that are made public are designed to act as a deterrent to potential rule breakers. There is a long-term theme regarding insider dealing and market manipulation, with the SFC seeking, wherever possible, criminal convictions, jail sentences and fines in the form of restitution of any profits made (whether or not that profit was actually crystallised).

A keynote case was the conviction of Du Jun, a former managing director of Morgan Stanley, who was jailed for seven years in September 2009 for insider dealing. Du’s jail term is the longest ever imposed on an insider and the maximum sentence available. In addition, among other actions taken, Du was fined HK$23,324,117, reflecting the notional (rather than realised) profit earned and was ordered to pay the SFC investigation costs of HK$933,340.

Margaret Cole, the FSA’s managing director of enforcement and financial crime, has spoken of how much more difficult it is for the regulator to take action against individuals as opposed to firms. The majority of firms which end up in enforcement accept their mistakes, put remedial actions in place and choose to settle at an early stage of the proceedings. Approved persons are much less likely to settle as their reputations, and potentially their livelihoods, can be at risk.

Despite the inherent difficulties, the FSA has taken a clear strategic decision to pursue individuals both in court and through the regulatory enforcement process to achieve the aim of credible deterrence. The most powerful message of all for a regulator to send to the marketplace is the disciplining of a senior approved person in a regulated firm.

In what was perhaps the starkest example yet, the FSA disciplined three former Northern Rock senior managers in the summer of 2010. The regulator issued a full prohibition on David Jones, the former finance director of Northern Rock plc, and fined him £320,000 for misreporting mortgage arrears figures. The prohibition and banning of Jones was in addition to the ban and fine of £504,000 imposed on David Baker, the former deputy chief executive of Northern Rock, and the ban and fine of £140,000 imposed on Richard Barclay, the former managing credit director of Northern Rock.

All three enforcement actions related to the deliberate misreporting of mortgage arrears figures which, if properly included in the 2006 annual accounts for Northern Rock, would have either increased the reported arrears percentage by more than 60 per cent or almost trebled the stated possessions figure.

The landmark enforcement actions imposed on these three executives was a turning point in the FSA’s supervisory stance towards approved persons. Despite the financial statements being unaffected, the FSA made it crystal clear that it considered the breaches to be extremely serious. It is probably not an exaggeration to say that a former finance director of a large retail bank found to have acted with a lack of integrity is unlikely to work in the field again.


If the potential future double act of Martin Wheatley and Margaret Cole working together to take action against approved person wrongdoing is not enough to focus the minds of senior managers, the potential for double jeopardy is also becoming apparent.

Many approved persons are not only registered with and regulated by the FSA but are also members of other professional bodies. In another connected case from Hong Kong, the Institute of Chartered Accountants in England and Wales has excluded Yiu Kai Tsang, fined him £15,000 and ordered him to pay costs of £2,495. The ICAEW’s action followed a decision by the Insider Dealing Tribunal of Hong Kong, which found Tsang guilty of insider trading and fined him HK$1m. The conclusion of the ICAEW disciplinary action stated that Tsang was not, as he had alleged, being punished for a “second time”, but was rather being punished by the ICAEW only once for one allegation of professional misconduct. The ICAEW appeared to deem it irrelevant whether or not Tsang’s actions had already been judged by other bodies elsewhere.

The actions of professional bodies may come a distant second to the power of the courts and the financial services regulators in imposing sanctions, but for a senior manager seeking a post-enforcement fresh start it could be the final nail in the career.


It has been on the horizon for some time, but the focus on the actions, or indeed inactions, of senior managers really has now reached centre stage. The brave new regulatory world of the FCA is setting the scene for credible regulatory deterrence for potential wrongdoing firmly with approved persons. Martin Wheatley has the mandate, track record and practical experience to continue, and with increased vigour, what the FSA has started. It will be imperative for approved persons not only to understand fully their obligations and accountabilities but also to be able to provide robust and consistent evidence that they have indeed discharged those obligations.

(This article was first published in Complinet ( Complinet, part of ThomsonReuters, is a leading provider of connected risk and compliance information and on-line solutions to the global financial services community.)

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