Key Takeaways
- • The FCA can impose personal financial penalties and prohibition orders on approved persons, including senior executives and directors of regulated firms, making individual liability a live risk for hedge fund principals operating under UK regulation.
- • Statement of Principle 7 makes individual senior managers responsible for regulatory compliance in their business areas, and it is frequently cited in enforcement cases against individuals.
- • In the Swinton case, the firm was fined £7.4 million in 2013, and in 2014 the CEO received a £412,700 penalty and a prohibition order, while the Finance Director and Marketing Director received penalties of £208,600 and £306,700 and were banned from significant-influence functions.
- • The FCA's enforcement approach has shifted from firm-level action to individual accountability, based on the "rolling bad apple" concept that executives can carry regulatory failings from one firm to another.
- • Approved persons can reduce personal enforcement risk by mastering the Statements of Principle and Code requirements, pursuing regular refresher training, and clearly understanding the scope of their role.
Summary
The article, published by Thomson Reuters Legal Solutions, examines how UK regulatory supervision has evolved since the 2008 financial crisis and what that means for the personal liability of individuals in regulated financial firms, including hedge fund managers. It draws on a 2009 speech by Hector Sants, then Chief Executive of the Financial Services Authority, who said "People should be very frightened of the FSA." Sants described an "intrusive" and "outcomes-focused" supervisory style in which regulators would make "judgments on the judgments of others," replacing a backward-looking, rules-based approach.
The Financial Conduct Authority took over conduct regulation in 2013 and has pursued much of the FSA's agenda. The FCA has also focused on behavioral economics and cultural change within firms, and it has adjusted its enforcement approach. Because action against firms alone was judged insufficient to change the behavior of senior staff, the regulator has targeted individuals more directly.
Under the approved persons regime, individuals performing certain controlled functions, such as director, partner, Chief Executive or Compliance Officer, must be individually approved by the FCA. Approved persons can face financial penalties and, in extreme cases, prohibition from holding any controlled function at a regulated firm. The article cites the 2014 prohibition of Jonathan Burrows, a Managing Director at BlackRock Asset Management, who was found to lack honesty and integrity after knowingly evading train fares, showing that conduct outside the individual's day-to-day role can be relevant to fitness and propriety. Fitness assessments consider honesty, integrity and reputation, competence and capability, and financial soundness.
Approved persons must comply with the FCA's Statements of Principle, which include acting with integrity, exercising due skill, care and diligence, and observing proper standards of market conduct. Senior managers performing significant-influence functions must also ensure their businesses are organized to be controlled effectively and comply with regulatory requirements. Statement of Principle 7 is singled out as a frequent basis for enforcement, since it makes senior managers responsible for compliance in their areas rather than leaving that duty solely with the Compliance Officer.
The article uses the Swinton case to illustrate enforcement in practice. The FCA fined the firm £7.4 million in 2013, citing an aggressive sales strategy that prioritized sales over fair customer treatment. In 2014, the FCA took action against three senior Swinton executives: the CEO received a £412,700 penalty and a prohibition from the Chief Executive function, while the Finance Director and Marketing Director were fined £208,600 and £306,700 respectively and barred from significant-influence functions, effectively ending their eligibility for senior financial services roles.
The article concludes that approved persons should understand the detailed requirements of the Code of Conduct and the Code of Market Practice, which the FCA keeps under continuous review, and should be clear about the scope of their roles to reduce the risk of personal enforcement.
The Financial Conduct Authority took over conduct regulation in 2013 and has pursued much of the FSA's agenda. The FCA has also focused on behavioral economics and cultural change within firms, and it has adjusted its enforcement approach. Because action against firms alone was judged insufficient to change the behavior of senior staff, the regulator has targeted individuals more directly.
Under the approved persons regime, individuals performing certain controlled functions, such as director, partner, Chief Executive or Compliance Officer, must be individually approved by the FCA. Approved persons can face financial penalties and, in extreme cases, prohibition from holding any controlled function at a regulated firm. The article cites the 2014 prohibition of Jonathan Burrows, a Managing Director at BlackRock Asset Management, who was found to lack honesty and integrity after knowingly evading train fares, showing that conduct outside the individual's day-to-day role can be relevant to fitness and propriety. Fitness assessments consider honesty, integrity and reputation, competence and capability, and financial soundness.
Approved persons must comply with the FCA's Statements of Principle, which include acting with integrity, exercising due skill, care and diligence, and observing proper standards of market conduct. Senior managers performing significant-influence functions must also ensure their businesses are organized to be controlled effectively and comply with regulatory requirements. Statement of Principle 7 is singled out as a frequent basis for enforcement, since it makes senior managers responsible for compliance in their areas rather than leaving that duty solely with the Compliance Officer.
The article uses the Swinton case to illustrate enforcement in practice. The FCA fined the firm £7.4 million in 2013, citing an aggressive sales strategy that prioritized sales over fair customer treatment. In 2014, the FCA took action against three senior Swinton executives: the CEO received a £412,700 penalty and a prohibition from the Chief Executive function, while the Finance Director and Marketing Director were fined £208,600 and £306,700 respectively and barred from significant-influence functions, effectively ending their eligibility for senior financial services roles.
The article concludes that approved persons should understand the detailed requirements of the Code of Conduct and the Code of Market Practice, which the FCA keeps under continuous review, and should be clear about the scope of their roles to reduce the risk of personal enforcement.
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