Final Notice
FINAL NOTICE
Individual
Number:
DFJ01012
ACTION
1.
For the reasons given in this notice, the Authority hereby:
(a) impose on Mr Jones a financial penalty of £13,300 pursuant to
section 66 of the Act, for breaches of Statements of Principle 6
and 1; and
(b) make an order, pursuant to section 56 of the Act, prohibiting Mr
Jones from performing any function in relation to any regulated
activities carried on by any authorised or exempt person, or
exempt professional firm, on the basis that he is not a fit and
proper person because he lacks competence and capability and
honesty and integrity. This order takes effect from 29 April
2013.
2.
Mr Jones agreed to settle at an early stage of the Authority’s
investigation. He therefore qualified for a 30% discount under the
Authority’s executive settlement procedures. Were it not for this
discount, the Authority would have imposed a financial penalty of
£19,000 on him.
SUMMARY OF REASONS
3.
During the relevant period Mr Jones was the chief executive, and also
a mortgage adviser, at Which Mortgage.
4.
Mr Jones breached Statement of Principle 6 by failing to act with due
skill, care and diligence by failing to ensure that the Firm had
appropriate controls to verify information submitted by clients to
support mortgage applications which led to the Firm being used to
facilitate financial crime, through the submission of false payslips to
high street lenders.
5.
Mr Jones breached Statement of Principle 1 by dishonestly altering
certain historic client files after concerns had been raised by a lender
and the Authority to attempt to mislead the Authority as to the
controls within the Firm when the applications were submitted.
6.
Mr Jones’s conduct was particularly serious because his failings:
(a) allowed the Firm to be used for purposes connected with
financial crime, specifically mortgage fraud;
(b) led high street lenders to offer mortgages to customers on the
basis of false and misleading information; and
(c)
sought to prevent the Authority from being made aware that
the Firm had been used for purposes connected with financial
crime.
7.
As a result of the nature and seriousness of these matters, Mr Jones
has failed to meet the minimum regulatory standards in terms of
competence and capability and honesty and integrity and is not a fit
and proper person to perform functions in relation to regulated
activities carried on by an authorised person. The Authority considers
that the sanction is necessary and proportionate, and it supports the
Authority’s regulatory objectives of:
(a) reducing the extent to which it is possible for a regulated
business to be used for a purpose connected with financial
crime; and
(b) ensuring greater confidence in the mortgage market.
DEFINITIONS
8.
The definitions below are used in this Final Notice.
(a) the “Act” means the Financial Services and Markets Act 2000;
(b) the “Authority” means “the body corporate previously known as
the Financial Services Authority and renamed on 1 April 2013 as
the Financial Conduct Authority”;
(c)
the “client files” means the sample of 38 mortgage application
client files submitted to high street lenders reviewed by the
Authority;
(d) “DEPP” means the Decision Procedure and Penalties Manual;
(e) the “directors” means Mr Derek Jones and Mr Douglas Jones;
(f)
“EG” means the Enforcement Guide, applying with effect from
28 August 2007;
(g) “FIT” means Fit and Proper test for Approved Persons;
(h) the “Handbook” means the Authority’s Handbook of Rules and
Guidance;
(i)
“HMRC” means Her Majesty's Revenue and Customs;
(j)
“Mr Jones” means Douglas Jones;
(k) the “relevant period” means 26 March 2010 to 14 October
2011;
(l)
the “Settlement Decision Makers” means two members of the
Authority’s senior management who have jointly made the
decisions which gave rise to the obligation to give this notice;
(m) the “Statements of Principle” means the Authority’s Statements
of Principle and Code of Practice for Approved Persons;
(n) “the Tribunal” means the Upper Tribunal (Tax and Chancery
Chamber); and
(o) “Which Mortgage/the Firm” means Which Mortgage Limited.
FACTS AND MATTERS
Background
9.
Which Mortgage is a mortgage and insurance intermediary firm
based in Glasgow. It was incorporated on 7 September 1995 and
became authorised on 31 October 2004 to undertake regulated
activities. The Firm's business comprised residential mortgage
contracts, buy-to-lets, commercial loans and general insurance.
Approximately a third of its business consisted of residential
mortgage contracts.
10. During the relevant period the Firm consisted of two directors,
namely Mr Jones and his son, Derek Jones, and two self-employed
mortgage advisers, neither of whom were approved persons. Mr
Jones was approved to perform the controlled functions of CF1
(Director) and CF3 (Chief Executive) and was also responsible for
insurance mediation. He was the controlling director and founder of
Which Mortgage, and he also provided mortgage advice to clients. He
retired in October 2011 and his approved status with the Authority
was withdrawn on 16 December 2011.
The Firm’s failure to identify false and misleading information on
payslips
11. A high street lender raised concerns with the Firm about the
submission of a payslip in support of a mortgage application made by
Client A in September 2011. It appeared to the high street lender
that the single payslip accompanying the application contained false
and misleading information. The high street lender rejected the
application and removed Which Mortgage from their panel of
mortgage intermediaries. The high street lender reported the Firm
and Mr Jones to the Authority and informed the Authority of its
findings and its decision to remove the Firm from its panel.
12. The Authority subsequently obtained and reviewed 38 client files,
which contained payslips which had been used in support of the
client’s application.
13. The Authority found that 11 of the client files contained payslips in a
single standard format even though each client worked for different
employers. The Authority subsequently obtained information from
HMRC in relation to these applications, which showed that each
payslip from these 11 files contained false and misleading
information about both the clients’ income and employment. Only
applications submitted by the directors were found to contain false
and misleading information. Applications submitted by the Firm’s
advisers were not found to be defective.
14. Mr Jones accepted that the Firm had deficiencies and had no effective
systems and controls in place to counter financial crime. He
acknowledged that no checks had been carried out on the
information set out in the payslips, nor questions asked during the
application process, which may have alerted him to possible
fraudulent activity. As a result, he had failed to detect the pattern of
false payslips, financial information and employment details being
submitted by a number of his clients and had thereby allowed
fraudulent information to be submitted to high street lenders.
15. Paragraphs 16 to 25 below set out the Authority’s findings in relation
to three example cases where Mr Jones failed to carry out basic
verification checks on the information contained in identically
formatted payslips and thereby failed to recognise a pattern of false
and misleading information. Similar failings occurred in relation to
each of the 11 client files reviewed by the Authority.
Client A
16. In September 2011, Client A applied for a mortgage with a high
street lender through Which Mortgage. The client intended to borrow
£121,000 for purchasing a property valued at £142,500.
17. The mortgage application contained, in support of the client’s income
information, a single payslip which purported to evidence that Client
A’s income was £33,000 per annum. The format of this payslip was
identical to the format of 10 other payslips contained in different
client files. HMRC records showed that Client A’s actual income for
the relevant year was, in fact, £12,532.
Client B
18. In March 2010 Client B applied for a joint mortgage from a high
street lender through Which Mortgage. The client intended to borrow
£450,000 in order to purchase a property valued at £605,000.
19. The mortgage application contained five payslips and stated that
Client B was employed as a “letting negotiator” with an income of
£14,600 per annum. The payslips reflected the same information as
contained in the mortgage application. The format of these payslips
was identical to the format of 10 other payslips contained in different
client files. HMRC had no record of Client B’s income or employment
for the relevant financial year.
20. In October 2010, Client C applied for a joint mortgage from a high
street lender through Which Mortgage. The client intended to borrow
£134,000 in order to purchase a property valued at £192,000.
21. The mortgage application contained five payslips and stated that
Client C’s income was £23,814 per annum. The payslips reflected the
same information as contained in the mortgage application. The
format of Client C’s payslips was identical to the format of 10 other
payslips contained in different client files. HMRC records showed that
Client C’s actual income for the relevant year was £8,897.
22. Mr Jones took no steps to verify the information contained in any of
the payslips provided by Clients A, B or C in support of their
mortgage applications and all of which were found to be false. He did
not seek to obtain any other information to support income or
employment details nor did he verify the information provided. He
failed to take any steps to alert himself to a pattern of false payslips
and false financial information being submitted through the Firm by
its clients.
23. The failure to have appropriate controls allowed false payslips
containing misleading information to be submitted through the Firm
to high street lenders on many occasions.
24. Mr Jones admitted that the systems and controls of the Firm were
deficient and that at no stage did he seek to verify the information
contained in any payslip submitted by any client in support of an
application for a mortgage.
25. Mr Jones acted without due skill, care and diligence in failing to
ensure that there were appropriate controls in place to check the
source or veracity of the information being submitted to the Firm by
its clients in support of their mortgage applications and thereby did
not alert himself to a pattern of false payslips. He was not dishonest,
or knowingly concerned, in the clients’ submission of false and
misleading information.
Seeking to mislead the Authority by replacing payslips in client files
26. After Client A’s mortgage application was rejected by a high street
lender, Mr Jones was informed by it that Client A’s payslip contained
false and misleading information. The Authority had been informed of
the decision of the high street lender to remove the Firm from its
panel and the Authority informed the Firm on 14 October 2011 that
they would visit it to carry out a review of the client files. This visit
was carried out on 1 December 2011.
27. Between 14 October 2011 and 1 December 2011, Mr Jones reviewed
a number of client files to see if these contained similar concerns
contained in Client A’s application. It was only at this stage that he
discovered that there was a pattern of false payslips being submitted
by a significant number of his clients. This alerted Mr Jones that his
clients had provided false and misleading information through the
Firm in support of their mortgage applications.
28. Mr Jones downloaded blank template payslips from the internet and
entered the same financial information contained in the original
payslip provided to the Firm by the client.
29. Mr Jones then replaced a number, but not all, of the false original
payslips, including those of Clients B and C above, with the
completed internet payslips. Mr Jones’s explanation for this conduct
was that it was “to maybe try and hide an embarrassment”. He
admitted that these replacements were made prior to the Authority’s
visit to the Firm and in an attempt to disguise from the Authority that
the Firm “had likely been duped by [its] clients”, lacked the
appropriate systems and controls and was being used to facilitate
financial crime. None of the internet payslips produced by Mr Jones
were submitted to the lenders. Mr Jones stated that he regretted his
actions which he
realised had
been “extremely naïve and
incomprehensible”.
30. Mr Jones’s conduct was dishonest and he intended to mislead the
Authority. It was designed to prevent the Authority from being made
aware during its visit in December 2011 that the Firm had been used
for purposes connected with financial crime and was also designed to
prevent the Authority from identifying the Firm’s lack of systems and
controls.
FAILINGS
31. The regulatory provisions relevant to this Final Notice are referred to
in Annex A.
Mr Jones’s failure to identify false and misleading information on
32. By reason of the facts and matters referred to in paragraphs 11-25
above, Mr Jones acted without due skill, care and diligence and
therefore lacked competence and capability in carrying out his
controlled functions. In particular, Mr Jones failed to ensure that the
Firm had appropriate controls to verify information submitted by
clients to support mortgage applications. This led to the Firm being
used to facilitate financial crime, through the submission of false
payslips to lenders, who offered mortgages to clients on the basis of
false information.
Misleading the Authority by replacing payslips in client files:
33. By reason of the facts and matters referred to in paragraphs 26-30
above, Mr Jones acted dishonestly and therefore lacked integrity. In
particular, Mr Jones:
(a) replaced payslips within the client files to make it less clear that
there was a pattern of false payslips which he had failed to
recognise and to disguise from the Authority that the Firm was
being used to facilitate financial crime; and
(b) in doing so knowingly sought to mislead the Authority regarding
the lack of systems and controls within the Firm to verify
information and counter financial crime.
Fitness and Propriety
34. The facts and matters identified above led the Authority to the
conclusion that Mr Jones fell seriously short of the minimum
regulatory standards required for approved persons performing
controlled functions. Mr Jones has failed to act with competence and
capability and honesty and integrity and is not a fit and proper
person to perform any function in relation to any regulated activity
carried on by any authorised person, exempt person or exempt
professional firm.
SANCTION
Financial penalty
35. The Authority has imposed a financial penalty on Mr Jones for
breaching Statements of Principle 6 and 1. As the misconduct took
place after 6 March 2010, the Authority’s new penalty regime
applies.
36. The principal purpose of a financial penalty is to promote high
standards of regulatory conduct by deterring persons who have
committed breaches from committing further breaches, helping to
deter
other
persons
from
committing
similar
breaches
and
demonstrating generally the benefits of compliant behaviour.
37. In determining whether a financial penalty is appropriate, the
Authority is required to consider all the relevant circumstances of a
case. A financial penalty is an appropriate sanction in this case, given
the serious nature of the breaches and the need to send out a strong
message of deterrence to others.
Calculation of financial penalty under DEPP
38. The Authority’s policy for imposing a financial penalty is set out in
Chapter 6 of DEPP. In respect of conduct occurring on or after 6
March 2010, the Authority applies a five-step framework to
determine the appropriate level of financial penalty. DEPP 6.5B sets
out the details of the five-step framework that applies in respect of
financial penalties imposed on individuals in non-market abuse cases.
Step 1 - disgorgement
39. Pursuant to DEPP 6.5B.1G, at Step 1 the Authority seeks to deprive
an individual of the financial benefit derived directly from the breach,
where it is practicable to quantify this.
40. The Authority has not identified any financial benefit that Mr Jones
derived directly from his breaches.
41. Step 1 is therefore £0.
Step 2 – the seriousness of the breach
42. Pursuant to DEPP 6.5B.2G, at Step 2 the Authority determines a
figure that reflects the seriousness of the breach. That figure is based
on a percentage of the individual’s relevant income. The individual’s
relevant income is the gross amount of all benefits received by the
individual from the employment in connection with which the breach
occurred, and for the period of the breach.
43. Mr Jones’s misconduct took place between March 2010 and
September 2011, during which Mr Jones’s relevant income was
£21,127.52.
44. In deciding on the percentage of relevant income that forms the
basis of the Step 2 figure, the Authority considers the seriousness of
the breach and chooses a percentage between 0% and 40%. This
range is divided into five fixed levels which represent, on a sliding
scale, the seriousness of the breach; the more serious the breach,
the higher the level.
45. For penalties imposed on individuals in non-market abuse cases
there are the following five levels:
Level 1 – 0%
Level 2 – 10%
Level 3 – 20%
Level 4 – 30%
Level 5 – 40%
46. In assessing the seriousness level, the Authority takes into account
various factors which reflect the impact and nature of the breach,
and whether it was committed deliberately or recklessly.
47. Factors relating to the nature of a breach by an individual include,
amongst others:
(a) the nature of the rules, requirements or provisions breached;
and
(b) the nature and extent of any financial crime facilitated,
occasioned or otherwise attributable to the breach.
48. Mr Jones is guilty of a Level 4 breach for the purposes of Step 2
(a) he acted without due skill, care and diligence in failing to detect
patterns of suspicious payslips being submitted to the Firm;
(b) he allowed mortgage applications to be submitted to lenders
through the Firm without applying his mind to the possibility
that they contained false and misleading information; and
(c)
he acted dishonestly by subsequently altering the client files in
order to mislead the Authority regarding the lack of systems
and controls within the Firm.
49. A Level 4 breach equates to 30% of Mr Jones’s relevant income. The
penalty figure for this breach after Step 2 is therefore £6,338.25.
Step 3 – mitigating and aggravating factors
50. Pursuant to DEPP 6.5B.3G, at Step 3 the Authority may increase or
decrease the amount of the financial penalty arrived at after Step 2
(but not including any amount to be disgorged in accordance with
Step 1) to take into account factors which aggravate or mitigate the
breach.
51. The Authority has not identified any aggravating or mitigating factors
in this case.
52. Step 3 is therefore £0.
Step 4 – adjustment for deterrence
53. Pursuant to DEPP 6.5B.4G, if the Authority considers the figure
arrived at after Step 3 is insufficient to deter the individual who
committed the breach, or others, from committing further or similar
breaches, then the Authority may increase the penalty.
54. In the interests of credible deterrence it is appropriate to increase
the penalty because:
(a) Mr Jones failed to appreciate the possibility that the Firm was
being used to facilitate financial crime;
(b) he failed to take any steps to help prevent the Firm from being
used to commit mortgage fraud;
(c)
his conduct led high street lenders to offer mortgages to
customers on the basis of false and misleading information; and
(d) he acted dishonestly by subsequently altering the client files in
order to prevent the Authority from being made aware that the
Firm had been used for purposes connected with financial crime.
55. The Authority has applied a multiplier of 3 to the figure reached at
Step 2 and set the total penalty figure at Step 4 at £19,014.75.
Step 5 – settlement discount
56. Pursuant to DEPP 6.5B.5G, if the Authority and the individual on
whom a penalty is to be imposed agree the amount of the financial
penalty and other terms, DEPP 6.7 provides that the amount of the
financial penalty which might otherwise have been payable will be
reduced to reflect the stage at which the Authority and the individual
reached agreement.
57. Mr Jones has agreed to settle at an early stage of the investigation,
and is therefore entitled to a discount of 30%. This discount is
applied to the Step 4 figure.
58. The penalty figure after Step 5 is therefore £13,330, which we have
rounded down to £13,300.
59. The Authority therefore has imposed a total financial penalty of
£13,300 on Mr Jones for breaching Statements of Principle 6 and 1.
60. It is appropriate and proportionate in all the circumstances to make
an order prohibiting Mr Jones from performing any function in
relation to any regulated activity carried on by any authorised
person, exempt person or exempt professional firm because he is not
a fit and proper person in terms of competence and capability and
honesty and integrity.
61. Mr Jones has demonstrated a lack of competence and capability and
honesty and integrity. In the interests of consumer protection it is
appropriate to impose a prohibition order on Mr Jones in the terms
set out above.
PROCEDURAL MATTERS
Decision maker
62. The decision which gave rise to the obligation to give this Notice was
made by the Settlement Decision Makers.
63. This Final Notice is given under, and in accordance with, section 390
of the Act.
Manner of and time for Payment
64. The financial penalty must be paid in full by Mr Jones to the Authority
by no later than 13 May 2013, 14 days from the date of the Final
Notice.
If the financial penalty is not paid
65. If all, or any, of the financial penalty is outstanding on 13 May 2013,
the Authority may recover the outstanding amount as a debt owed
by Mr Jones and due to the Authority.
66. Sections 391(4), 391(6) and 391(7) of the Act apply to the
publication of information about the matter to which this notice
relates. Under those provisions, the Authority must publish such
information about the matter to which this notice relates as the
Authority considers appropriate. The information may be published
in such manner as the Authority considers appropriate. However,
the Authority may not publish information if such publication would,
in the opinion of the Authority, be unfair to you or prejudicial to the
interests of consumers or detrimental to the stability of the UK
financial system.
67. The Authority intends to publish such information about the matter to
which this Final Notice relates as it considers appropriate.
Authority contacts
68. For more information concerning this matter generally, contact Paul
Howick (direct line: 020 7066 7954 or email paul.howick@fca.org.uk)
at the Enforcement and Financial Crime Division of the Authority.
……………………………………………..
Enforcement and Financial Crime Division
ANNEX
STATUTORY PROVISIONS, REGULATORY GUIDANCE AND POLICY
Statutory provisions
1.
Section 1A(1) of the Act states that the body corporate previously
known as the Financial Services Authority is re-named as the
Financial Conduct Authority.
2.
The Authority’s operational objectives established in section 1(B) of
the Act include protecting and enhancing the integrity of the UK
financial system and the protection of consumers.
3.
Section 56 of the Act provides that the Authority may make a
prohibition order prohibiting an individual from performing a specified
function.
4.
Section 66 of the Act provides that the Authority may take action to
impose a penalty on an individual of such amount as it considers
appropriate where it appears to the Authority that the individual is
guilty of misconduct and it is satisfied that it is appropriate in all the
circumstances to take action. Misconduct includes failure, while an
approved person, to comply with a statement of principle issued
under section 64 of the Act or to have been knowingly concerned in a
contravention by the relevant authorised person of a requirement
imposed on that authorised person by or under the Act.
Handbook provisions
5.
In exercising its power to impose a financial penalty, the Authority
must have regard to relevant provisions in the Authority’s Handbook
of rules and guidance. The main provisions relevant to the action
specified above are set out below.
Statements of Principle and the Code of Practice for Approved
Persons
6.
The Statements of Principle set out the Statements of Principle as
they relate to approved persons and descriptions of conduct which, in
the opinion of the Authority, do not comply with a Statement of
Principle. It further describes factors which, in the opinion of the
Authority, are to be taken into account in determining whether or not
an approved person’s conduct complies with a Statement of Principle.
7.
Statement of Principle 3.1.3G states that when establishing
compliance with or a breach of a Statement of Principle, account will
be taken of the context in which a course of conduct was undertaken,
including the precise circumstances of the individual case, the
characteristics of the particular controlled function and the behaviour
to be expected in that function.
8.
Statement of Principle 3.1.4G provides that an approved person will
only be in breach of a Statement of Principle where he is personally
culpable, that is in a situation where his conduct was deliberate or
where his standard of conduct was below that which would be
reasonable in all the circumstances.
9.
Statement of Principle 3.1.6G provides that Statement of Principle
(and in particular the specific examples of behaviour which may be in
breach of a generic description of conduct in the code) is not
exhaustive of the kind of conduct that may contravene the
10. The Statements of Principle relevant to this matter are Statements of
Principle 6 and 1.
11. Statement of Principle 6 provides that an approved person
performing a significant influence function must exercise due skill,
care and diligence in managing the business of the firm for which he
is responsible in his controlled function.
12. Statement of Principle 1 provides that an approved person must act
with integrity in carrying out his controlled function. In the opinion of
the Authority an approved person would be in breach of Statement of
Principle 1 if he deliberately misleads (or attempts to mislead) the
Authority by act or omission.
The Fit and Proper Test for Approved Persons
Rules and guidance effective until 31 March 2013
13. FIT sets out and describes the criteria that are relevant in assessing
the continuing fitness and propriety of approved persons.
14. FIT 1.3.1G states that the Authority will have regard to a number of
factors when assessing the fitness and propriety of a person to
perform a particular controlled function. The most important
considerations will be the person’s:
(a) honesty, integrity and reputation;
(b) competence and capability; and
(c)
financial soundness.
15. FIT 2.2.1G states that in determining a person's competence and
capability, the Authority will have regard to all relevant matters
including but not limited to:
(a) whether the person satisfies the relevant Authority training and
competence requirements in relation to the controlled function
the person performs or is intended to perform;
(b) whether the person has demonstrated by experience and
training that the person is suitable, or will be suitable if
approved, to perform the controlled function; and
(c)
whether the person has adequate time to perform the controlled
function and meet the responsibilities associated with that
function.
16. FIT 2.1.1G states that in determining a person's honesty, integrity
and reputation, the Authority will have regard to matters including,
but not limited to, those set out in FIT 2.1.3G. This guidance
(a) whether the person has contravened any of the requirements
and standards of the regulatory system (FIT 2.1.3G(5)); and
(b) whether, in the past, the person has been candid and truthful in
all his dealings with any regulatory body and whether the
person demonstrates a readiness and willingness to comply with
the requirements and standards of the regulatory system and
with other legal, regulatory and professional requirements and
standards (FIT 2.1.3G (13)).
Rules and guidance effective from 1 April 2013
17. FIT sets out and describes the criteria that are relevant in assessing
the continuing fitness and propriety of approved persons.
18. FIT 1.3.1G states that the Authority will have regard to a number of
factors when assessing the fitness and propriety of a person to
perform a particular controlled function. The most important
considerations will be the person's:
(a) honesty, integrity and reputation;
(b) competence and capability; and
(c)
financial soundness.
19. FIT 1.3.2G states that in assessing fitness and propriety, the
Authority will also take account of the activities of the firm for which
the controlled function is or is to be performed, the permission held
by that firm and the markets within which it operates.
20. FIT 2.2.1G states that in determining a person's competence and
capability, the Authority will have regard to all relevant matters
including but not limited to:
(1) whether the person satisfies the relevant Authority training and
competence requirements in relation to the controlled function
the person performs or is intended to perform;
(2) whether the person has demonstrated by experience and
training that the person is suitable, or will be suitable if
approved, to perform the controlled function;
(3) whether the person has adequate time to perform the controlled
function and meet the responsibilities associated with that
function.
21. FIT 2.1.1G states that in determining a person's honesty, integrity
and reputation, the Authority will have regard to all relevant matters
including, but not limited to, those set out in FIT 2.1.3 G which may
have arisen either in the United Kingdom or elsewhere. The Authority
should be informed of these matters but will consider the
circumstances only where relevant to the requirements and
standards of the regulatory system. This guidance includes:
(a) whether the person has contravened any of the requirements
and standards of the regulatory system (FIT 2.1.3G(5)); and ;
(b) whether, in the past, the person has been candid and truthful in
all his dealings with any regulatory body and whether the
person demonstrates a readiness and willingness to comply with
the requirements and standards of the regulatory system and
with other legal, regulatory and professional requirements and
standards (FIT 2.1.3G(13)).
DEPP guidance since 6 March 2010
22. The Authority has had regard to the guidance on the imposition and
amount of penalties set out in Chapter 6 of the current version of
DEPP. All references to DEPP in this subsection of the Notice refer to
the current DEPP guidance.
23. DEPP 5.1.1G provides that a person subject to enforcement action
may agree to a financial penalty or other outcome rather than
contest formal action by the Authority. The fact that he does so will
not usually obviate the need for a statutory notice recording the
Authority’s decision to take that action. Where, however, the person
subject to enforcement action agrees not to contest the content of a
proposed statutory notice, the decision to give that statutory notice
will be taken by senior Authority staff. The decision will be taken
jointly by two members of the Authority’s senior management, one
of whom will be of at least director of division level (which may
include an acting director) and the other of whom will be of at least
head of department level. At least one of the Settlement Decision
Makers will not be from the Enforcement and Financial Crime
Division. The other settlement decision maker will usually be, but
need not be, from the Enforcement and Financial Crime Division.
Consistent with section 395(2) of the Act, a Settlement Decision
Maker will not have been directly involved in establishing the
evidence on which the decision is based.
24. DEPP 6.4.1G provides that the Authority will consider all the relevant
circumstances of the case when deciding whether to impose a
financial penalty.
25. DEPP 6.5B.1G sets out the five steps for calculating financial
penalties for individuals in non-market abuse cases.
Step 1 - disgorgement
26. The Authority will seek to deprive an individual of the financial
benefit derived directly from the breach (which may include the profit
made or loss avoided) where it is practicable to quantify this.
Step 2 – the seriousness of the breach
27. The Authority will determine a figure which will be based on a
percentage of an individual's "relevant income". "Relevant income"
will be the gross amount of all benefits received by the individual
from the employment in connection with which the breach occurred
(the "relevant employment"), and for the period of the breach.
28. This approach reflects the Authority's view that an individual receives
remuneration commensurate with his responsibilities, and so it is
reasonable to base the amount of penalty for failure to discharge his
duties properly on his remuneration. The Authority also believes that
the extent of the financial benefit earned by an individual is relevant
in terms of the size of the financial penalty necessary to act as a
credible deterrent. The Authority recognises that in some cases an
individual may be approved for only a small part of the work he
carries out on a day-to-day basis. However, in these circumstances
the Authority still considers it appropriate to base the relevant
income figure on all of the benefit that an individual gains from the
relevant employment, even if his employment is not totally related to
a controlled function.
29. Having determined the relevant income the Authority will then decide
on the percentage of that income which will form the basis of the
penalty. In making this determination the Authority will consider the
seriousness of the breach and choose a percentage between 0% and
30. In deciding which level is most appropriate to a case against an
individual, the Authority will take into account various factors which
will usually fall into the following four categories:
(a) factors relating to the impact of the breach;
(b) factors relating to the nature of the breach;
(c)
factors tending to show whether the breach was deliberate; and
(d) factors tending to show whether the breach was reckless.
31. Factors relating to the impact of a breach committed by an individual
include whether the breach had an adverse effect on markets and, if
so, how serious that effect was. This may include having regard to
whether the orderliness of, or confidence in, the markets in question
has been damaged or put at risk.
32. Factors relating to the nature of a breach by an individual include:
(a) the nature of the rules, requirements or provisions breached;
(b) the nature and extent of any financial crime facilitated,
occasioned or otherwise attributable to the breach;
(c)
the scope for any potential financial crime to be facilitated,
occasioned or otherwise occur as a result of the breach;
(d) whether the individual failed to act with integrity;
(e) whether the individual is an experienced industry professional;
(f) whether the individual held a senior position with the firm; and
(g) whether the individual took any steps to comply with Authority
rules, and the adequacy of those steps.
Step 3 – mitigating and aggravating factors
33. The Authority may increase or decrease the amount of the financial
penalty arrived at after Step 2, but not including any amount to be
disgorged as set out in Step 1, to take into account factors which
aggravate or mitigate the breach. Any such adjustments will be
made by way of a percentage adjustment to the figure determined at
Step 2.
Step 4 – adjustment for deterrence
34. If the Authority considers the figure arrived at after Step 3 is
insufficient to deter the individual who committed the breach, or
others, from committing further or similar breaches then the
Authority may increase the penalty. Circumstances where the
Authority may do this include:
(a) where the Authority considers the absolute value of the penalty
too small in relation to the breach to meet its objective of
credible deterrence;
(b) where previous Authority action in respect of similar breaches
has failed to improve industry standards;
(c)
where the Authority considers it is likely that similar breaches
will be committed by the individual or by other individuals in the
future; and
(d) where a penalty based on an individual's income may not act as
a deterrent, for example, if an individual has a small or zero
income but owns assets of high value.
Step 5 – settlement discount
35. The Authority and the individual on whom a penalty is to be imposed
may seek to agree the amount of any financial penalty and other
terms. In recognition of the benefits of such agreements, DEPP 6.7
provides that the amount of the financial penalty which might
otherwise have been payable will be reduced to reflect the stage at
which the Authority and the individual concerned reached an
agreement.
36. The Authority’s policy on exercising its enforcement power is set out
in EG, which came into effect on 28 August 2007.
37. The Authority’s approach to financial penalties and public censures is
set out in Chapter 7 of EG.
38. EG 7.3 states that the Authority has measures available to it where it
considers it is appropriate to take protective or remedial action.
39. The Authority’s approach to exercising its powers to make prohibition
orders is set out at Chapter 9 of EG.
40. EG 9.1 states that the Authority’s power under section 56 of the Act
to prohibit individuals who are not fit and proper from carrying out
controlled functions in relation to regulated activities helps the
Authority to work towards achieving its statutory objectives. The
Authority may exercise this power to make a prohibition order where
it considers that, to achieve any of those objectives, it is appropriate
either to prevent an individual from performing any functions in
relation to regulated activities, or to restrict the functions which he
may perform.
41. EG 9.3 states that in deciding whether to make a prohibition order
the Authority will consider all the relevant circumstances.
42. EG 9.4 sets out the general scope of the Authority’s power in this
respect. The Authority has the power to make a range of prohibition
orders depending on the circumstances of each case and the range of
regulated activities to which the individual’s lack of fitness and
propriety is relevant.
43. EG 9.9 provides that when deciding whether to make a prohibition
order against an approved person, the Authority will consider all the
relevant circumstances of the case. These may include, but are not
limited to whether, and to what extent, the approved person has
failed to comply with the Statement of Principle issued by the
Authority with respect to the conduct of approved persons.
44. EG 9.12 provides a number of examples of types of behaviour which
have previously resulted in the Authority deciding to issue a
prohibition order. The examples include providing false or misleading
information to the Authority (EG 9.12(1)).
45. EG 9.23 provides that in appropriate cases the Authority may take
other action against an individual in addition to making a prohibition
order, including the use of its power to impose a financial penalty.