Marching to the crack of the FSA’s whip

The Financial Services Authority recently took the unusual step recently of prosecuting a property fund for breach of the FSA rules on change of control.

Currently, where there is to be a change in the control of a firm regulated by the FSA, approval must be sought from the FSA prior to the change taking place. This, as a rule, makes perfect sense. The integrity of the financial markets relies on the integrity of those who operate in them. In order for the FSA to fulfil its statutory objectives, it must be kept informed as to changes in the control of a regulated entity and have the opportunity to approve or disapprove the changes. The FSA should be expected to scrutinise closely the companies that it regulates and those who sit behind them.

The seriousness with which the FSA views this issue is reflected in the potential punishment. Failure to obtain approval is a criminal offence which the FSA can prosecute against either a corporate entity or an individual taking a controlling interest. Up until March 2009 consequential fines were limited to £5,000. Since then, the rules have changed and offences committed after March 2009 are vulnerable to an unlimited fine.

The change of control process is relatively straightforward. Usually, the best way to handle any potential change is to instigate dialogue with the FSA from an early stage. The benefit of this is that any concerns that the FSA may have can be handled proactively in order that the eventual application for approval goes through as smoothly as possible. There are of course circumstances when the change in control needs to happen urgently and, in these instances, it is even more important to stay in touch with the relevant FSA team.  

In this particular instance, the prosecution was against Semperian PPP Investment Partners and William Doughty, its Chief Executive together with two other Semperian entities. Semperian had notified the FSA in mid December 2008 that it proposed to acquire an FSA regulated subsidiary from Telereal, an investment and property services company. However, it failed to wait for FSA approval before completing the deal three weeks later. The FSA granted its approval retrospectively.  

Despite this, the FSA decided to prosecute. The FSA’s rationale was that Semperian was putting its commercial interests before its regulatory responsibilities. Its view was that this was a serious offence.  

In the end, the FSA dropped its prosecution against two of the subsidiary entities and also against William Doughty. However, Semperian was fined £1,000 after pleading guilty to breaching the rules.  

The only other prosecution that the FSA has brought for breach of control rules was against an individual who was a sole director of a mortgage broker. That individual was fined £3,000 for acquiring a controlling interest in a regulated firm without giving the FSA prior notice. He was then fined a further £3,000 for making false and misleading statements to the FSA and ordered to make a contribution towards the FSA’s costs. That situation is arguably distinguishable from Semperian’s. Unlike that individual, Semperian was not avoiding seeking approval from the FSA. Rather, it pushed the completion through without
the FSA’s sign off.

In all the circumstances this appears to be a heavy handed approach by the FSA. Whilst the change of control rules are clearly important and compliance with regulatory rules should be paramount, there are times when commercial decisions need to be made.  Whilst commercial interest should not override the rules, the FSA should save its considerable enforcement powers for circumstances that justify it.
  
Although the FSA’s message of ‘credible deterrence’ has its place, too much regulatory zeal might undermine its credibility.

Claire Carroll is senior associate and a specialist in FSA regulatory issues at international law firm, Eversheds LLP.