Prohibition: the ultimate regulatory sanction
Given the size of regulatory fines since the start of the financial crisis, most commentators have tended to focus on the staggering level of financial penalties imposed on banks and other financial institutions. However, in enforcement actions against individuals, the regulators also frequently look to impose an even more damaging sanction - a prohibition order. If you would like to learn more about how to manage your personal regulatory responsibilities, you can download a copy of our annual publication on key developments in Financial Regulation.
Over the past three years, the FCA has prohibited 76 individuals, considerably more than it fined during the same period. It is therefore important to understand how this regulatory ‘tool’ is applied in practice and the scope for challenging such decisions.
Both the FCA and the PRA can make a prohibition order if they consider an individual is not a “fit and proper” person to perform certain functions in relation to a regulated activity. The effect of such an order is to prohibit the person from performing either a specified function (e.g. MLRO or Compliance Oversight) or any function. Thus, whilst the scope varies from case to case, the power is a very broad one and can be exercised wherever it appears that an individual has ceased to meet the fitness and propriety threshold.
The limited scope for Upper Tribunal intervention
The Upper Tribunal has recently considered the nature of this power, and a number of important principles emerge from their decisions:
- A prohibition order is a “draconian penalty that affects the ability of a person to earn a living in the financial services sector”. It should therefore not be imposed lightly.
- In cases involving a lack of competence, the regulator must show that the lack of competence was to such a degree that it demonstrates that the individual is likely to represent a risk to the public in the future.
- It will be comparatively rare for a full prohibition to be imposed in one-off cases of failure to exercise due skill, care and diligence.
- It is open to an individual to seek to demonstrate to the Upper Tribunal that he has learnt any lessons from his failures and would not make the same mistakes were he to continue in such a role. In this regard, the individual is free to rely on evidence that was not before the Regulatory Decisions Committee. This might, for example, include evidence of training that he or she has received since the RDC made its decision. That said, the Tribunal will be more impressed if the individual underwent further training shortly after the misconduct came to light.
- When relying on having undergone further training, the individual will need to demonstrate that the training he received was focused on the specific skills required rather than just providing good general knowledge of the relevant areas. Detailed evidence will need to be adduced in order to satisfy the RDC or the Tribunal.
- Crucially, recent case law suggests that it is not open to the Upper Tribunal to make an overall finding of fitness and propriety: the Tribunal cannot substitute its opinion for that of the FCA or PRA. Parliament has decided that the regulators are best placed to form a view as to the precise nature of the supervisory action they should take and has limited the Tribunal's jurisdiction accordingly. (A prohibition order is technically a non-disciplinary sanction, whose purpose is to protect the public rather than punish the offender.)
- All that the Upper Tribunal can do is to decide whether the regulator's decision to impose a prohibition order was within the range of reasonable decisions open to it. The threshold that the regulator has to meet is therefore relatively low.
- By the same token, the Upper Tribunal does not have the power to limit the time period of a prohibition order. However, an individual can apply to lift the order if he can demonstrate, for example, that, through further experience of working in the industry, he has acquired the necessary capability to perform the relevant functions.
It therefore seems likely that the FCA and PRA will both continue to impose prohibition orders in cases where there is no finding of a lack of integrity, but merely a lack of competence. Whilst there have been a few successful challenges against the imposition of a prohibition order, unless the Upper Tribunal considers that the FCA or PRA acted irrationally or perversely, it is still for the regulator, rather than the independent Tribunal, to decide whether to impose a prohibition order.
Accordingly, it is vital that all relevant evidence is presented in full at the RDC meeting (or its PRA equivalent).
Individual Accountability in Financial Services: What you need to know in 2017
Download your copy of BLP's annual Financial Regulation publication and get access to over 20 practical articles on key topics including enforcement, the Senior Managers Regime (SMR), competition law, financial crime, data protection, FinTech and much more...