FCA Principle 11: Speak now or forever hold your…Final Notice

So what should I be doing?

Principle 11 states that “a firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice”[2].

The FCA expects to be told about[3]:

1. any proposed restructuring, reorganisation or business expansion which could have a significant impact on the firm’s risk profile or resources (such as setting up a new firm/branch, providing services into a new territory, starting a new regulated activity, and/or materially changing outsourcing arrangements);
2. any significant failure in the firm’s systems or controls (including those reported to the firm by its auditor); and
3. any action which a firm proposes to take which would result in a material change in its capital adequacy or solvency.

This catches both domestic and overseas operations and the FCA expects firms to deal with fellow regulators in other jurisdictions, such as the SEC, AMF and BaFin, in the same open and cooperative spirit[4].

In terms of timings, the appropriate period of notice will depend on the event in question, though the FCA expects to be included in discussions sooner rather than later, and certainly before any internal or external commitments are made. Notifications may be given orally, but writing is better. The FCA will require written notification for more complex matters and those which require it to take action[5].

Whenever and however a firm chooses to comply with Principle 11, the bottom line is simple: it is the firm’s responsibility to ensure that matters are properly and clearly communicated to the FCA.

What should I not be doing?

Among larger financial institutions, the breaches of Principle 11 described in Final Notices tend to be more serious and/or sinister in character than merely drowning in paperwork typical of smaller firms or consumer credit providers.

Recent examples:

1. A £2.1m fine and 126-day restriction on activities were levied on Bank of Beirut (UK) Ltd. for giving false assurances that anti-money laundering inadequacies identified by the FCA had been resolved. Though the authorised persons at the firm were influenced by senior management to behave this way, the FCA expected higher standards from such individuals.
2. Milburn Insurance Co. Ltd. was fined £1,137,500 for being untruthful about the existence of certain correspondence which proved that it was operating beyond its authorisation. Information was revealed deliberately and selectively so as to imply that the offending operations were not in force.

Breach of Principle 11 is often accompanied by some other breach(es):

1. Sonali Bank (UK) Ltd. incurred a £3.25m fine and 168-day restriction on activities for breaches of Principles 3 (management and control) and 11. The Principle 11 breach saw Sonali take 7 weeks to notify the FCA that it knew a potential fraud may have occurred.
2. Threadneedle Asset Management was fined £6,038,504 for failing to describe accurately its trading practices after the FCA flagged up concerns, which, in turn, revealed breaches of Principle 3.
3. The Co-Operative Bank was publicly censured, predominately for giving misleading statements about its capital position in breach of the Listing Rules. Its breach of Principle 11, however, was for failing to notify the FCA about intended changes to two senior positions and the reasons behind those changes.
4. Deutsche Bank was fined £226.8m for multiple breaches of Principles 3, 5 (market conduct) and 11 in relation to manipulation and improper influence over IBOR submissions. Concerning Principle 11, it had been variously dishonest, reckless, inaccurate and late in its dealings with the FCA. Matters were made worse when the FCA discovered cultural shortcomings, inspired by senior management, which failed to place sufficient importance on the accuracy and completeness of communications with the FCA.

Though additional breaches undoubtedly increase the size of the penalty, it is difficult to discern a precise causal relationship between a breach of Principle 11 and the size of sanction imposed.

So what should I not be doing again?

Few recipients of FCA Final Notices are ignorant about their disclosure obligations under Principle 11. Rather, the issue seems to be the manner in which such information is (or is not) disclosed. Among financial institutions, sanctions are often imposed for providing – deliberately or otherwise – false, misleading, incomplete and/or late information; among consumer credit providers, they are for failing to respond adequately (or at all) to correspondence from the FCA.

Some general rules by which to abide:

1. Administrative competence: react, respond, be prompt and professional when dealing with the FCA.
2. Keep lines of communications with the FCA open and don’t delay.
3. Check and double-check the truth of all assurances and statements provided to the FCA, and triple-check any which relate to pillars of the financial system, such as IBOR, anti-money laundering rules, or fraud, even if the firm or its customers are innocent victims. Though the FCA will differentiate between recklessly inaccurate and dishonest disclosures, avoid both.
4. Senior management: cultivate in your staff a sense that it is important to comply with the FCA.
5. Authorised persons: don’t let senior management convince you that it is not important to comply with the FCA.
6. Despite the above, it seems that those obligations which can be overlooked are the seemingly insignificant ones: a change of contact details or key personnel. If in doubt, inform the FCA.
7. Remember that the FCA will give credit for timely and voluntary reporting as well as a discount of up to 30% of fines for early settlement of disciplinary proceedings.

[1] A discount on penalties can be obtained e.g. for reporting employee fraud https://www.fca.org.uk/publication/final-notices/seymour_pierce.pdf: para 2, especially 2.4(1)).

[2] https://www.fca.org.uk/about/principles-good-regulation.

[3] SUP 15.3.8: https://www.handbook.fca.org.uk/handbook/SUP/15/3.html.

[4] PRIN 3.3.1 and 3.4.5: https://www.handbook.fca.org.uk/handbook/PRIN/3/?view=chapter.

[5] SUP 15.3.9 to 15.3.10: see Footnote 3.