Your IndustryMar 19 2013

FSA offers small firms get-out from name and shame rules

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The Financial Services Authority has offered a potential reprieve for small firms such as smaller adviser firms from new rules allowing the regulator to name and shame earlier during enforcement proceedings, if they can prove clients would jump ship to a competitor.

In a consultation paper on the new powers, which will be afforded to the incoming conduct regulator the Financial Conduct Authority, the regulator says its default position is that it will “normally” publish statements on warning notices.

The FSA states it will not acquiesce to a request not to publish on the basis of potential reputational damage - “given this is an inevitable consequence of publication”.

However, it does say there are situations where it would decide against publication, for example where an individual who is the subject of enforcement proceedings can prove a medical condition that would be exacerbated by the stress and publicity a notice would cause.

Another key reason for not publishing a notice would be where a firm can prove that doing so would damage their business to the extent that there is a risk of bankruptcy or insolvency, especially if the notice relates to a smaller firm.

In particular the FSA uses the example of a small IFA firm, which could show a real danger of clients defecting to rivals if it suffered adverse publicity from a warning notice.

The FSA says: “We have issued a warning notice to a small IFA for failing to put in place adequate systems and controls over its sales process in respect of high risk investment products.

“The firm claims that if details of the warning notice are published, many of its existing customers will take their business to competitor firms and it will have difficulty attracting new business if there is adverse coverage of the firm in the media.

“This would lead to staff redundancies. The IFA is also able to produce some evidence to show that the reduction in business is likely to reach a certain level, at which point the firm will become insolvent.”

A final reason for not publishing a warning notice would be if it could be proved that doing so would be “detrimental to the stability of the UK financial system”, the regulator adds.

The FSA states that the publication of warning notices will take the form of a statement and will give details on what action is being considered, for example “proposing to prohibit an individual as well as fine them”.

However, it will not publish details of levels of fines as this “will lead to speculation or comment about the seriousness of the failings which, without context, may be seen to be unfair”.