FSA imposes sanctions on senior management

FSA has recently published the third Final Notice in enforcement proceedings against three individuals, formerly of Credit Suisse First Boston International. FSA took action against the Chief Executive Officer, Head of Financial Control and Global Head of Compliance in connection with conduct designed deliberately to mislead the Japanese tax authority as to the nature and scope of the activities carried out on behalf of the Firm in Japan.

While none of the individuals concerned were "approved persons" within the post-N2 regime, FSA's action in these cases sends clear signals of its intention to pursue individuals implicated in misconduct. FSA's case focussed on breaches of the SFA Principles, which were then applicable. However, the terms in which FSA expressed its case are clearly suggestive of the FSA Principles for Approved Persons and the Code of Conduct, which now apply. It is therefore anticipated that FSA will take a similar policy line against individuals in cases brought under the new regime.

The specific grounds for action

The specific grounds upon which action was taken included:

Chief Executive Officer

• Failure to act with due, skill, care and diligence to detect, to prevent and to remedy misconduct by the Firm;
• Failure to organise and control the Firm's internal affairs in a responsible manner. In particular, he failed:

1. Properly to supervise and monitor the activities of staff to whom he had delegated relevant matters;
2. To ensure that warning signals of the Firm's misconduct were picked up, followed up and investigated;
3. To ensure that appropriate, swift and decisive action was taken to halt and/or prevent and/or remedy the Firm's misconduct.

Head of Financial Control

• The direct involvement of the Head of Financial Control in conduct designed deliberately to mislead an overseas authority over a significant period of time.
• As a manager of staff, he failed to prevent or stop the deliberate attempts by staff to mislead the Japanese authority and, on occasion, actively encouraged such attempts.

Head of Global Compliance

• Having received relevant information to the activities and deliberate concealment in Japan, he failed to take any adequate steps to:
• Enquire into the activities and procedures of the Tokyo branch;
• Satisfy himself that the branch's activities were conducted in accordance with the requirements of the overseas authority, or take modifying action if needed; and
• Ensure that any procedures designed to conceal the activities of the branch from the relevant authorities ceased.

The consequences

The Chief Executive Officer was fined £150,000.

The Head of Financial Control was determined no longer to be fit and proper to perform any function in relation to any regulated activity carried on by any authorised person.

The Head of Global Compliance was similarly determined no longer to be fit and proper to perform any compliance function in relation to any regulated activity carried on by any authorised person.

Learning the lessons

The FSA Principles for Individuals and the Code of Conduct directly address many of the individual actions involved in these cases. Taken together with the detailed arrangements set out in the Systems and Controls section of FSA's Handbook, FSA is clearly demonstrating the need for firms to implement a control environment for their operations.

Firms are expected to establish detailed systems to ensure that these types of management issues do not arise. Such systems may include:

• Documented management structures, job descriptions and reporting lines;
• Clear and documented division of responsibility for all the firm's activities;
• Procedures to ensure the appropriate supervision of staff throughout the organisation; and
• Escalation procedures so that any issues that do arise can be addressed and/or escalated to more senior management as required.

Finally, the clear message from the Credit Suisse cases is the global impact of FSA's standards. Management based in the UK cannot abdicate responsibility for activities conducted by overseas branches. While detailed requirements may apply only to UK activities, FSA expects the firm's systems and controls to address all the firm's activities to a greater or lesser extent, wherever they are conducted.

For further information, please contact Simon Morris at [email protected]