John Pottage V FSA and compliance obligations – The FSA will be ruing the day that it proposed a fine of £100,000 on John Pottage for his alleged failings when CEO of UBS in his capacity as both CF3 (Chief Executive) and CF8 (Apportionment and Oversight).

• Not only did the Tribunal not find Mr Pottage’s failure to institute a ‘systematic overhaul’ at an earlier date than when an internal review was initiated to be beyond the bounds of reasonableness,
• it positively agreed that the actions taken by Mr Pottage prior to July 2007 to deal with the operational and compliance issues as they arose were reasonable steps.

Repeatedly in the Decision reference is made to the fact that the Tribunal took into account that Mr Pottage was:-

• not a risk expert and
• nor was it his job to carry out the function of a risk expert.

Equally, the Tribunal said:

• “… if people who are specialists in compliance and risk control do not have material concerns about compliance monitoring and operational risk management,
• …….a CEO in Mr Pottage’s position and with his experience will more likely have no or insufficient information on which to base his own challenge or with which to make his own corroborative tests”.

The decision reinforces the view that directors and senior managers are not automatically liable for failures that take place in the areas for which they have functional responsibility.

The trigger for liability is the reasonableness of the conduct, and in such a case there will be a range of reasonable responses:

• if the conduct under examination falls within that range a disciplinary case will fail.
• It matters not that the conduct was not sufficient to achieve the regulatory or risk management objectives of the firm or FSA, nor that more could have been done.

Warning

Bear in mind the FSA’s Enforcement Guide states that taking action against individuals sends an important message about the FSA’s regulatory objectives and priorities and the FSA considers that such cases have important deterrent values.

Taking account of this matter the decision is based on current law, and not infrequently the state’s response to a decision which it is thought does not promote its objectives is to change the law. We now need to see whether changes in rules or indeed primary legislation are made so that the FSA and its successor bodies have a lower hurdle to overcome in order to make a director liable

http://www.tribunals.gov.uk/financeandtax/Documents/decisions/John_Pottage_v_FSA_decision.pdf