Down but not out - Relief for senior management as FSA loses test case

Relief for senior management as FSA loses test case, but Sants warns that corporate governance issues need to be "urgently addressed".

The FSA has failed to convince the Upper Tribunal that a senior UBS manager should be fined £100,000 for inadequate supervision.  John Pottage, former UK chief executive at UBS Wealth Management, was the first individual to be fined by the FSA for failing to control the conduct of others.  Mr Pottage was not accused of any personal wrongdoing but was targeted by the FSA for failing to undertake a "systematic overhaul" in respect of "serious flaws" in the governance and risk management framework at UBS Wealth Management.  

Between September 2006 and July 2007 there had been numerous compliance failures at UBS including unauthorised trading, misuse of money from at least 39 client accounts and a failure to pay withholding tax.   Mr Pottage was not accused of being involved in those activities. However, the FSA considered that he should have conducted a more thorough investigation and review of UBS's operations and compliance procedures when he became head of the division in 2006. 

Mr Pottage complained to the Upper Tribunal, arguing that he had done all that he could to stamp out inadequate compliance procedures.  While the Upper Tribunal was satisfied that there had been "serious flaws" in UBS's risk management system, it found that Mr Pottage had taken an active role in the firm's Risk Management Committee and "the FSA ha[d] not established its case that Mr Pottage had committed misconduct".  The fine was therefore overturned and the matter decided in favour of Mr Pottage, whom the Upper Tribunal considered had taken sufficient steps to improve UBS's internal compliance procedures and controls.  The FSA has confirmed that, in accordance with the Upper Tribunal's decision, it is discontinuing its action against Mr Pottage.

Comment

The decision will be a relief to executives in financial institutions; had the FSA succeeded in the Upper Tribunal, it would have had far reaching consequences for the responsibilities, risk (and, therefore indirectly, remuneration) of those carrying on oversight functions.  It would also inevitably have led to a greater amount of reporting and monitoring by individuals in that role.  Whilst no doubt this would be music to the FSA's ears, this would have led to a slow down in decision making and an increased atmosphere of paranoia at a senior management level.  It is also still unclear as to the precise standard the FSA considers needs to be met, which is itself unhelpful for both regulated and regulator.  

Whilst it is now licking its wounds, the FSA is unlikely to back down completely on this issue.  Indeed Hector Sants, Chief Executive of the FSA, stated yesterday that "ultimately firms fail because of the decisions taken by their boards".  He also said that many senior executives and non-executives in key positions lack the technical skills to manage the risks in their banks.   While Sants made it clear that the FSA will not interfere unduly, he stressed that the issue of corporate governance needed to be "urgently addressed". 

Many will have been following the Pottage saga with interest, thinking "it could have been me".  Whilst this round has been won by those at the coalface, this is likely to be a long running fight.  Inevitably, the FSA is likely to already be preparing the groundwork for its next attempted scalp even where the target has not personally been involved in any wrong doing.

Lawyers Laurence Lieberman