While many people may have been tempted to take their foot off the pedal over the summer and enjoy the unusually good weather and the even more unusual sight of England performing creditably at a World Cup, the Tribunal was hard at work finalising and releasing its judgements in the cases of Hussein and Burns.

In both cases it was found that the FCA was time-barred from imposing a fine for some or all of the misconduct that was investigated, although this did not prevent Mr Hussein and Mr Burns from being prohibited. These cases serve as useful reminders that, while individuals and their advisers should be cognisant of the limitation rules and in rare circumstances the limitation rules can limit the action that the regulator can take, the limitation rules can never prevent the regulator from investigating an individual's historic conduct or withdrawing approval from or prohibiting an individual.

The limitation rules

The limitation rules only apply where the regulator is seeking to take action under section 63A FSMA (i.e. imposing a fine on an individual for performing a controlled function without approval) or section 66 FSMA (i.e. imposing a fine, suspension of approval, limitation of approval or public censure on an individual for being guilty of misconduct).

The limitation rules do not apply where the subject of the investigation is a firm or where the regulator is seeking to take action under section 56 FSMA (i.e. imposing a prohibition order on an individual for not being a fit and proper person to perform functions in relation to a regulated activity) or section 63 FSMA (i.e. withdrawing approval from an individual for no longer being fit and proper to perform the function to which its approval relates).

Where the limitation rules do apply, the regulator can only take action if it issues a Warning Notice within three or six years of the start of the limitation period (three years if the controlled function was performed without approval/the misconduct occurred prior to 25 July 2014 and six years if the controlled function was performed without approval/the misconduct occurred on or after 25 July 2014).

The start of the limitation period is the date on which the regulator knew, or had information from which it could reasonably be inferred, that the individual had performed the controlled function without approval/of the misconduct.

Why the limitation rules can never prevent the regulator from investigating an individual's historic conduct or taking certain action against an individual

The limitation rules can never prevent the regulator from investigating an individual's historic conduct or taking certain action against an individual as: (i) the regulator's power to appoint investigators is separate from its power to take action; and (ii) the limitation rules do not apply where the regulator is seeking to take action under section 56 FSMA and impose a prohibition order or section 63 FSMA and withdraw approval. Someone who has previously worked in the financial services industry can therefore never be sure that there will not be a Notice of Investigation waiting for them in the post one day.

Section 168 FSMA sets out when the regulator may appoint investigators to conduct an investigation on its behalf. It includes when there are circumstances suggesting that an individual may: (i) have performed a controlled function without approval; (ii) be guilty of misconduct; (iii) not be a fit and proper person to perform functions in relation to a regulated activity; or (iv) not be a fit and proper person to perform the function to which its approval relates.

The regulator's power to appoint investigators is not dependent on it being able to take action. Therefore, for example, if there are circumstances suggesting that an individual may have performed a controlled function without approval then the regulator has the power to appoint investigators even if the limitation rules mean that it could not take action under section 63A FSMA and impose a fine.

In practice, if it appears to the regulator that there are circumstances suggesting that an individual may have performed a controlled function without approval or be guilty of misconduct then it will probably also appear to the regulator that there are circumstances suggesting that an individual may not be a fit and proper person to perform functions in relation to a regulated activity and, if that person is currently approved, may not be a fit and proper person to perform the function to which its approval relates.

Therefore any argument that the regulator cannot investigate historic conduct because it is time-barred from taking action under sections 63A and 66 FSMA will be given short shrift. This is not only because the regulator's power to appoint investigators is not dependent on it being able to take action but also because the regulator will likely have cited in the Notice of Appointment of Investigators that it is also investigating because there are circumstances suggesting that it may be appropriate to take action under sections 56 and/or 63 FSMA.

From a policy perspective, this makes sense. As the regulator does not know at the start of an investigation what will be discovered, while it may be appropriate for the limitation rules to limit the action that a regulator can take, it is not in the public interest for the limitation rules to prevent the regulator from investigating.

As Mr Hussein and Mr Burns are painfully aware, even though the limitation rules may mean that the regulator cannot take action under sections 63A or 66 FSMA in relation to particular historic conduct, this does not prevent the regulator from considering that historic conduct as part of its investigation into and determination of whether an individual is a fit and proper person.

Consistent with the fact that prohibition orders and withdrawals of approval are designed to protect the public from future harm rather than to punish past behaviour, the limitation rules can never prevent the regulator from imposing these sanctions.

Why the limitation rules are unlikely to limit the action that the regulator can take

Although the limitation rules can limit the action that the regulator can take (i.e. prevent it from taking action under sections 63A or 66 FSMA), in practice, they are unlikely to unless the regulator has made a significant error. This is because of: (i) the trigger for the start of the limitation period being the date on which the regulator knew, or had information from which it could reasonably be inferred, that the individual had performed the controlled function without approval/of the misconduct; (ii) the absence of any long-stop provision in the limitation rules; and (iii) the length of the limitation period. 

The fact that the date of the conduct is not the trigger for the start of the limitation period and the absence of a long-stop means that, regardless of how long ago the conduct took place, the limitation rules will only prevent the regulator from taking action under sections 63A and 66 FSMA if the length of the limitation period is greater than the time between: (i) the date on which the regulator knew, or had information from which it could reasonably be inferred, that the individual had performed the controlled function without approval/of the misconduct; and (ii) the issuance of the Warning Notice.

This results in a regime that is not as severe as that for criminal issues (where action can never be time-barred) but also contrasts with that for civil claims (where, although there is no uniform approach, the limitation period will often begin when the conduct took place and there may also be a long-stop).

Even allowing for the glacial pace that regulatory investigations have been known to move at, the limitation period provides plenty of time for an investigation to be conducted and a Warning Notice to be issued. This is proper; the limitation regime should not be something designed to catch the regulator out. However, it does mean that the limitation rules are only likely to limit the regulator's ability to take action if the regulator makes a significant error and either takes a long time to appreciate the importance of the information that it holds or decides not to investigate conduct and then later changes its mind. With the extension of the limitation period to six years, the mistake will have to be even more severe going forward.

Why individuals and their advisers should be cognisant of the limitation rules

Although the limitation rules can never prevent the regulator from investigating an individual's historic conduct and are unlikely to prevent the regulator from taking any action, it is still important that individuals and their advisers are cognisant of them.

Every so often there will be occasions where the regulator has made a sufficiently significant error that by the time that it issues a Warning Notice and proposes to take action under sections 63A or 66 FSMA it is time-barred from doing so. Hussein and Burns not only demonstrate this but also demonstrate the importance of individuals and their advisers knowing the limitation rules and being prepared to challenge the regulator in relation to them. In both cases the regulator failed to recognise as early as it should have done that it was time-barred from taking some or all of the action that it was proposing to take. It was only because the regulator was tenaciously challenged about whether or not it was time-barred from imposing the fines that it was proposing that it eventually conceded the point.

FOR QUESTIONS OR MORE INFORMATION, PLEASE CONTACT:

Ian Weinstein

P: +44.207.851.6176

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