If the FSA has concerns about a firm or individual's conduct, we may give a 'private warning' rather than take formal enforcement action.

What is a 'private warning'?

There is no reference to private warnings in the legislation that set up the FSA, the Financial Services and Markets Act. But their meaning and effect is explained in the Enforcement Guide (see EG 7.10 – 7.17). This says that in certain cases, despite having concerns about the behaviour of a firm or approved person, we may decide that it is not appropriate to bring formal disciplinary action. Instead, we may consider it helpful to make a firm or person aware that it or they came close to being subject to formal disciplinary action.

Private warnings are primarily a tool of our Enforcement division, but they are also used by other parts of the FSA. They are, however, a more serious form of reprimand than would usually be made in the course of ongoing supervisory correspondence. A private warning requires that we identify and explain what troubles us about a firm’s conduct and/or procedures, and tells the subject of the warning that we have seriously considered formal disciplinary measures.

A private warning is not intended to be a determination by us on whether the recipient has breached our rules. But a warning, together with any comments we receive in response, will form part of the firm or approved person's compliance history. Our rules state that the warning may influence our decision on whether to start disciplinary action in relation to any future breaches (EG 7.15). But if we begin disciplinary action, we will not rely on the earlier warning when deciding whether the new possible breach has taken place. However, if a person has previously been told about the FSA's concerns in relation to an issue, either by means of a private warning or in supervisory correspondence, then this can be an aggravating factor for the level of penalty imposed in respect of a similar issue that is the subject of later FSA action.

How will firms know they are getting a private warning?

It will be obvious from the terms of any letter we write whether it is intended to constitute a private warning. In particular, a warning letter will describe itself as a private warning and will refer to the Enforcement Guide to explain the consequences of receiving it for the firm or person.

What is the procedure?

The decision to give a person a private warning will be taken by a senior member of staff in every case. Our normal practice is to notify in writing the person concerned that we have concerns about their conduct and feel it is necessary to give a private warning about it. The recipient will then have an opportunity to comment on our understanding of the circumstances giving rise to our concerns and whether a private warning is appropriate. We will carefully consider any response to our initial letter before we decide whether to give the private warning.

What circumstances could lead to a private warning?

The Enforcement Guide (EG) gives two examples of circumstances in which we will tend to give a private warning rather than take formal disciplinary action. These are:

  • if the matter of concern is 'minor in nature or degree'; or
  • the firm has taken 'full and immediate remedial action'.

But these examples are not intended to be exhaustive, and we will take into account all the circumstances in each case before deciding whether a private warning is appropriate.

Many of the criteria identified in the Decision Procedure and Penalties manual (DEPP 6.2.1) for determining whether we should take formal disciplinary action will also be relevant to a decision to give a private warning. For example, we will consider:

  • the loss - or risk of loss - caused to consumers or other market users;
  • the degree of cooperation shown by the firm or individual during an investigation; and
  • whether we have issued any guidance relating to the behaviour in question and, if so, the extent to which the person has sought to follow the guidance.

In each case, we will consider the likely impact of a private warning on the recipient and whether any risk that person poses to our regulatory objectives requires us to take more serious action.

Three examples of private warnings demonstrate the very different circumstances in which they may be used:

  • We issued a private warning to a small regulated firm because of concerns that it had breached Principle 11 (relations with regulators) of the Principles for Business. This was because the firm had been late in paying our fees and had made potentially misleading statements about when it was likely to pay them.
  • We issued a private warning to a listed company because of concerns that it had failed to notify us of changes to the number of shares held by a particular shareholder group as it should have done in line with the Listing Rules.
  • We issued a private warning to the compliance officer (an approved person) of an authorised firm because of the inadequacy of the firm's written compliance procedures, the compliance manual and the processes for ensuring that the firm would not be used to facilitate financial crime.