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Breaches by unauthorised firms
The sanctions for breach of the general prohibition are very serious. There are four principal consequences:
- criminal liability;
- unenforceability of agreements;
- liability for compensation;
- action by the FSA or the government to obtain an injunction and restitution.
Criminal liability
Abreach of the general prohibition is punishable by up to two years’ imprisonment and an unlimited fine.
It is a defence to establish that the accused took all reasonable precautions and exercised all due diligence to avoid committing the offence. The burden of proof is on the accused.
Importantly, the most severe sanction, imprisonment, is available not only when individuals act in their own capacity but also when they act on behalf of (unauthorised) organisations. Further, mere negligence can give rise to criminal liability: there does not have to be an intention to break the law.
The relevant provisions are contained in section 400 of FSMA. By section 400(1), an officer of a body corporate is guilty of an offence committed by that body corporate if the offence was perpetrated with their consent or connivance, and attributable to any negligence on their part. ‘Officer’ is widely defined in section 400(5) to include ‘a director, member of the committee of management, chief executive, manager, secretary or other similar officer of the body’. Further, the same subsection extends the provisions to those who, while not formally appointed, purport to act in any such capacity. By section 400(5)(b), the provisions also extend to individual controllers.
There are similar provisions for partners of firms and for officers of unincorporated associations and members of their governing bodies.
In summary, where an officer (as defined) of a company permits a regulated activity to be carried out or a financial promotion to be made by their (unauthorised) company through negligence or lack of knowledge, they run the risk of a two-year prison sentence.
If a company breaches the general prohibition or financial promotion restriction, it will materially help its defence if it can show it sought proper professional advice as part of the process of ‘taking all reasonable precautions and exercising all due diligence’.
Unenforceable agreements and compensation
The second and third consequences of breaching the general prohibition or financial promotion restriction are that:
- any resulting agreement is unenforceable against the customer;
- the customer is entitled to:
– recover any money or other property paid or transferred by them under the agreement;
– receive compensation for any loss.
These are the provisions contained in sections 26–30 of FSMA. However, the court does have discretion in applying them. The test is whether enforcing the agreement would be ‘just and equitable’. If the court is satisfied that it is (given the circumstances of the case), it may allow the agreement to stand and the money/property that has been paid/transferred to be retained.
The following will be relevant factors in the ‘test’: whether the applicant (ie the person in breach) reasonably believed that they were not doing anything wrong; whether (in cases of breaches of the financial promotion restriction) the agreement was entered into as a consequence of the unlawful promotion.
These factors again highlight the importance of taking professional advice. If a company/individual accidentally breaches the general prohibition or financial promotion restriction they can avoid the worst consequences by proving that they took proper precautions. As well as being a defence against criminal prosecution, proof of such precautions may persuade the court that it is just and equitable for the agreement to be enforced.
Injunctions and restitution
The FSA and the government are entitled to seek injunctions to restrain future/anticipated contravention of the general prohibition or restriction on financial promotion. Similarly, application may be made by the FSA or the government for orders to repay profits wrongly accrued or losses or adverse effects suffered. The court applications will be made under section 380 (for injunctions) or section 382 (for restitution orders) of FSMA.
Breaches by authorised firms
Breach by authorised firms of the rules is not in itself a criminal offence. Nonetheless, the consequences can be serious. The main one is FSA discipline. The FSA’s principal disciplinary powers are:
- public statements and public censure under section 205 of FSMA;
- financial penalties under section 206;
- cancellation of permission for an authorised firm or withdrawal of approval from an individual.
The sanction chosen by the FSA will fit the nature and gravity of the offence. Afurther consequence is exposure to claims for damages. By section 150 of FSMA, a private person who suffers loss as a result of a contravention of an FSA rule has the right to sue for breach of statutory duty (subject to some limited exceptions). This right to damages is in addition to any other right in contract law or tort.
When is an authorised firm criminally liable under FSMA?
Section 397 makes it a criminal offence to make misleading statements. The offence is committed if both:
- a person makes a materially false or misleading or deceptive statement either knowingly or recklessly, or dishonestly conceals a material fact;
- the act or omission is for the purpose of inducing another person to enter into a relevant agreement (broadly, an agreement under FSMA). | 
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