FCA issues reminder to firms on handling of information

In its latest ‘Market Watch’ newsletter (6 page / 161KB PDF) focusing on market conduct and transaction reporting issues, the FCA said it wanted to avoid the inappropriate dissemination of knowledge of its enquiries, which it said can tip off potential subjects and lead to evidence being destroyed.

The FCA said if compliance teams needed to work with other departments to collect information they should first discuss this with the regulator, which would then recommend the next steps.

In an anonymised case study, the FCA described a situation where an employee of an advisory firm who was subject to a criminal insider dealing case was tipped off. The firm’s compliance team contacted its deal team to help collate information, and without reference to the FCA or to internal legal advice the relevant deal team manager then questioned the individual, tipping them off, and prompting them to resign and leave the country.

The FCA indicated that although the tipping off was unintentional, it nevertheless hindered the regulator's ability to investigate. It said that firms should “be aware that if you do not follow the confidentiality requirements of our requests you run the risk of regulatory scrutiny or action, and the reputational damage that this may cause. You should also be aware that if you inadvertently facilitate tipping off to the fact of our investigation you may also hinder our shared objective of enhancing market integrity.”

Financial regulation expert David Hamilton of Pinsent Masons, the law firm behind Out-Law, said the FCA had sent a timely reminder to firms to handle information requests appropriately, maintaining confidentiality and avoiding any action that could potentially undermine the authority’s enquiries.

“The message is clear: even inadvertent disclosures can have significant consequences. The case study demonstrates the importance of having clearly articulated policies and procedures for dealing with regulatory – and, by extension, any law enforcement – enquiries, including confidentiality protocols, well-defined reporting lines and delegated authorities for reviewing and compiling material responsive to information requests. These must be communicated to, and understood by, staff across front, middle and back offices,” Hamilton said.

The Market Watch newsletter also reminded firms that material that could be subject to legal professional privilege should not be included in suspicious transaction and order reports or market observations submitted to the FCA. Firms which included privileged information in such reports ran the risk of losing any claims to legal privilege.

The regulator said any privileged material submitted could become disclosable by the FCA in the event of enforcement action being taken. It said direct extracts or quotes from privileged documents should also not be included, although where relevant to the narrative of the notification, the presence of such material should be disclosed to the FCA.

Hamilton said it was unclear why some firms had attached material subject to legal professional privilege to suspicious transaction reports.

“Reading between the lines, it may have been intended to improve the quality of the suspicious transaction and order report, providing the FCA with legal analyses to substantiate the firms’ suspicions. As the FCA notes, however, disclosure of privileged material does create significant risks,” Hamilton said.

Hamilton said the warning covered both legal advice privilege and litigation privilege: the former applying to confidential communications between lawyers and clients for the primary purpose of giving and obtaining legal advice; and the latter to confidential communications between lawyers or clients and any third party for the dominant purpose of obtaining legal advice in the conduct of existing or reasonably contemplated adversarial litigation.

“Such material cannot generally be compelled to be disclosed, enabling clients to deal candidly with their legal advisers and obtain advice without fear of their communications being disclosed,” Hamilton said.

“Voluntary disclosures of privileged material must therefore be treated with extreme care, and only after legal advice is obtained. The FCA makes clear that disclosure could amount to a general waiver of legal professional privilege in the material,” Hamilton said.

“This could be unfavourable to the disclosing party if, for example, the FCA were subsequently to use the material in an enforcement action against it. Chapter 3 of the FCA’s Enforcement Guide expressly states that the regulator will not accept any condition or stipulation which would purport to restrict its ability to use any information it receives in exercise of its statutory functions,” Hamilton said.

“Even if the material is used against another person, the FCA may need to disclose it to the subject and they may claim collateral waiver against a broader set of materials. This is not to say that disclosure is necessarily inappropriate in all cases, but the circumstances must be considered carefully and the risks weighed,” Hamilton said.