Out-Law Analysis 4 min. read

FCA enforcement proposals mean firms face changes to investigation procedures

UK financial firms should be ready to engage with changes to processes including internal investigation procedures as the Financial Conduct Authority (FCA) proposes a new approach to enforcement cases.

The FCA has recently published a consultation (91 pages / 992 KB) with a particular focus on increasing its ability to publicise investigations, as part of its strategy to achieve deterrence and tackle serious misconduct. The consultation was accompanied by a speech from Therese Chambers, the FCA’s joint executive director of enforcement and market oversight, highlighting the regulator's current priorities.

At present, the regulator’s approach to publicity is set out in chapter 6 of its Enforcement Guide (EG). The FCA will not normally make public the fact that it is or is not investigating a particular matter, or any of the findings or conclusions of an investigation. The regulator will only make this information public when there has been a formal finding leading to a statutory notice, or in “exceptional circumstances” where disclosure is necessary to maintain public confidence - such as where the matters under investigation have become the subject of public concern, speculation, or rumour.

What are the new FCA enforcement proposals?

The FCA’s proposals would create three categories of cases in relation to publicity. First, there will be cases where the FCA is likely to announce publicly that it has opened an enforcement investigation. This would include cases where the regulator believes disclosure could help the investigation, for example, by encouraging potential witnesses or whistleblowers to come forward, or address public concern or speculation, including by correcting information already in the public domain.

Secondly, there will be cases where the FCA is unlikely to make a public announcement. This would include investigations with a covert element, most cases against individuals, and cases conducted for overseas regulators.

The third and final category would include investigations where the FCA will consider an announcement on a case-by-case basis. This would include all other cases, as the public interest factors referred to above are not exhaustive.

By way of further detail, the FCA is proposing to include the identity of the subject of the investigation, the industry sector and regulatory or legal provisions to which the investigation relates, and a summary of the suspected breaches, failings, or other misconduct being investigated.

The publicity process would be an ongoing one, with the announcement normally stating that the opening of an investigation does not imply the regulator has reached a conclusion that there has been a breach, failing, or other misconduct. This applies unless there has been a previous public finding, such as the result of supervisory action. The FCA also proposes to publish updates on investigations and confirmations when investigations are closed without further action.

Importantly, the proposals would apply to existing investigations as well as new ones. Firms should also note that under the plans, the regulator is proposing to give the subject of the investigation “no more than one business day’s notice” of an announcement, with the power to publish without notice in urgent cases.

However, if an announcement or update is potentially market sensitive, the FCA says it would generally inform the subject of the proposed announcement or update after markets have closed, publishing on the regulator’s website at 7am and via an FCA-approved primary information provider.

Other FCA proposals concern reforms to the EG, including giving its directors of enforcement the power to authorise the commencement of civil and criminal proceedings. At present, only the FCA’s executive director of enforcement and market oversight may do this.

The proposals also set out to clarify that the FCA may refuse an interview subject the right to the attendance of a particular legal advisor where there are concerns that this may prejudice its investigation – for example, where a legal advisor has a conflict of interest or owes a duty of disclosure to another party including the interviewee’s employer.

Finally, the FCA may consider a firm’s willingness to volunteer the results of its own investigation, whether protected by legal privilege or otherwise, when deciding what action to take. The FCA may wish to discuss the commissioning and scope of an investigation report by the firm and may also expect to see the underlying materials supporting a report on the basis of a ‘limited waiver’ of privilege.

Implications and strategy of the enforcement proposals

The FCA’s consultation is a natural consequence of its more assertive and agile approach to regulation under Nikhil Rathi, the current CEO. The roots of this approach could be seen in the policy of previous executive director of enforcement and market oversight, Mark Steward.

The current indication is that the regulator will continue to open a large number of investigations. However, the importance of FCA tools for addressing harm to consumers and markets has also been highlighted, such as a more robust approach to refusing applications for authorisation and a greater willingness to seek variations or cancellations of permissions. The aim of this is to enable the regulator to produce a “streamlined portfolio of cases” with the greatest deterrent impact, while closing more enforcement cases and prioritising redress over financial penalties.

Firms should be ready to engage with the regulator about the content and timing of announcements about the opening, progress, and closure of investigations. The current proposal of giving firms one day’s notice before making an investigation announcement could have potentially devastating financial and reputational consequences. If it is adopted, firms would have to negotiate with FCA supervisors at an early stage about publicity where an investigation is likely or consider adopting their own proactive and reactive media strategies to maintain control over the timing and content of the narrative given to investors and the market.

However, firms can take comfort from the regulator’s acknowledgment of the value of internal investigation. The proposals suggest that firms willing to disclose investigatory reports and surrounding materials are less likely to enter the enforcement process. Equally, firms with robust proposals for redress and remediation are more likely to see investigations closed without a financial penalty being imposed.

The deadline for responding to the consultation is 16 April.

Co-written by Nicholas Kamlish of Pinsent Masons.

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