Independence essential if financial firms’ internal investigations are to succeed, says expert

Out-Law Analysis | 23 Nov 2015 | 4:39 pm | 3 min. read

FOCUS: The media is wrong to assume that financial firms effectively get to “mark their own homework” when they agree with the regulator to conduct an internal investigation at the point where enforcement action is imminent.

Jamie Symington, a director in wholesale, unauthorised business and intelligence enforcement at the Financial Conduct Authority (FCA), addressed the issue of internal investigations when he spoke at the annual regulatory conference held by Pinsent Masons, the law firm behind Out-Law.com, on 5 November. He said that one way in which firms could avoid problematic press coverage was to ensure the independence of any investigation, for example by inviting a third party firm to conduct the investigation.

As firms are increasingly subject to scrutiny by external auditors, regulators and the criminal authorities, they need to be ready to respond to all allegations and suspicions in a considered and proper way and address the issues raised. Internal investigations, when conducted properly, can be an effective and appropriate way to begin this process.

When to investigate

In his speech, Symington spoke of the dangers that can arise when firms choose to conduct their own investigations. He said that the misperception by the media that firms are essentially being allowed to “mark their own homework” had the potential to undermine public confidence in the role of the FCA as a regulator. Not only that, but this media commentary was particularly misplaced where the case required the expertise of the regulator, for example in cases of insider dealing and boiler room fraud.

So as not to entirely disenchant the audience, Symington also acknowledged the benefits that can come from a firm conducting its own investigation. Firms are best placed to examine what has happened when problems arise, can establish facts quickly and implement measures to remediate immediately, he said.

Symington went on to highlight some factors which firms should take into account when considering whether an internal investigation is necessary and appropriate.

Self reporting

What the FCA does not expect is a daily email listing every issue; something that Symington referred to as “defensive reporting”. Rather, firms should balance the seriousness of the issue against the urgency of notification. Symington took the opportunity to remind us of some of the hefty fines that the regulator has issued recently for a lack of openness – the golden key to the regulator’s heart.

Efficiency and speed

Symington highlighted the benefit of having a firm which has direct access to its own systems, and which can provide the regulator with the evidence that has been discovered for the regulator’s review, contributing to the most efficient investigation and a speedy outcome.

Independence

In Symington’s view, there could be no doubt that an important factor was the degree of independence the firm has when conducting the investigation. This could be achieved by instructing a third party to conduct it.

Early engagement with the FCA

Symington advised firms to engage with the FCA at an early stage if they were considering an internal investigation. This would allow them to discuss their plans, and to agree the ground rules with the regulator.

Transparency

Symington concluded his speech with a hot topic for the regulator: transparency. He urged firms to be open with their investigation and its outcome. He said that legal professional privilege was often an “unhelpful and unwelcome” barrier to transparency cited by firms. Some liked to “read aloud the output from investigations” rather than “commit material into document form”, which he described as “an absurd way to suggest that a public authority should operate”. Instead, firms should be open and willing to share the core product of their investigation with the FCA: the actual evidence.

A two-way street

While transparency by firms may well be considered a requirement, as set out in Principle 11 of the FCA’s Principles of Business, transparency from the regulator is also needed to encourage the industry to engage in the dialogue that the regulator seeks.

We do not consider asserting legal privilege to be a guise or an obstruction. There are many instances in which it is necessary to protect communications between a firm and its lawyers by asserting legal privilege, and the importance of this should not be underestimated. Any assumption by regulators or prosecutors that a refusal to waive privilege is a sign of a firm trying to hide matters or frustrate any external investigation is misplaced.

Symington and the FCA’s message was short and poignant: what is required is communication, trust and transparency, on the part of both firms and the regulator.

Michael Ruck is a financial enforcement expert at Pinsent Masons, the law firm behind Out-Law.com.