“It is essential that our enforcement decision making processes command public confidence and operate both efficiently and fairly. The changes set out in the PS are designed to achieve just that and reflect the views of stakeholders who responded to our consultation.” Mark Steward, Director of Enforcement and Market Oversight at the FCA

Background

On 18 December 2014, HM Treasury (HMT) published its ‘Review of enforcement decision making at the financial services regulators’ (hereinafter referred to as ‘the HMT Review’ or ‘the Review’) The report focussed on the transparency, fairness, effectiveness and speed of the FCA’s and the PRA’s enforcement decision-making processes.

On 19 November 2015, the PRA and the FCA published Andrew Green QC’s Report into the FSA’s enforcement actions following the failure of HBOS (‘the Green Report’).

Whilst the HMT Review acknowledged that both regulators had delivered “strong enforcement action” it nevertheless made some recommendations to improve the existing decision-making processes and arrangements at the PRA and FCA covering the following:

  • Referral decision-making
  • cooperation between regulators and ongoing dialogue during investigations, and
  • informing the subject of an investigation about the matters under investigation.

As a direct result of these recommendations, in April 2016, a joint Consultation Paper (CP) was issued which also included proposed changes to the FCA’s Decision Procedure and Penalties Manual and Enforcement Guide.

Following receipt of responses to the CP on the 1 February 2017, the FCA and the PRA published their Policy Statement on ‘The Implementation of the Enforcement Review and the Green Report’ (referred to as PS17 / 1 and PS2 / 17 by the FCA and PRA respectively). They also published the final amendments to the FCA’s Glossary, the Decision Procedure and Penalties manual and the Enforcement. Access the full Policy Statement here.

The PS highlights areas for change in the enforcement referral and investigation processes at both the PRA and FCA and whilst some of this remains work in progress, the steps taken will nevertheless support a more transparent approach thus addressing the recommendations from the Green report.

FCA and PRA responses:

Referral decision-making process

The Green Report recommended that prior to regulators deciding which firms or individuals to refer investigation, they should consider whether the regulatory response is appropriate and proportionate under the circumstances.

Notwithstanding the above, both the PRA and FCA emphasised the importance of maintaining an element of discretion when submitting the Enforcement Referral Document (ERD). The FCA noted the introduction of a new table within the ERD to allow for commentary on potential subjects, including the rationale as to why a firm, or individual is not being referred to enforcement for investigation. Furthermore, the FCA will be consulting on the provision of a set of guiding principles which ultimately will determine the strategic choices made by the FCA.

The PRA has committed to publishing its’ own guide in relation to its enforcement process, and the internal referral arrangements, as part of its ongoing plans to implement the HMT Review’s recommendations during 2017. Whilst this is progress, it remains to be seen how this will come to fruition until both the FCA and PRA provide the additional clarity on their processes.

Co-operation between regulators and ongoing dialogue during investigations

Whilst there is an existing Memorandum of Understanding in place between the PRA and FCA allowing both regulators to share information the Green report highlighted there is still some work to be done to improve the transparency and effectiveness of such communications. In this regard the report recommended that quarterly meetings are held between regulators to discuss ongoing investigations, which has broadly been accepted. This will allow for ongoing review of the scope and as such allow the subject of the investigation the opportunity to make representations in the event of any scope changes. Both the PRA and FCA have stated that following further experience of joint investigations, they will publish guidance on their joint approach.

Informing the subject of an investigation about the matters under investigation

As noted above, one of the recommendations was to enhance the subjects’ understanding about the matters under investigation. The FCA has responded to the recommendation by committing to provide the relevant extracts from its internal documentation, the ERD. The PRA has also acknowledged this requirement and will seek to ensure that the subject of an investigation is provided with more information about the investigation, for example setting out information on potential breaches and how they have occurred.

The HMT Review recommended that a scoping meeting should ideally be held with the subject as soon as investigators are able share their plans and timetable for the investigation with the subject. Whilst agreed in principle, the regulators did nevertheless highlight a need for flexibility. They also acknowledged that the involvement of the supervision department in sharing information could assist the process and help to clarify enforcement and supervisions role during investigations. Investigators will also provide periodic updates to subjects about the progress of investigations and the format and frequency of these updates will be flexible depending on the nature and stage of the investigation.

Settlement arrangements (FCA only)

The FCA no longer intends to apply discounts for early settlement at stages two and three of the enforcement process. The impact of this change means that a discount of up to 30% will only be an option for firms to negotiate at stage one of the enforcement process.

Regulatory Decisions Committee (RDC)

The FCA have introduced the ability to partly contest a case on a “penalty only” basis in front of the Regulatory Decisions Committee (RDC).

Regulatory change

The revised settlement arrangements and RDC changes noted above, came into effect on 1 March 2017. However, as mentioned above, there is still further work / consultation to be undertaken by the FCA and PRA.

What should individuals or firms be doing?

Individuals, or firms who are subject to an investigation should familiarise themselves with the changes to the settlement process and revised RDC arrangements. They should also consider how they might respond to an investigation during the early stages, particularly when presented with the scope, rationale and implied breaches. Being better informed by the regulator could therefore fundamentally shape how individuals, or firms can potentially respond and demonstrate compliance with the matters under investigation.

For further information please contact Gary Dixon.