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Alan Hughes: Where the FCA is getting it wrong on enforcement

“At least one outcome of this review should be greater transparency about explaining why aspects might take a long time, while ensuring the process is fair and – if possible – for the regulator to be more decisive when circumstances call for it”


Chancellor George Osborne announced on 6 May that HM Treasury would be undertaking a review of the enforcement decision-making process of both the FCA and the PRA. 

This review will focus on whether their current enforcement processes strike an appropriate balance between fairness, transparency, speed and efficiency – part of the Government’s continuing drive to improve the accountability of firms and individuals in the financial services sector. The first stage is a call for evidence. Firms with strong views on the FCA’s enforcement processes should read and respond to this call for evidence. 

Early in the life of the new regulator, it is certainly encouraging to see the Government looking to consider the existing enforcement processes with a view to improving them. However, as is always the case, whether any real and effective change is achieved will be the key measure.

Current enforcement process

The FCA’s existing decision-making processes are set out in the Decision Procedure and Penalties Manual Sourcebook in the FCA’s handbook (DEPP) and its enforcement philosophy is “credible deterrence”. 

Potential cases for enforcement action are assessed against published referral criteria and the DEPP provides for decision- making to be split between the FCA’s executive management and the regulatory decisions committee.

Decisions to settle FCA enforcement actions are taken by the FCA and decisions to impose financial penalties (or other measures such as prohibition orders) are taken by the RDC, which will take written and oral representations prior to any penalty being imposed.

Following outcomes of the RDC, the firm or individual concerned may refer the matter to the Upper Tribunal. This is not an appeal – the tribunal considers the matter on its own merit and decides which action is best. 

This usually involves an oral hearing and can include the examination of witnesses and disclosure of information. Any judgments by the tribunal on points of law may be referred to the Court of Appeal.

Many firms will have strong views on the FCA’s enforcement processes and the scope of this review is wide enough to consider most such issues.

Based on our experience of the FCA’s enforcement processes, we have identified what we feel to be some of the key issues. 

Notwithstanding the decision-making structure outlined above, the FSA previously identified that many firms or individuals felt the regulator had already made a decision in principle before the investigation stage had begun.

Realistically, many of those who are the subject of enforcement action are likely to feel this way. However, for a regulator to be effective, it is as important to be seen to be fair and transparent as it is to be fair and transparent. 

As part of this review, it should therefore be carefully considered not just whether the current decision-making process is fair and not pre-determined but also if it is transparent enough and, if not, how transparency and communication can be improved.

When advising firms and individuals on these matters, our first piece of advice will often be to try to maintain an open and constructive dialogue with the FCA supervision and enforcement teams from day one. 

At some stage you will clearly have to make a decision about your approach to potential enforcement action – should you fight or settle  – but maintaining a dialogue with the FCA will make that process less painful and can result in significantly better outcomes as opposed to taking an aggressive and confrontational stance from day one.

An area where we have previously called for more transparency is over the interaction between decisions to take enforcement action against firms and individuals within those firms. The payment protection insurance misselling scandal is one such example. To us there does not appear to be a great deal of transparency when trying to understand why the senior management of an organisation which has been found guilty by the FCA of serious rule breaches escape personal enforcement action in some cases but not others. There does appear to be some inconsistency on this issue.

The speed of decision-making is another key area. Firms often consider the FCA firstly does not act quickly enough when warning signs are apparent and when it does, it then seems to take a long time to bring such matters to a conclusion. Again this is a difficult issue. 

The review will report to the Chancellor by autumn. We wait to see what themes emerge and if and how this leads to real change in future years.

Alan Hughes is a partner at Foot Anstey LLP 



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There are 13 comments at the moment, we would love to hear your opinion too.

  1. Frankly, the FCA doesn’t bother me too much. Where they ought to start is at the kangaroo court they call the FOS.

  2. Trevor Harrington 30th June 2014 at 5:11 pm


    I quote from your article :-
    “…. for a regulator to be effective, it is as important to be seen to be fair and transparent as it is to be fair and transparent”.

    When did that happen then?

    The only thing I have ever seen from this regulator, the FSA before them, and the PIA before that, (FIMBRA was slightly different), is their constant requests for consultation feed back from the IFA sector, only to completely ignore all the input that we give them, and a total disregard for our constant warnings that their latest piece of projected regulation simply will not achieve their aims.

    Indeed, as we sit here now, the IFA sector is not even represented on their “small firms committee” any longer, and more to the point they have now refused to have IFAs on it at all.

    I am afraid to say that most IFAs have long since arrived at the point where continually banging their heads against the regulatory brick wall, has indeed induced concussion and stupor, to the point where even the most vociferous of us have been stunned into silence.

    I have lost count of the number of times I have offered my 33 years service and exemplary experience in an unblemished IFA career, to the regulator, to which I have never even had a realistic invitation to have a conversation with them.

    When the regulator starts talking sensibly to a representative body of IFAs, then I would strongly suggest that they will find that they are pushing at an open door. Furthermore, they will also find that their subsequent regulation achieves exactly what they want to achieve, without the usual myriad of unintended consequences.

    Before you venture the point – The fact there is no obvious representative body of IFAs, is no excuse for the regulator themselves not forming one.

    It is just a question of whether they want to get their regulation right at the outset, or whether they wish to continue with their delusion that they know better than everyone else, notably those who have been in the profession for decades, and those who are as keen as they are to raise standards and increase professionalism to the benefit of the entire public at large in the UK.

  3. How often are individual intermediaries subjected to enforcement action? I would have thought this would be on a very small number of occasions and for very serious offences when the case.

  4. Julian Stevens 30th June 2014 at 7:25 pm

    Matthew ~ You are obviously an FCA stooge.

  5. I agree with Trevor H, no,surprise there.

    I used to reply to FSA consultations and try to make constructive suggestions, but the F-pack don’t want to talk to people at the coalface.

  6. Julian – Because I challenge your dogged belief that the regulator is out to destroy you?

  7. @ Matthew

    I don’t believe “skilled persons report’s” are recorded as enforcement action
    Therefore go ask all the IFA,s who have been forced to provide such (at huge personal expense) only to be reported back that hey everything is OK !!

    Then come back and tell us that the regulator is not an uneducated bully, & power mad QUANGO !!

    And before you come back and say well there must be something wrong for them to be concerned enough to demand such action, just stop to think ? why do so many of these come back as OK then ? and enforcement action is so low against IFA’s ?

    Out of interest do you know the regulators response to demanding a skilled persons report if you challenge it ? it is; do it !! or we issue a 166, if you don’t do that we will shut you down with enforcement either way you will have to pay !!!

  8. @DH
    You are correct, a skilled persons report is usually a precursor to, or part of, enforcement action but the two are mutually exclusive.

    A skilled person report is, by definition, required under S166 so they are one and the same.

    It might help to look at some statistics to put all this in perspective (all from the FCA website). For the year ended March 2013, there were 113 skilled person reports commissioned of which 20 related to investment. For the year ended March 2014 there were 52 skilled person reports of which 9 related to investment. So, that’s potentially 29 applying to IFAs over a two year period but almost certainly less as investment managers are in the same bucket.

    I would be interested in seeing the statistics showing numbers that subsequently come back as “hey everything is OK!!!”

  9. @ Grey area, I would wager that the majority of those related to banks and wealth management firms based on the activity of the regulator last year.

  10. @ Grey Area

    Without confusing the issue; I was ordered to have a skilled persons report done on 10 of my files ? or should I say ordered to have 10 files reviewed by a totally independent compliance company (at my expense) or if I don’t, I would slapped with a 166 (again at my expense) or enforcement and ultimately closure (which I would be billed for) !!

    On what grounds I asked ? because we cant determine if they are suitable or not !! these were not big or in my view not that complicated cases, but I suppose that’s just my opinion, however all came back suitable after a long and expensive review, with nothing but a “we agree with the reviewers finding” response from the then FSA !!! and a bloody big hole in my pocket !!

    So yes agree with your point we don’t see the statistics on this, as I would say this is “enforcement” by the regulator as we are being forced to justify ourselves for their lack of knowledge (in my opinion) but then my lack of tick boxing and minute file preparation was to blame ? but nothing that a bit of Q&A wouldn’t have sorted ? hey ho; and they wonder why regulatory & compliance costs have gone through the roof ?

  11. DH – a skilled persons report is a ‘s166’

  12. Ah is it ? Matthew !
    My understanding is a 166 is when they (the FCA) have one of their designated compliance companies do one, and a skilled persons report is if they instruct you to choose one and report their findings to the FCA. One and the same I know, but it irrelevant to a large degree.
    Either way; the point is they are not counted as enforcement which is (in my view) not entirely correct.

  13. Trevor Harrington 2nd July 2014 at 4:22 pm

    The issue is more financially led than you are portraying.

    In the beginning, when God created the regulator, we had a regulator who was charged (amongst other things) with reviewing Financial Advisers who were perhaps thought to be less than moral and fair in their advice to clients.

    This became expensive for the regulator, who was far too busy spending our regulatory fees on other things which they felt were more important. Some would say that these extra expenditure items at the regulator included pensions which no practitioner could reasonably afford, and art to adorn the walls of their offices, and indeed offices which were way beyond the budget of any business which retained a stupid desire for something as selfish as a reasonable profit.

    The solution for the regulator was obvious, and that was simply to send out the demand for a review, whilst instructing that some other business should actually do the review, and that the practitioner who was being charged … should pay for it.

    Ignoring the obvious concepts of conflicts of interest within the review company itself, I would have to say that, as a regulatory fee payer, it does feel a bit like paying for the same thing twice.

    Of course, none of this is relevant to a regulator who is currently not subject to Government decree, other than if the Government create new primary legislation.

    However, I would also have to say, particularly after the regulator’s misguided treatment of the Treasury Select Committee, that new primary legislation will indeed come in due course, and to steal an expression from the regulator’s own rather unpleasant vernacular, I would “be very frightened if I were you”. Certainly, if I was an employee at the regulator, I would not be confidently planning my early retirement on enhanced pension benefits any longer, especially if I was under age 55.

    So be it .. they have been warned

    I think the expression is “every dog has his day”, and I for one am looking forward to it, although I do fear that any replacement of the regulator, or additional Government law making, could well create a real “dogs breakfast” unless they receive realistic input from real practitioners … if you will forgive my melange of metaphors.

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