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