Changes to financial regulators’ enforcement decision-making processes
Following a process that has lasted for more than two years, the UK Financial Conduct Authority (FCA) and the UK Prudential Regulation Authority (PRA) have confirmed changes to their enforcement decision-making processes. These changes take the form of guidance, not formal rules.
We set out below the key changes announced by the regulators, some of which came into force on 31 January 2017, with the rest having taken effect on 1 March 2017. Accordingly, firms and individuals who are currently facing enforcement investigations may be impacted by the changes to the regulators’ enforcement decision-making processes. The practical impact that most of these changes will have will largely depend on how FCA and PRA enforcement teams implement them. As a result, things are not necessarily going to be clear cut for firms and individuals who find themselves under investigation by the FCA and/or the PRA.
Focused Resolution Agreements (effective 1 March 2017)
The FCA has adopted a more flexible approach to Focused Resolution Agreements (FRAs). Subjects of investigations may use FRAs to refer a subset of the FCA’s findings against them to the FCA’s Regulatory Decisions Committee (RDC). These findings may be the FCA’s proposed sanction, the FCA’s factual findings and/or the FCA’s characterisation of what breaches a firm or an individual has committed. If a subject enters into a FRA, the FCA has indicated that it is unlikely that it will exercise its discretion to publish a warning notice statement.
How FRAs are used will determine what, if any, early settlement discount will be available to the subject of an investigation:
- Those who use FRAs to challenge the FCA’s proposed sanction will still enjoy a 30% early settlement discount.
- Those who use FRAs to challenge the FCA’s characterisation of what breaches they have committed will enjoy an early settlement discount of between 15% to 30%.
- Things will be less certain for those who use FRAs to challenge the facts of a case, as they may enjoy an early settlement discount of 0% to 30%.
Whether a firm or an individual is eligible for a FRA is “entirely within the discretion of the settlement decision makers”. The FCA has offered no guidance as to what subjects can or should do in order to put themselves in the running for a FRA. Those thinking of taking advantage of FRAs will need to think carefully about how to best position themselves for this opportunity.
Early settlement discounts – all or nothing (effective 1 March 2017)
Although the industry pushed back quite hard on the FCA’s proposal to abolish Stage 2 (20%) and Stage 3 (10%) early settlement discounts, the FCA has pressed ahead with this proposal. As a result, if a firm or an individual does not settle an FCA enforcement investigation within Stage 1 or agree a FRA during Stage 1, they will not be eligible for any early settlement discount.
The FCA has, however, given some clarification as to when it may consider extending the usual 28-day period for Stage 1. Factors the FCA will take into account when deciding whether to extend Stage 1 include “the extent to which factors outside the firm’s or individual’s control will have a material impact on their ability to engage in settlement negotiations within the period set out in the stage 1 letter”.
Fast-track to the Upper Tribunal (effective 1 March 2017)
The FCA has followed through with its idea of introducing a “fast-track” to the Upper Tribunal. This new option will allow subjects of investigations to refer the FCA’s case against them straight to the Upper Tribunal, without having to go through the FCA’s usual settlement process.
Stage 1 settlement discussions (effective 1 March 2017)
The FCA has committed to the aim of giving subjects of investigations at least 28 days’ notice of the commencement of Stage 1.
Although HM Treasury had encouraged the FCA to provide the subject of an investigation with “the key legal and factual bases of [a] case” and “identify… the evidence [it] regard[s] as key” in advance of Stage 1, the FCA has instead said that it will identify the “key evidence on which its case relies at the commencement of stage 1”. If adhered to, this guidance may help to alleviate some of the challenges we have experienced on investigations where FCA enforcement teams have been reluctant to identify the key evidence their case relies on and, in some cases, declined to provide copies of that evidence to the extent it is not already available to the subject of an investigation.
Scoping meetings (effective 31 January 2017)
The FCA and the PRA will aim to hold scoping meetings once investigators “are in a position to share their indicative plans on the direction of the investigation and timetabling of key milestones based on the particular circumstances of the case”. As a result, we may find that scoping meetings are held slightly later in the enforcement timetable than has previously been the case. This approach will hopefully make scoping meetings a more helpful tool – for both subjects of investigations and the regulators.
Investigators will also be encouraged to hold at least quarterly update meetings with the subjects of their investigations. Although many enforcement teams already provide regular updates to subjects of investigations, this guidance will hopefully inject some discipline and consistency into this practice.
What will all this mean in practice?
The FCA and the PRA have retained a significant degree of flexibility in terms of how they apply their new guidance in practice. As a result, it is difficult to predict with certainty how the regulators’ new proposals will affect enforcement investigations. However, the regulators’ Policy Statement and guidance do provide subjects of investigations with more material with which to argue that the FCA and the PRA should take a more transparent approach to their enforcement decision-making processes.
The FCA’s adoption of FRAs is likely to result in a lot more cases (especially those against senior individuals, which the FCA has indicated are set to increase) being partly contested before the RDC. It is well known that the RDC is experiencing a heavy workload at the moment, so it is not clear how the RDC will handle these additional cases.
The PRA is due to publish further information about its enforcement processes later this year. The FCA is also due to launch a separate consultation on its penalties policy. The FCA has also indicated that it will undertake a more wide-ranging review of its Enforcement Guide.