FCA and PRA publish proposals aimed at improving their enforcement decision-making processes

The consultation

On 14 April 2016, the FCA and PRA published a joint Consultation Paper on changes to the way they carry out their enforcement activities, with responses due last month. The proposals were made in response to a review by HM Treasury of enforcement decision making by the regulators and a report by Andrew Green QC into the FSA’s enforcement actions following the failure of HBOS (the Green Report). The two Reports suggested that changes could be made in the following areas:

  • pre-referral decision-making;
  • dialogue between enforcement and supervision arms of the regulators; and
  • keeping the subject of the investigation informed of the progress of the investigation.

The Consultation Paper proposes ways to achieve the changes suggested by the Reports and, additionally, proposes a framework to incentivise the settlement of partly contested cases. The salient proposals are highlighted here.

Referral decision-making

The Reports identified that there is a lack of clarity and transparency in the referral process between the supervisory and enforcement arms of the regulators. The Green Report suggested more stringent requirements in identifying potential subjects of investigation and recording the reasons relied upon in choosing whether or not to commence investigations into those firms or individuals. The FCA has already implemented this recommendation and the PRA will be publishing its enforcement referral framework later this year.

Subjects' understanding and representations during investigations

The PRA and the FCA also intend to implement the HMT Review’s recommendation of scoping meetings between investigators and subjects. These meetings would allow the subjects of investigations to have more information about their alleged misconduct and the timeline of the investigation, so that subjects have the opportunity to comment on the allegations and investigation plan. Additionally, the regulators are reviewing their policies towards early admissions and whether there should be a clearer incentive for early admissions, which will achieve the HMT Review’s recommendation to reduce the time within which enforcement action is concluded. The regulators intend to provide a list of non-exhaustive factors which they may consider when deciding whether to grant additional time to respond to a preliminary investigation report or warning notice. This will hopefully serve to increase the transparency of the regulators' decision-making processes in such instances.

Settlement

The FCA is proposing to curtail substantially the current settlement process from its current four stages. The streamlined process will be:

  • pre-Stage 1 preliminary meetings which the FCA will offer to explain its outline findings and allow the subject to identity any potential factual errors;
  • a period of 28 days, triggered by a notice from the FCA, during which a settlement with the FCA will benefit from a 30% discount off the full penalty (Stage 1); and
  • a post-Stage 1 period during which any settlement reached may benefit from a discretionary discount but will not attract the discounts in the current graduated discount scheme.

This proposal reflects the view outlined in the Consultation Paper that "cases either settle or do not, and that an extended graduated discount scheme may not optimise settlement prospects".

The Paper also proposes the new concept of a "focused resolution agreement". This would enable the subject of an investigation, who had conceded the facts of the allegation, to contest the penalty before the Regulatory Decisions Committee. A 30% discount for settlement would apply if the agreement was reached during Stage 1. According to Mark Steward, Director of Enforcement and Market Oversight at the FCA, this will allow subjects "to seek a hearing on penalty before independent decision-makers… without losing the credit for co-operation they might otherwise get if they accepted the penalty proposed by FCA staff". It is hoped that the proposal will increase the direct accessibility of regulatory decision-makers to firms and individuals, which is likely to give a far greater sense of fairness. In his speech delivered at the Thomson Reuters Annual Compliance & Risk Summit on 26 April 2016, Mr Steward also suggested that the FCA is considering the possibility of extending the use of such an agreement to a scenario where the facts of the allegation are only partially agreed and there is no agreement as to the penalty.

Contested decision-making

In its present form, the Decision Procedure and Penalties Manual requires those who receive a warning notice to make representations to the regulator’s decision-maker before the case can move to the Upper Tribunal. The FCA proposes to amend the Manual to enable a recipient of such a notice to proceed straight to the Upper Tribunal. Furthermore, the FCA will introduce a process that allows a subject to use the expedited route to the Upper Tribunal before any warning notice has been issued. This could significantly reduce the timeframe within which enforcement decisions are reached, in line with the recommendation of the HMT Review.

Comment

The proposals put forward in the Consultation Paper seem, on their face, to signal positive change but the extent to which they make a real impact will depend upon the spirit within which they are applied by the regulators, if adopted. Time will tell. As to further changes, the FCA and the PRA plan to propose changes in relation to penalties later in the year and a Consultation Paper on these will follow.