The FCA and PRA recently released a consultation paper on proposed changes to the FCA’s Decision Procedure and Penalties Manual, and its Enforcement Guide. The intention behind the changes is to increase transparency, fairness, effectiveness and the speed of the FCA’s and thePRA’s enforcement decision making processes. The paper consults on the recommendations arising out of (i) HM Treasury’s 2014 paper entitled “Review of enforcement decision-making at the financial services regulators“, and (ii) Andrew Green QC’s 2015 report on the FSA’s enforcement actions after the failure of HBOS.
The following points arising out of the paper are worthy of note:
- The paper contains a number of proposals which are clearly designed to promote early settlement of enforcement cases. For example, the FCA proposes to give those subject to an investigation (“subjects”) 28 days’ notice before the stage 1 settlement period commences. It also proposes to allow for without prejudice meetings during this period (referred to as “pre-stage 1 preliminary meetings”).
Perhaps the most significant development in this area, however, is the proposed abolition of the stage 2 and 3 settlement discounts (being discounts of 20% and 10% respectively). Under the new proposals, only cases which settle within stage 1 (or where the subject follows the process outlined in the next paragraph) will be eligible for a 30% early settlement discount, albeit the FCA does retain the discretion to apply later discounts in appropriate cases. The purpose of this proposal is to focus the minds of all parties on settlement at an early stage, but will create a difficult judgment call for subjects (and their advisors) in borderline cases, where stage 1 is drawing to a close and a mutually agreeable settlement has yet to be reached. ThePRA will consult separately on changes to its settlement process later this year.
- The FCA also proposes to create a new streamlined procedure for resolving cases where the subject accepts (i) all relevant facts, and (ii) all issues of whether those facts amount to a breach, and the only contested issue is the sanction. In such cases, the subject would enter into a “focused resolution agreement” with the FCA, and would be given the opportunity to make submissions on the appropriate penalty to the Regulatory Decisions Committee. Where such a focused resolution agreement is entered into in settlement stage 1, the FCA proposes to apply the same fixed 30% discount outlined above. It is worth noting, however, that under the procedure proposed in the paper, the FCA still has the power to publish a warning notice in respect of the subject, which may make this option less attractive.
- Increasing the transparency of the enforcement decision making process is a key driver behind many of the proposed changes, and is a thread that runs throughout the paper. For example, where a decision to refer to enforcement is made, the FCA now proposes to provide the individual being investigated with a succinct summary of (i) the potential breaches, (ii) the matters giving rise to those breaches, and (iii) an explanation of the criteria applied in reaching the decision to refer. Similarly, when the investigation is on foot, the FCA proposes to give periodic updates (on at least a quarterly basis) about the progress of the investigation to those being investigated. The above changes will no doubt be welcomed by those subject to regulatory investigations, who had previously complained about the “shutters [coming] down” during the investigation, and the unpredictability of the frequency of communications from theFCA.
- The paper explicitly notes that while the changes will be relevant to regulatory enforcement cases (such as disciplinary cases and regulatory market abuse investigations), they will be less relevant to criminal investigations and civil litigation brought by the regulators (such as criminal insider dealing cases and unauthorised business cases), which were not within the focus of the HM Treasury’s Review.
Responses to the consultation are due by 14 July 2016.