For those who are unfortunate enough to have captured the attention of the regulator’s Enforcement Division, it often comes as a cold, hard shock to realise that they are the subject of an investigation. At the outset, things can seem to move very quickly – although the truth is that the investigation itself will inevitably take a matter of months – if not years – to reach its conclusion. The initial paperwork served can be confusing and it is not always obvious as to what the investigation actually concerns.
With this in mind, this article aims to provide a basic understanding of the initial stages of the FCA investigation process and to answer some of the most common questions that arise.
How does an investigation begin?
Before an FCA investigation can formally begin, investigators must be appointed to conduct the investigation. For the purposes of this article, we will be focussing on s167 and 168 of [1]the Financial Services and Markets Act 2000 (FSMA), the two sections that are most often used by the FCA to appoint investigators. The section under which appointment is made is determined by the concerns the FCA wishes to investigate.
If no specific breach or contravention has been identified, but the regulator considers that there is a good reason to conduct a general investigation into the nature, conduct or state of a business, or into the ownership or control of an authorised person, the investigators will be appointed under s167.
If the investigation concerns a specific breach or contravention of a rule, principle or the fitness or propriety of an individual, then the investigators will be appointed by virtue of s168 (1) or (4) FSMA.
If the investigation concerns a significant matter (i.e., market abuse, insider dealing or making misleading statements), then the investigators will be appointed by virtue of s 168(2).
The section under which the investigators are appointed is key for two reasons. Firstly, it determines which of the FSMA investigatory powers are available to the investigators. Secondly, it determines whether the subject of the investigation is notified of the investigation.
What powers are available to the investigators?
One of the main areas of concern for investigation subjects is to understand what evidence the FCA will be able to collect. Aside from evidence which may be handed over on a voluntary basis, FSMA provides a number of statutory investigatory powers which can require persons to provide the investigators with information or documents and to attend an interview. These powers, found in sections 171-173 FSMA, are often referred to as “compelled powers”.
Investigations into general concerns
Under s171, compelled powers are provided to any investigator who is appointed under section 167. The powers are limited in scope and can only be imposed on the subject of the investigation or any person connected with the subject.
Investigations into specific breaches or fitness and propriety
Section 172 (investigations into specific breaches or fitness and propriety) governs the compelled powers that are available to investigators appointed under s168 (1) or (4). It has a much broader remit than the s171 power, as it allows compulsion of not only the subject of the investigation or any connected person, but also of a person who is neither the subject of the investigation nor connected with the subject by virtue of s172(2).
However, this power is restricted in that an ‘unconnected’ person can only be compelled under s172(2) if the documents or information are “necessary or expedient” for the purposes of the investigation.
Investigations into significant matters
Section 173 is the widest of the compelled powers. It permits for an investigator appointed under s168(2) to impose a compelled requirement on any person. Furthermore, it also allows the investigator to require any person to give “all assistance” to an investigation. There is no caveat that any requirement be “necessary or expedient” for the purpose of the investigation. It need only be relevant to the investigation.
Restrictions on FCA powers
It is important to remember that the FCA powers to require the production of documents or information under FSMA are restricted in respect of two classes of material: (i) protected items (as defined by s413 FSMA) and (ii) documents subject to banking confidentiality.
Protected items, which captures items defined as being subject to legal professional privilege can never be obtained by compulsion. The FCA can ask a person to waive privilege and to provide the documents or information on a voluntary basis, but they cannot compel their provision.
Banking confidentiality relates to items or information in respect of which a person owes an obligation of confidence by virtue of carrying on a banking business. It means that banks can only provide details relating to a customer’s account in limited circumstances. There is power under s175 to allow investigators to obtain information relatively simply if the bank itself is the subject of an investigation, or the person to whom the obligation of confidentiality is owed is the subject of the investigation. However, the process of obtaining the confidential records of a person not directly the subject of an investigation is somewhat harder for the FCA, although not impossible.
When will I be notified that I am a subject?
A person who is the subject of an FCA investigation is not always told that they are under investigation straight away. Often, and especially in criminal or market abuse investigations, the investigators will have been working on the case for a considerable time before they notify the subject that they are under investigation.
As noted above, the question as to whether a subject must be notified of the fact that they are under investigation is also determined by the section of FSMA under which the investigator was appointed.
Investigations into general concerns
If the appointment of investigators has been made under s167, then the subject must be given notice of the fact that they are under investigation. This is normally provided within one week of the Memorandum of Appointment being finalised. Notification is given by the FCA serving a Notice of Appointment of Investigators, as well as a copy of the Memorandum upon the subject.
Investigations into specific breaches or fitness and propriety
If the appointment is made under s168 (1) or (4), then the subject of the investigation must be given notice (in the manner described above), unless to do so would result in the investigation being frustrated in some way, e.g. documents would likely be destroyed if notice were to be served.
Investigations into significant matters
If the appointment is made as a result of s168(2), then there is no requirement to notify the subject, and indeed it is not normally given at the outset of the investigation. Once the subject becomes aware of the investigation through other means (i.e., following arrest), then formal notice will usually be given.
In cases where no notice is given at the outset, the first time that the subject will normally be made aware that they are under investigation is when the FCA require information from them personally, either through the provision of documents or a request for interview.
Whilst sometimes notification will be given a number of weeks before production of the information is required, on other occasions the subject will remain oblivious of the investigation until the FCA either arrives in person (to execute search warrants, for example) or shortly before they are compelled to attend the FCA to furnish information orally in an interview.
Investigation documents
As described above, the FCA will normally (eventually) notify the subject of the investigation by serving them with a copy of the Memorandum of Appointment of Investigators (‘the Memorandum’) and a Notice of the Appointment (‘the Notice’). This paperwork will contain the nature and reasons for commencing the investigation, as well as the names of the investigators who have been appointed.
If you receive notification that you are a subject of an investigation, the key information that you should look for is:
(a) the period which is the subject of the investigation;
(b) the reasons for the appointment (although these are generally extremely brief); and
(c) the specific breaches or offences that are under investigation.
Subjects should not be surprised at the brevity of the information contained on the face of the Memorandum and the Notice. This will have usually have been purposely limited by the FCA, who will be seeking to preserve as wide a scope of investigation as is possible.
What is a scoping matter?
Once a subject is aware of an investigation, the FCA will often suggest that an initial ‘scoping meeting’ takes place. The scoping meeting is extremely important as it provides an early opportunity for the subject to try and obtain more information as to the basis and concerns of the investigation.
Scoping meetings should be taken very seriously and legal advance always sought in advance. With proper legal assistance, the scoping meeting can provide a valuable opportunity to obtain some clarity and insight about the investigation. Without such advice and guidance, the scoping meeting often ends up a merely administrative procedure. While this is undoubtedly the preference for the FCA (who will want to give as little information as possible at the early stages), any intelligence that can be gleaned can assist the subject immeasurably in forward planning. Preparing for interviews and identifying areas where evidence that can provide the subject with support or assistance can be obtained.
Will I be told if the scope of my investigation changes?
Sometimes the scope or conduct of an investigation will change during its lifetime. Section 170 (9) requires the FCA to give notice of any such change if the investigation subject would OR could be significantly prejudiced by not being made aware. Obviously, if the subject is unaware that an investigation is being conducted, then there is no need for the FCA to advise the subject of any changes to their investigative approach.
Generally, where a notice of appointment of investigators has been served, then the FCA will give notice of any change of scope or conduct.
If you do find yourself the subject of an FCA enforcement investigation, the most important thing is to treat the matter seriously and seek legal advice as soon as possible. A lawyer can guide you through the maze of uncertainty that surrounds the process and will advise you on what to do to best ensure your chances of a positive outcome. After all, the result of an investigation can be a fine, suspension or ban from the industry, or a serious spell of imprisonment.
This article was originally published in Thomson Reuters Accelus.
