This article was co-authored by Ian Weinstein, Associate at Brown Rudnick.
It is now over five years since the FCA gained the ability to publish “warning notice statements” in order to publicise that a warning notice had been issued.
When the FCA first proposed its policy for publishing warning notice statements, it trumpeted the effect that they would have. The FCA stated that its ability to publish warning notice statements marked “a real departure from the previous regulatory regime” and was “a bold move towards more transparent and open regulation“. However, simultaneously, the FCA’s proposed policy raised genuine fears in the industry that warning notice statements would result in individuals and firms being named and shamed inappropriately early in the enforcement process.
By reference to the warning notice statements published in the five years since October 2013, this article examines:
- where warning notice statements sit in the broader enforcement process and the rules and policy relating to them;
- the breakdown by year, subject and topic of the warning notice statements published;
- what was (and was not) published and what this tells us about how the FCA deploys its power and exercises its discretion in practice;
- whether the FCA’s hopes and/or the industry’s fears have been realised; and
- what all this means in practice for individuals and firms who are under investigation.
Part 1: Where warning notice statements sit in the broader enforcement process and the rules and policy relating to them
The broader enforcement process
In general, the FCA does not publicise that it is carrying out an investigation. While there are exceptional circumstances when the FCA may publicise that an investigation is being carried out (e.g. to maintain public confidence or to protect consumers), the mere fact that an investigation is taking place will not justify the existence of the investigation being publicised.
Once the FCA investigation team has a sufficient understanding of the nature and gravity of the issue to make a reasonable assessment of the appropriate outcome, it may enter into settlement discussions with the investigation subject (“the Subject”). At this stage (“Stage 1“), while the Subject will have some idea of the material obtained by the FCA investigation team as part of its investigation and had some opportunity to make representations, it will not have had the opportunity to make representations with the benefit of having received full disclosure from the FCA.
Prior to 1 March 2017, the outcome of settlement negotiations at Stage 1 was binary; either a full settlement was reached, the text of a final notice was agreed and, if applicable, the sanction was discounted by 30%, or no settlement was reached and the investigation continued.
Things are no longer so clear-cut. Since 1 March 2017, it is now also possible to agree a focussed resolution agreement (“FRA”) where some, but not all, of the issues are agreed, and the size of any sanction discount is dependent upon the breadth of the FRA.
There are now 3 potential outcomes of settlement negotiations at Stage 1:
- No deal: where the Subject and the FCA investigation team cannot agree either a full settlement or a FRA, the investigation will continue and this may lead to the FCA investigation team recommending to the Regulatory Decision Committee (the “RDC“) (a FCA committee which is operationally independent from the Enforcement Division) that a warning notice is issued. If the RDC agrees, it will issue a warning notice setting out the action that the FCA proposes to take and why;
- Partial deal: if the Subject and the FCA investigation team agree a FRA, the FCA investigation team will recommend to the Settlement Decision Makers (the “SDMs“) (the members of the FCA’s senior management who are responsible for agreeing to the terms of the FRA) that they approve the FRA. If the SDMs agree, they will issue a warning notice. As part of the FRA, the Subject will undertake not to dispute the issues agreed; and
- Deal: if the Subject and the FCA investigation team agree a full settlement, the FCA investigation team will recommend to the SDMs that they approve the settlement. If the SDMs agree, they will issue a warning notice. As part of the settlement agreement, the Subject will agree not to contest the warning notice. In this scenario, the decision notice and final notice will usually also be issued the same day.
As well as recommending to the RDC/SDMs that a warning notice should be issued, the FCA investigation team may also recommend that a warning notice statement is issued. The RDC/SDMs will then decide whether to issue a warning notice statement and, if so, what information it should contain and whether it should identify the Subject. More detail on that is provided below.
When a warning notice is issued, and subject to the terms of any FRA or settlement agreement, the FCA is required to disclose to the Subject material on which it has relied or which, in the FCA’s opinion, might undermine the FCA’s case. The Subject then has the choice as to whether or not to make representations to the RDC (it is also able to fast-track its case straight to the Tribunal and skip the RDC stage).
The RDC will either dismiss the FCA investigation team’s case or, if it upholds the case (including in part), issue the Subject with a decision notice setting out the action that the FCA has decided to take and why.
The Subject is able to refer a decision notice issued by the RDC to the Tribunal.
The statutory power to publish warning notice statements
The power to publish warning notice statements was introduced by the Financial Services Act 2012, which amended section 391(1) of the Financial Services and Markets Act 2000 (“FSMA“) so as to provide that “[i]n the case of a warning notice falling within subsection (1ZB)…after consulting the persons to whom the notice is given or copied, the regulator giving the notice may publish such information about the matter to which the notice relates as it considers appropriate“. Section 391(1)(a) prohibits the FCA from publishing the warning notice itself.
Prior to this change, the earliest that the identity of the Subject could be made public was when the decision notice was published (or when the final notice was published if the decision notice was not referred to the Tribunal), in either case therefore, after the Subject has had the chance to make representations with the benefit of having received disclosure from the FCA). The exceptions to this are if the FCA had chosen to make the investigation itself public due to exceptional circumstances or if the Subject is a listed company and had needed to make the investigation public either because it was inside information or because it fell within the category of a material matter for the purpose of the Subject’s accounts. However, even if the investigation had been made public, this would not have indicated that the FCA was proposing to take action against the Subject.
Warning notices falling within section 391(1ZB) FSMA are essentially those proposing a disciplinary sanction. If the warning notice proposes a non-disciplinary sanction and therefore does not fall within section 391(1ZB) FSMA, neither the warning notice itself nor any details concerning it may be published.
The FCA’s power to publish warning notice statements is subject to section 391(6) FSMA which provides that the “FCA may not publish information under [section 391 FSMA] if, in its opinion, publication of the information would be-:
- unfair to the person with respect to whom the action was taken (or was proposed to be taken);
- prejudicial to the interests of consumers; or
- detrimental to the stability of the UK financial system.“
The power to publish warning notice statements in section 391(1) FSMA contrasts with that concerning the publication of decision and final notices in section 391(4) FSMA. Section 391(4) provides that the FCA “must publish such information about the matter to which [the decision or final notice] relates as it considers appropriate“. There is also no prohibition on the publication of the decision/final notice itself. In fact, the FCA invariably publishes the relevant notice when discharging its obligation under section 391(4) FSMA.
The difference in the statutory powers for publishing information about warning notices and decision and final notices (may versus must and whether or not the notice itself can be published) reflects the preliminary nature of a warning notice and the limited opportunity that the Subject has had to make representations.
Publication of information about a decision or final notices pursuant to section 391(4) is also subject to section 391(6) FSMA. However, it is extremely rare that a person to whom a decision or final notice is given (i.e. the Subject) or copied (i.e. a third party who the notice identifies and, in the opinion of the FCA, the notice is prejudicial to) successfully argues that the FCA may not publish certain information about a decision or final notice due to section 391(6).
The FCA’s policy for issuing warning notice statements
In March 2013 the FCA issued a Consultation Paper (CP13/8) which set out its proposals on how it should use its new power. The FCA proposed that, although it would consider the relevant circumstances of each case, its expectation was that:
- it would “normally” publish a warning notice statement where it had issued a warning notice;
- a warning notice statement would “ordinarily” include details of:
- the name of the firm or individual;
- additional information to enable the identification of the firm or individual (e.g. FCA registration number, address or date of birth);
- in the case of an approved person, his or her employer; and
- a brief summary of the facts which gave rise to the warning notice.
- it would “not normally” publish the nature and level of the proposed disciplinary sanctions. This is because, as the FCA may only publish information about warning notices proposing a disciplinary sanction, it would in many cases not be able to publish details of all of the sanctions it is seeking to impose (e.g. that it is proposing to prohibit an individual as well as impose a fine).
Consistent with the statutory requirement in section 391(6) FSMA, the FCA made clear that in considering the relevant circumstances of each case, the RDC would not publish information if publication would, in its opinion, be:
- unfair to the person with respect to whom the action is proposed to be taken;
- prejudicial to the interests of consumers; or
- detrimental to the stability of the UK financial system.
The FCA proposed that, when considering whether publication would be unfair, the RDC would have regard to, amongst other matters, whether the Subject is a firm or an individual and the extent to which the Subject has been made aware of the case against them during the course of the investigation.
If the RDC still considered it appropriate to issue a warning notice statement then it would consult the persons to whom the warning notice was given or copied, and consider any representations that they might make about why publication would be unfair. The person to whom the warning notice is given or copied would usually have 14 days to make their representations.
The main circumstances in which the FCA considered that the RDC would likely be convinced by any representation that issuing a warning notice statement would be unfair was where a person could demonstrate that publication could materially affect their health, result in disproportionate loss of income or livelihood, prejudice criminal proceedings to which they are a party or give rise to some other equal degree of harm.
The Consultation Paper caused significant consternation in the industry. There was now a prospect – indeed, a presumption – that Subjects would be identified without having had the opportunity to make representations with the benefit of having received disclosure from the FCA. This seemed unfair, particularly for individuals and small firms who were likely to suffer the most from the publicity; there was a strong argument that elements of the proposed policy were inconsistent with section 391(6) FSMA.
On 15 October 2013, the FCA published its Policy Statement (PS13/9) setting out how it would use its new power. The policy was incorporated into the FCA Handbook through changes to DEPP and the Enforcement Guide.
The industry’s concerns about the proposed policy led to the original proposal being changed in the following ways:
- the policy now contained a presumption that it would not be appropriate to identify an individual who had received a warning notice. After taking into account the responses to the Consultation Paper, the FCA now considered that the potential harm caused to an individual from publication at this stage of the enforcement proceedings would normally exceed the benefits of early transparency. It remained the presumption that it would be appropriate to identify a firm which had received a warning notice;
- the policy now specifically provided that the size of a firm was a relevant consideration when considering whether publication of information is unfair. The FCA acknowledged that there may be instances where the impact of publication on a small firm resembles the impact on an individual; and
- as a consequence of the presumption that individuals would not be identified in warning statements:
- the policy now allowed for the publication of anonymised details so that the FCA could still publish a warning notice statement where it thought it appropriate to make the nature of its concerns public but not identify the Subject; and
- the policy now contained examples of the circumstances when the FCA may decide that it is appropriate to identify an individual (e.g. where it is not possible for the FCA to describe the nature of its concerns without making it possible to identify the individual).
These changes softened the policy in relation to individuals and small firms but did not fully address the industry’s concerns.
Since its introduction, the policy has been amended to reflect the introduction of FRAs and the fact that the SDMs now also issue warning notices and decide whether warning notice statements should be issued where a FRA has been agreed. The FCA’s expectation is that the SDMs are unlikely to decide that it is appropriate to issue a warning notice statement where a FRA has been agreed and “it is likely that a final notice will shortly follow“.
It is unclear whether this expectation will apply regardless of the breadth of the FRA. So far, there has only been one case involving a FRA made public: Linear Investments Limited. In this case, no warning notice statement was issued but the FRA was as broad as possible and the only issue left outstanding was the appropriate level of penalty.
It is also likely that the statement that the test is whether “it is likely that a final notice will shortly follow” misstates the actual test. It would be more logical for the test to be whether “it is likely that a decision notice will shortly follow“. While the FCA can have a good idea of how long it will take for a decision notice to be issued (i.e. for the RDC to reach a decision), it is much harder for the FCA to have a good idea of how long it will take for a final notice to be issued. This is because it does not know whether the Subject will refer any decision notice to the Tribunal (as Linear Investments Limited has done), in which case there will potentially be years between the issuing of the warning notice and the issuing of the final notice.
Part 2: the breakdown by year, subject and topic of the warning notice statements published
What has this “bold move towards more transparent and open regulation” actually led to being published? Between 15 October 2013 and 14 October 2018, the FCA issued 25 warning notice statements, of which only 1 identified the Subject.
The 25 warning notice statements breakdown by year, subject and topic as follows:-
From the breakdown, it can be seen that:
- a disproportionate number of the warning notice statements were published in 2014 (16 of the 25). This is due to the large number of warning notice statements relating to benchmark manipulation (11 of the 25, all of which were published in 2014); andFrom the breakdown, it can be seen that:
- the vast majority of warning notice statements relate to individuals rather than firms (23 of the 25).
In all 23 warning notice statements relating to individuals, the FCA followed the presumption not to identify the individual. Of the 2 warning notices statements involving firms, 1 followed the presumption and identified the firm but the other did not.
While this breakdown is helpful in telling us what has been published in the last 5 years, it is of limited use in understanding how the FCA has exercised its discretion to publish information about warning notices. It does not tell us what has not been published; whether or why there have been occasions where the FCA investigation team has chosen not to recommend that a warning notice statement be issued and/or the RDC/SDMs have gone against the FCA investigation team’s recommendation.
The answers to these questions are important if firms and individuals are to understand whether, taking into account their specific circumstances, a warning notice statement is likely to be issued and they are likely to be identified in it. In order to answer these questions, a more detailed analysis is required.
Part 3: What was (and was not) published and what this tells us about how the FCA deploys its power and exercises its discretion in practice
It should not be inferred from the relatively small number of warning notice statements published that the FCA has neglected to use its powers. It is necessary to seek to reconcile the investigations carried out and outcomes reached in that period, with the FCA’s opportunity to publish them. Annex A contains a full analysis of how the following conclusions were reached, and the assumptions adopted.
It appears that in the 5 years from 15 October 2013, there were only 3 cases where the FCA acted contrary to the presumptions in its policy. There were 2 cases where, contrary to the presumption, a warning notice statement was not published and 1 case where, contrary to the presumption, a firm who was given a warning notice was not identified in the warning notice statement.
An analysis of these cases tends to the conclusion that where the nature of the concerns cannot be described without identifying an individual, then a successful argument can be made that this should rebut the presumptions that a warning notice statement should be issued/a firm should be identified (see Annex B for a detailed analysis of these cases).
Firms and individuals should therefore, perhaps unsurprisingly, expect the FCA to follow the presumptions in its policy. However, they should also be mindful that, in certain circumstances, there is scope to overcome the presumptions in favour of publication/identification.
Part 4: Whether the FCA’s hopes and/or the industry’s fears have been realised
Have warning notice statements been a “bold move towards more transparent and open regulation“?
The absence of press coverage over the publication of warning notice statements makes it hard to conclude that they have been a “bold move towards more transparent and open regulation“.
With the exception of warning notice statements 14/1 and 14/2 (which received some attention because they were the first published), warning notice statements which do not identify the Subject receive little attention in the press. This is not surprising. A warning notice statement that does not identify the Subject is a relatively uninteresting and anodyne document. There is not much that is newsworthy in it; it does not require a warning notice statement to be issued to know that the FCA does not approve of benchmark manipulation.
The sole warning notice statement that did identify its Subject (Interactive Brokers (UK) Limited – 17/5) did receive some media attention. Being able to report the Subject makes for a much more interesting story. However, even in the case of Interactive Brokers (UK) Limited, the final notice received far more attention when it was published than the warning notice statement did. Again, this is unsurprising; the fact that a sanction that has been imposed is more newsworthy than the fact that a sanction has been proposed.
It does therefore seem that the aspiration that warning notice statements would attract meaningful publicity was heavily undermined when the presumption became that individuals would not be identified.
Have warning notice statements resulted in individuals and firms being named and shamed inappropriately early in the enforcement process?
In the first 5 years from 15 October 2013, only Interactive Brokers (UK) Limited was identified in a warning notice statement. While this is not relevant to whether or not, as point of principle, it is appropriate that Subjects can be identified at this point in the enforcement process, it does put the size of the issue into perspective.
Additionally, the FCA has favoured going against the presumptions that a warning notice statement should be issued/a firm should be identified, rather than identify an individual.
Part 5: What all this means in practice for individuals and firms who are under investigation
The evidence from the first 5 years of warning notice statements points to some meaningful conclusions, including in relation to some issues not explicitly covered in the policy. Notwithstanding this, it should be remembered that the sample size of warning notice statements is relatively small and the decision making process is not public, so it is important to treat these conclusions as guidance rather than rules.
- The FCA will generally follow the presumptions in the policy. This means that firms and individuals should not take false comfort from the seemingly low number, in absolute terms, of warning notice statements published and should be prepared for a warning notice statement to be published if a disciplinary sanction is proposed.
- Individuals who do not choose to settle or enter into a FRA should be prepared for a warning notice statement to be published. However, they can take comfort from the fact that they are unlikely to be identified in the warning notice statement. If an individual is not going to be identified in a warning notice statement, there is no reason for them to be unduly concerned about the prospect of a warning notice statement being published.
- Firms who do not choose to settle or enter into a FRA should not only be prepared for a warning notice statement to be published but should also be prepared to be identified in the warning notice statement. However, given firms’ historic willingness to settle cases or enter into a FRA, the number of warning notice statements concerning firms will likely continue to be low.
- Notwithstanding that a warning notice statement is unlikely to be published where a FRA has been agreed, firms and individuals may want to make sure that they explicitly agree as part of any FRA that a warning notice statement will not be published (or, at the least, they will not be identified in any warning notice statement that is published).
- Where the FCA has acted contrary to the presumptions in the policy this has so far always been in favour of not issuing a warning notice statement and/or not identifying the person to whom the warning notice was given. This implies that Subjects have had some success in arguing that the issuing of a warning notice statements and/or being identified in a warning notice statement would be unfair.
- It seems that where the nature of the concerns cannot be described without identifying the individual then a successful argument can be made that this should rebut the presumption that a warning notice statement should be issued/a firm should be identified. This contrasts with the policy which implies that it is more likely that such a scenario would lead to identification of the individual.
Annex A – Analysis of the number of opportunities that the FCA has had to issue a warning notice statement and identify Subjects
In the 5 years from 15 October 2013, the FCA published 973 decision and final notices (24 decision notices and 949 final notices). Of these, 158 (11 decision notices and 147 final notices) concern a disciplinary sanction in relation to which a warning notice statement could have been published.
7 of the 147 final notices concerning a disciplinary sanction relate to cases where a decision notice had already been published (i.e. because the FCA’s decision was referred to the Tribunal). Therefore the 158 decision notices and final notices concerning a disciplinary sanction relate to 151 separate cases.
Using the information contained in the published decision notices and final notices it is possible to match 14 of the warning notice statements to the 151 cases.
Annex C to this article sets out these 14 warning notice statements and the decision and final notices that they relate to.
Of the 11 warning notice statements which cannot be matched to one of the remaining 137 cases.
- 3 relate to cases which were discontinued.
- 7 of the remaining 8 cases relate to benchmark manipulation. These do not match one of the 137 cases because (it can be inferred):
- no decision notice or final notice has yet been published (most likely because the ongoing criminal proceedings have led to the regulatory proceedings being stayed); or
- although a disciplinary sanction was proposed at the time that the warning notice was issued, the result of the criminal proceedings led to the FCA not imposing a disciplinary sanction (e.g. it is possible to tell from Christian Bittar’s final notice that warning notice statement 14/13 relates to him but, as set out in his final notice, the FCA did not ultimately impose a fine on him as the Crown Court imposed a confiscation order in relation to substantially the same conduct).
- It is likely that the other non-discontinued case does not match any of the 137 cases because the warning notice was contested and no decision notice or final notice has been issued in relation to it yet.
An analysis of the remaining 137 cases shows that there were only 2 cases where no warning notice statement was issued where the presumptions indicate that one should usually be expected.
- In 102 of the remaining 137 cases the decision notice and/or final notice show that a settlement was reached at Stage 1. The FCA’s policy is, subject to exceptional circumstances, not to issue a warning notice statement where a settlement has been agreed at Stage 1. If a full settlement is agreed then there is no need for a warning notice statement as the final notice can be published. Where a FRA is agreed the FCA’s expectation is that the SDMs are unlikely to decide that it is appropriate to issue a warning notice statement. These cases have therefore been excluded.
- In 9 of the remaining 35 cases the decision notice and/or final notice show that a settlement was reached at Stage 2. Prior to the introduction of FRAs, it was also possible to settle in the period between the end of Stage 1 and the end of the expiry of the period for making written representations in response to the giving of a warning notice (“Stage 2“). Although not explicit in the FCA’s policy from the time, it seems unlikely that a warning notice statement would be issued if a case settled at Stage 2. This is because, taking into account the time necessary for the warning notice statement to be consulted on, the warning notice may well not have been ready to be published before the end of Stage 2. Additionally, if the settlement negotiation at Stage 2 appeared to be making headway, then it would be likely that a final notice would soon be published and therefore, as with the current policy in relation to FRAs, the FCA could be expected not to publish a warning notice statement. These cases have therefore been excluded.
- In 19 of the remaining 26 cases an analysis of the decision notice, final notices and/or other information published by the FCA show that, although the decision notice or final notice was published on or after 15 October 2013, the warning notice was not. These cases have therefore been excluded.
- In 5 of the remaining 7 cases the only disciplinary sanction was a public censure (in 4 of the 5 cases a fine would have been imposed were it not for the financial position of the person given the final notice). As no discount can be applied to a censure, the FCA does not always state whether a settlement was reached. It has been assumed that these cases settled at Stage 1 or Stage 2 and it was therefore not appropriate for a warning notice statement to be issued in relation to them. This assumption is supported by the fact that all of the 5 final notices:
- either state that the decision which gave rise to the obligation to give the final notice was made by the SDMs (i.e. not the RDC) or that the decision was made by the RDC but that the Subject did not wish to make any representations and was prepared to accept the proposed action; and
- none of the final notices contains an annex of the Subject’s representations to the RDC (such an annex is commonly included if the Subject made representation to the RDC).
The chart below summarises this analysis:
Annex B – The cases where the FCA did not follow the presumptions
There are 3 cases where the FCA did not follow the presumptions:
- 2 cases where no warning notice statement was issued; and
- 1 case where a warning notice statement was issued in relation to a firm but the firm was not identified.
Although it is only possible to speculate as to why the FCA did not follow the presumptions in the policy in these 3 cases, there is sufficient evidence for an educated guess.
The cases where a warning notice statement was not issued
In the case of Darren Cummings, the representations to the RDC included issues relating to his mental health at the time of the conduct. Although the representations do not comment on Mr Cummings’ mental health at the time of the investigation, it may be that this provides an explanation as to why a warning notice statement was not issued. In CP13/8 it was stated that “[o]ne scenario where the FCA may decide not to publish information is where the subject can demonstrate that his/her physical or mental health would be adversely affected by the publication of information”. Although this statement was made in the context of a proposed policy that would identify individuals, it is possible to see how it could be argued that a warning notice should not be published (even one that did not identify the individual) if the publication of it would adversely affect the mental health of the Subject.
In the case of Andrew Tinney, many of the details of the conduct described in the decision notice were already in the public domain. These included Mr Tinney’s identity. It would therefore be difficult for the FCA to describe the nature of its concerns without identifying Mr Tinney. Although the FCA’s policy states that not being able to describe the nature of its concerns without identifying the individual can be a reason to rebut the presumption that an individual should not be identified, this could also be an argument for not publishing a warning notice statement at all. The point is potentially more powerful where the nature of the FCA’s concerns are already public and a warning notice statement is therefore not necessary to alert the market to them.
The case where the firm was not identified
Warning notice statement 14/11 states that a warning notice has been issued to a firm but does not identify the firm. However, retrospectively, it is possible to identify Quick Purchase Limited as the firm. The facts in the warning notice statement match those in the final notice issued to Quick Purchase Limited. It is only possible to speculate, but it is possible that the reason that Quick Purchase Limited was not identified is because of the size of the firm. The firm only had one controlled function holder, Steven Martin, who was himself fined in relation to the same facts. It may be the case that it was successfully argued that identifying Quick Purchase Limited would cause a loss of custom which in turn would lead to insolvency. In CP13/8 the FCA said that it “would probably not publish information if there is clear and convincing evidence of likely insolvency as this would amount to disproportionate harm“. It may also be that the RDC decided that if Quick Purchase Limited was identified then this would, in effect, identify Steven Martin and this would be inappropriate considering that he is an individual and had reached a settlement with the FCA.
Annex C – warning notice statements matched to decision and final notices