At the start of February, the FCA and PRA published a joint policy statement setting out their recommendations on strengthening the transparency and effectiveness of their enforcement decision making-processes following investigations. The Policy Statement was issued in response to comments received on the FCA/PRA Consultation Paper “Proposed Implementation of the Enforcement Review and the Green Report” (the “Consultation Paper”) and aims to explain the changes the FCA/PRA are going to make to their enforcement policies and processes. As a reminder:

  • The Enforcement Review was published by the Treasury in December 2014, and focused on the transparency, fairness, effectiveness and speed of the FCA’s and PRA’s enforcement decision-making processes. The Enforcement Review made a number of recommendations to improve those processes.
  • The Green Report was a report conducted by Andrew Green QC into the FSA’s enforcement actions following the failure of HBOS. It was published in November 2015 and made a number of recommendations regarding the conduct of investigations. It was published at the same time as the PRA’s and FCA’s joint report into the failure of HBOS plc.

Mark Steward, Director of Enforcement and Market Oversight at the FCA, commented on the Consultation Paper and said: “It is essential that our enforcement decision-making processes command public confidence and operate both efficiently and fairly. The changes set out in today’s PS are designed to achieve just that and reflect the views of stakeholders who responded to our consultation.” Miles Bake, Head of Legal, Regulatory Action Division of the PRA, also commented that: “The PRA’s enforcement processes must be clear, transparent and reasonable. This Policy Statement outlines a number of concrete steps the PRA is taking to ensure that we implement the recommendations from the HMT Enforcement Review and the Report of Andrew Green QC.”

Consultation Paper speed-read

The Consultation Paper sought responses on a number of issues, which are summarised below:

Referral decision making: The FCA’s current policy is that it does not normally make public whether or not a particular firm or individual is under investigation unless there are exceptional circumstances. The FCA will seek to identify useful examples of cases where a firm or individual has demonstrated exceptional co-operation or taken remedial action that has been a major factor in deciding not to take enforcement action. Following the responses in the consultation process, the FCA has indicated that it will decide whether its published referral criteria require further amendment. However, the FCA has indicated that it is not minded to develop further layers of procedure and process, such as formal pre-referral meetings and representations, as there is a need for flexibility in the referral criteria which requires the FCA to have discretion.

Co-operation between the regulators in enforcement investigations: The current position is that the FCA and PRA have a Memorandum of Understanding (MOU) whereby they agree to proactively offer information of material interest to the other. This is in line with recommendations made in the Enforcement Review that there should be an exchange of regular updates and that the supervisory teams of both regulators should bring potentially relevant information to the attention of investigators as promptly as possible. The Green Report also recommended that there should be quarterly meetings to consider the appropriateness of the scope of matters under investigation. Those recommendations were broadly endorsed by the responses to the Consultation Paper and therefore the FCA and PRA have confirmed that they will hold quarterly meetings on enforcement investigations, as recommended in the Green Report. The aim will be to ensure that a broad overview is given to the investigation, and that there is a continuing review of the scope. There will not be an opportunity for the subject of the investigation to make representations regarding any change in scope.

Subjects’ understanding and representations in enforcement investigations: Both the Enforcement Review and the Green Report recommended that the FCA and PRA provide more information on the basis for a subject’s referral to enforcement for investigation. The Green Report recommended that a summary of the potential breaches should be provided. The FCA has already implemented this, and the PRA has confirmed that it will ensure more information is provided to subjects of investigations regarding the reasons for the investigation.

Both the FCA and PRA will be reviewing their approaches to discounts for early settlement, as most respondents indicated that the current enforcement process and approach to discounts did not create a sufficient incentive for subjects to make early admissions in enforcement investigations. The FCA will explore this as part of its penalty policy review, and the PRA will review its settlement policy in the early part of this year.

The FCA and PRA will seek to provide periodic updates to subjects, with a focus on the practical steps that have been taken in the investigation and the steps that the investigation team proposes to take. It is hoped that this will also assist with achieving a constructive dialogue with investigation subjects.

Settlement and Contested Decision Making (FCA only): As a result of the consultation, the FCA will aim to give 28 days’ notice of the beginning of stage 1 of settlement discussions and where appropriate, will offer a preliminary without prejudice meeting to explain the FCA’s view of the misconduct. The aim of this will be to enable the subject to understand the case against them. The FCA is also abolishing penalty discounts at Stages 2 and 3 of settlement.

The FCA has also confirmed that it will be introducing a process for partly contested cases, which will allow the subject of an investigation to agree certain elements of a case (e.g. the penalty, facts, liability or a combination of those issues) and to contest the other elements before the Regulatory Decisions Committee.

What next?

The FCA’s proposals which have not already been put into practice will be implemented by amendments to the Enforcement Guide and Decision Procedure and Penalties Manual, as set out in Appendix 1 of the Consultation Paper. The majority of the changes came into effect on 31 January 2017, but the proposals in relation to partly contested cases and the abolition of stage 2 and 3 penalty discounts will come into effect on 1 March 2017. The PRA will be issuing a policy statement this year setting out a guide to its enforcement processes.

These changes should be welcomed. If they can achieve their ultimate aim of increasing transparency for the subjects of enforcement actions following investigations that ought to result in better outcomes for those subjects, as there will be greater scope to manage their risks and exposure to enforcement action if they can improve their dialogue with the regulators.