The Financial Conduct Authority (FCA) has recently responded to the Treasury’s 2014 review of its enforcement decision making process; its response recognises that enforcement action is an expensive and resource intensive option.
The factors underpinning the FCA’s past decisions to utilise its resources to bring an enforcement action, instead of considering an alternative route, have often been relatively opaque. In order to remedy this, the FCA has updated the criteria it uses when deciding whether to appoint enforcement investigators; as Georgina Phillippou, acting director of enforcement and market oversight at the FCA states in relation to the publication of the updated criteria:
“Enforcement is not the only tool at our disposal where we see misconduct by firms or individuals, nor is it the most appropriate one to use in every case...[The FCA’s] publication will make our decision making process more transparent. Firms and the public will now have a clearer understanding of the questions we ask ourselves before we start a formal investigation”.
The FCA, in publishing its revised criteria, has set out clearly that enforcement is but one of the regulatory tools available. It emphasises its risk-based approach when considering what purpose or goal would be served if enforcement action were to be taken. Its core aims and statutory objectives – namely protecting consumers, enhancing market integrity and promoting competition – rest at the heart of decision making.
The criteria will be used where the FCA considers the potential outcome of an investigation might be a fine, ban, suspension, prohibition order or public censure (it should be noted that the criteria do not apply to, amongst other things, civil litigation, criminal prosecutions, cases involving market abuse and those which fall under the Competition Act 1998). A number of key issues to be considered are set out: the strength of the evidence; the impact of opening an investigation; involvement of any other agencies (UK or overseas) and the deterrence value of such action. Both specific deterrence relating to deterring wrongdoers from repeating their behaviour and a general wider deterrence are highlighted. The latter focuses on changing behaviours in a particular market. Being seen to act in this area is an important consideration regarding raising market standards and publicly holding to account those responsible for serious breaches, particularly where those breaches could undermine public confidence in the financial markets.
Consumer redress is a key consideration, though the FCA acknowledges that redress can be secured outside of formal enforcement proceedings. Other considerations include an assessment of any negative impact on market integrity and competition. Regarding overseas jurisdictions, whether enforcement action would ensure further investor protection or market confidence are questions raised.
The fact the referral criteria are not intended to be exhaustive is underlined with the FCA confirming that case-specific considerations could also be applied. Indeed, any of these factors on their own may be sufficient to warrant an enforcement investigation and, even in self-reported breaches, misconduct may be deemed so serious that the only alternative is to proceed with enforcement action.
Of note is the emphasis that the assessment on whether enforcement is indicated includes input from the Supervision, Market Oversight and Enforcement divisions of the FCA. This confirmation demonstrates a willingness to adopt a reasoned and full evaluation of the most proportionate way in which to deal with issues which arise, taking into account a firm’s or individual’s previous supervisory history and market conduct, which should lead to more robust and reasoned decision making, and an appropriate use of the FCA’s funds.
The FCA also underlines its position that where an investigation is opened it does not mean that it has decided if a breach has been committed, nor whether the type of enforcement action that should be taken has been determined. Evidence is investigated and then a view is formed about whether there has been misconduct and the appropriate regulatory tool to use. The referral criteria may be used throughout the lifetime of an investigation.
Other recommendations will be subject to consultation later in the year. The Treasury made recommendations across the full life cycle of an enforcement case, so we expect more from the FCA on the investigation period, settlement negotiations, and dealing with contested cases.
The first stage in the transparency drive is to be welcome. Whether the FCA will face challenges in the future based upon its interpretation of the criteria in particular cases remains to be seen.