The recent memorandum of understanding between the FRC and the FCA, formalising lines of communication, is a reminder of the urgent need to consider self-reporting in the event that wrongdoing is uncovered.

Regulatory framework

On 20 December 2017 the Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC) entered into a memorandum of understanding (MOU), setting out how the two regulators will share information each has obtained in the course of their oversight. This follows a 2016 MOU between the FRC and the Serious Fraud Office (SFO). The FRC also recently entered into a temporary arrangement to exchange information with the Insolvency Service (IS) on 18 January 2018.

As the regulator for accounting and audit standards in the UK, the FRC has the power to request, or compel the production of, documents and information from auditors. Consequently, if the FRC obtains and reviews an auditor’s materials, it is in the position of receiving unvarnished, and confidential, opinions from trusted professional advisors with a deep level of understanding of a corporate’s business.

Once the FRC reviews these papers, not only will it look to ensure that auditors are carrying out their role as guardians of corporate governance, but it will also consider if there is any information that would potentially be of interest to the SFO, FCA, or IS.

Moreover, if the SFO or FCA are investigating corporate wrongdoing, they will likely reengage with the FRC to see if any concerns had previously been raised with the auditor of that company. Often this can provide significant information and contemporaneous evidence for investigators.

The FRC can therefore play a significant role in passing on intelligence, and documentation, to both the FCA and the SFO. Accordingly, corporates should carefully consider their options when confronted with evidence of wrongdoing and ensure that the SFO or the FCA do not hear about any potential misfeasance from the FRC before they hear it from the corporate itself.

Increased scrutiny

The potential for such information sharing taking place between the SFO or FCA and FRC is arguably higher now because:

  1. both of these relationships have now been formalised through clear memoranda of understanding, and
  2. the FRC has significantly increased investment in its Enforcement Division, from late 2017.

It should also be noted that because an accountant’s papers do not attract privilege in the same way that a lawyer’s papers can, once such documents are in an authority’s possession, they can review these materials freely.

Impact

In the event such information is brought to an enforcement agency’s attention via such a route, it would be markedly harder for the corporate to then achieve any significant benefit from retrospective cooperation. Specifically, failing to self-report would impact a corporate’s chances or obtaining:

  • a Deferred Prosecution Agreement, in the event the investigation into criminal activity is led by the SFO, unless any subsequent cooperation was “extraordinary”, or
  • a 30% settlement discount in the event the FCA launches civil enforcement action, in the event a settlement is reached at Stage 1 of proceedings.

Practical concerns

This memorandum of understanding between the SFO and FRC is further evidence of an ever more joined-up approach to regulating the financial market. By squeezing professional advisors it is clear that the Government believes there will be a knock on effect on corporate attitudes to compliance.

Only time will tell whether this approach is successful in preventing serious financial crime within the UK.