The FCA has published a consultation paper on its proposals for improving the way it carries out enforcement investigations. This follows the recommendations made by HM Treasury in its 2014 'Review of enforcement decision-making at the financial services regulators' and by Andrew Green QC in his 2015 report into the FSA's enforcement actions following the failure of HBOS plc.
A key aspect of the FCA's proposals is a change to eligibility for discounts for early settlement.
The current system of discounts comprises three tiers:
- Stage 1: 30% reduction, if settlement is reached before the point at which the FCA has a sufficient understanding of the nature and gravity of the breach to make a reasonable assessment of the appropriate penalty, but after a reasonable opportunity to reach a settlement has been given.
- Stage 2: 20% reduction, if settlement is reached between the end of Stage 1 and the end of the period for making written representations to the Regulatory Decisions Committee ("RDC").
- Stage 3: 10% reduction, if settlement is reached between the end of Stage 2 and the date when a decision notice is given by the RDC.
The proposed changes fall into two categories:
Partly contested cases
The FCA has sought to address concerns that there is no system of discounts for partial settlement (concerns which HM Treasury had concluded were too difficult to address) by proposing a procedure to narrow the issues between the FCA and the subject of an investigation ("subject"): 'focused resolution agreements', by which the FCA and the subject would agree the facts and liability in the case, and leave the RDC to decide solely on the appropriate penalty. The subject must accept all facts relevant to the proposed enforcement action and all issues of whether those facts amount to one or more breaches. The FCA has likened the process to a defendant pleading guilty in criminal proceedings.
The FCA proposes that in such cases where a focused resolution agreement is entered into during Stage 1, the subject would still receive the benefit of a 30% discount on the ultimate financial penalty, notwithstanding that the dispute as to the appropriate penalty would continue on to the RDC.
As is the case for current Stage 1 settlement, the Settlement Decision Makers will then have to approve the proposed resolution.
The FCA's proposal is a welcome one and there are clear benefits for cases in which the debate turns purely on what penalty should be imposed. As well as receiving the 30% discount on any financial penalty, the subject will avoid the costs and time associated with arguing a full case before the RDC.
In coming up with this proposal, the FCA also tried to address alternative scenarios where only (i) the facts, or (ii) some of the issues could be agreed, suggesting a discretionary 15-30% discount and 0-30% discount in each scenario respectively. However, the FCA determined that these alternatives were not viable for the lack of any real saving of the time and cost associated with achieving a full or facts and issues settlement. The FCA is, however, open to comments on these two alternatives, and it may be that they are incorporated into the proposals at a later stage.
Concern has been expressed by the industry at the lack of external scrutiny of FCA penalty decision-making. The FCA's proposal is a move towards encouraging firms to challenge the FCA more on penalties. In particular, where the key dispute centres on the appropriate penalty, firms will no longer have to weigh up the benefit of the 30% discount for early settlement against the chances of successfully challenging the proposed penalty. This will likely lead to a greater number of cases reaching the RDC and Tribunal, which both the FCA and wider market would welcome.
Elimination of Stage 2 and 3 discounts
By contrast, HM Treasury recommended removing the discounts currently available at Stages 2 and 3 (though leaving the FCA with a discretionary power to award discounts in appropriate circumstances), in order to draw a clear line early on between those cases that can and cannot be settled. The Treasury encountered a general view among respondents to its consultation that cases either settle early on or do not, and that a graduated discount scheme might not be as beneficial as intended. Indeed, the Treasury noted that between 2012 and 2014, only nine cases settled in Stage 2 or beyond.
The FCA considers that its other proposals for improving the investigation and settlement procedure, many of which are in reality already being practised, including earlier provision of information to the subject, quarterly or better update meetings with the subject, pre-Stage 1 pre-settlement meetings and notice of the start of Stage 1, should have a sufficient focusing effect on the minds of the parties to enable the them at an early stage to understand what points can be agreed and what is really in dispute. Consequently, in line with the Treasury's recommendation, the FCA proposes to abolish the Stage 2 and 3 discounts.
This is a curious development and it will be interesting to see whether it has the desired focusing effect. We also await clarity on whether the FCA will leave itself with the discretionary power suggested by the Treasury to award discounts in Stage 2 or 3 in appropriate circumstances, a point which is not clear in the current proposal document. We expect the FCA will at least want to maintain a discretion to discount the penalty in exceptional cases; for example, where there has been a substantial change in the nature or seriousness of the action being taken and a settlement would have been possible at an earlier stage if the action had commenced on a different footing.
In any case, it is now even more crucial for a company or individual finding itself the subject of an investigation to carry out an early assessment of its prospects and settlement options, and particularly to consider the potential benefits of entering into a focused resolution agreement.
Comments on the FCA's proposals are invited before 14 July 2016.