During 2014/2015 there were a swathe of reviews and reports on various aspects of financial services regulatory enforcement, identifying weaknesses in the current arrangements and consulting on possible ways to strengthen the effectiveness of the enforcement regime, particularly against individuals.
In December 2014, HM Treasury published its review (the “HMT Review”) of the enforcement decision-making process of the financial institution regulators, making a number of recommendations for change at the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”). The FCA and PRA subsequently published a report in November 2015 which set out their conclusions and recommendations following their investigation into HBOS’s failure in October 2008. The report concluded that the failure of HBOS could “be explained by a combination of factors” stating that “ultimate responsibility for the failure of HBOS rests with its Board”. While the report laid the responsibility with the HBOS executives, the report highlighted the FSA’s (as it was at the time) lack of appreciation for the strategy adopted by HBOS and its delay in intervention.
At the same time as this report was published, the FCA and the PRA published the report of Andrew Green QC (the “Green Review”) which concluded that “the scope of the FSA’s enforcement investigations in relation to the failure of HBOS was not reasonable”, the decision-making was materially flawed and the FSA (as it was then) should have conducted a much broader investigation of series of investigations, to encompass more parts of the bank and more individuals.
As a consequence, the Green Review made recommendations for change in the areas of: (i) pre-referral decision-making; (ii) ongoing dialogue between enforcement and supervision divisions during an investigation; and (iii) informing the subject of an investigation about the matters under investigation.
Having considered the recommendations, on 14 April 2016 the FCA and PRA published a consultation paper which addressed the various recommendations and sought views on further proposed changes. The PRA will also be conducting a separate consultation in relation to settlement and contested decision making and therefore some of the proposed changes only apply to the FCA. Ultimately, the purpose of the proposals is to lead to more transparency in the enforcement process along with increased efficiency in the investigation and settlement processes.
In order to enhance the transparency of the enforcement process, the FCA and PRA propose to publish more information about early intervention work, with a request for suggestions as to the level of detail that interested parties would find useful. In the same endeavor, recommendations were made to increase the dialogue between the FCA and PRA and subject firms and individuals, with the FCA/PRA proposing to provide more information on the subject’s referral to enforcement and engaging in scoping meetings with the subject once investigators are appointed.
The most significant proposals within the consultation paper are in respect of settlement. Currently, where cases are partly contested there is no process to allow for early settlement; if there is anything still being negotiated then the matter is ‘contested’ and no settlement can be entered into. This leads to unnecessary time spent and costs. To address situations where some aspects are agreed, the FCA proposes that the parties can enter into a “focused resolution agreement” in respect of the facts and liability, with the Regulatory Decisions Committee (“RDC”) determining the regulatory response. The FCA will also allow the 30% early settlement discount to be retained for matters where a focused resolution agreement is entered into during Stage 1 (the early settlement stage) and it is only the penalty being contested. It is anticipated that this will encourage the use of the RDC during the settlement process.
In light of the HMT Review, the FCA further proposes to update the Enforcement Guide:
- so the FCA can provide 28 days’ notice of the Stage 1 period in settlement discussions commencing;
- to allow for the incorporation of pre-Stage 1 preliminary meetings; and
- upon the commencement of Stage 1, where necessary, the FCA will assist in resolving factual disputes and/or the firm/individual to make a decision as to whether to resolve the dispute by agreement. While the firms/individuals may be willing to engage in such meetings, how receptive the FCA will be during these meetings remains to be seen.
There have been calls for Stage 1 to be extended but the FCA continues to maintain that in most cases 28 days is a reasonable period of time and that “any extensions should be in exceptional circumstances only”. Whilst the FCA has proposed to amend the Enforcement Guide to list factors which they will take into account when considering an application, in light of the position stated in the consultation paper it seems likely that the granting of an extension will be rare.
The FCA further proposes to adopt the HMT Review recommendation to remove the Stage 2 and 3 early settlement discounts of 20% and 10% respectively to “assist in demarcating, at an early stage, between the cases that can be settled and those that must be contested”. While the feedback to this proposal is yet to be published, the City of London Law Society and the British Bankers Association have raised concerns in respect of the proposed abolition as it may prevent “other cases to be disposed of more expeditiously…”
Following the publication of the consultation paper there were renewed calls from the Treasury Select Committee (“TSC”) in its report from July 2016 for the FCA’s enforcement function to be set up outside the FCA. It is the TSC’s view that “a separate statutory body would bolster the perception of the enforcement function’s independence… separation would allow all three regulators - the FCA, PRA and an enforcement body - to enjoy much greater clarity over their objectives”. The FCA responded that this would “potentially lessen our ability to be an effective regulator and impact our ability to protect consumers and ensure the integrity of the UK financial system”.* The consultations closed on 14 July 2016 and the FCA and PRA are due to publish the responses and a policy statement by the end of the year. It is generally felt that regulators are universally pursuing enforcement action more frequently and more aggressively. There is increasing political pressure to be seen to be cracking down and the Green Review stressed that there should be an almost tick-box approach to considering senior management from the top down for enforcement activity, not just a focus on the entity. These proposals may therefore change the shape of the regulatory process for those being investigated and have an effect on where costs mount up and where cover should be provided. Whilst fines are not covered, there is an increasing grey area as to when costs cover kicks in.