We have commented previously on the Financial Conduct Authority’s (“FCA”) and Prudential Regulation Authority’s (“PRA”) joint policy statement on enforcement decision-making (see here). By way of a reminder, the FCA and the PRA published in February 2017 a joint policy statement on the proposed implementation of HM Treasury's (“HMT”) review of enforcement decision-making at the FCA and the PRA and Andrew Green QC's report into the FSA's enforcement actions following the failure of HBOS plc. The policy statement outlines the amendments to the FCA’s Glossary, the Decision Procedure and Penalties manual (“DEPP”) and the Enforcement Guide (“EG”).

Of particular interest to professional advisers and FCA-regulated persons are:

  • the introduction of partly contested cases, and
  • the abolition of penalty discounts at stage 2 and 3 of settlement.

Both of these changes are effective from 1 March 2017. In this blog, we provide further details and comment on these two proposals.

1. The introduction of partly contested cases

In broad terms, this will allow a person under investigation to reach agreement with the FCA in respect of some of the matters under investigation whilst retaining the option to bring non-agreed aspects to the attention of the Regulatory Decisions Committee (“RDC”). There are three approaches:

  1. The person under investigation concludes a focused-resolution agreement with the FCA. Under this approach, the facts of the matter, and the liability of the person in question, are agreed between the FCA and the subject. The RDC’s role is to determine the penalty only.
  2. The person under investigation agrees the facts of the matter with the FCA. However, the person disputes that the breaches as alleged by the FCA arise from those facts. The RDC resolves these disputes.
  3. The person under investigation agrees to one or more relevant issues with the FCA. The outstanding (and limited number of remaining) issues are resolved before the RDC.

As outlined in the joint policy statement, the FCA will introduce these changes to the DEPP and the EG.

Whilst a case-by-case approach will be taken with respect to each matter, the FCA say it will rarely be appropriate to publish warning notices in such cases as any final notice is likely to follow shortly thereafter.

Although the success of this change will depend on how the FCA implement it, in principle this proposal is to be welcomed. A contested case to the RDC brings uncertainties, time delays and can incur very significant costs. Introducing a scheme to reduce the areas of dispute and thereby expedite a satisfactory outcome is likely to be a positive development for both the regulated person and the FCA.

There are some potential problems with the proposal. In particular, it may be challenging in practice to ensure that a partly-contested case remains within the agreed parameters. It is easy to envisage new areas of dispute emerging during the course of RDC proceedings, for example as the disclosure process progresses or as the detail of the areas of dispute are presented. This could be a particular area of concern in the case of unrepresented FCA persons.

The FCA has offered a welcome indication that it will rarely be appropriate to publish a warning notice ahead of a final decision. Even in cases where the subject intends to contest fully, the publication of a warning notice has the potential to cause a devastating reputational impact to the person so as to render it virtually pointless to do so. In a partly-contested case, in which some or all aspects of fact and liability are accepted by the subject, such publication would be likely to defeat any benefit that there may have been in pursuing some part of the case to the RDC.

2. Abolition to Stage 2 and 3 discounts to penalty

As outlined in the joint policy statement, the FCA will abolish the current Stage 2 and 3 discounts to penalty. These Stages formed part of the FCA’s discount for early settlement scheme. In broad terms, the size of the discount was contingent upon when the matter was settled in the FCA’s investigative process: the later a matter was settled, the lower the size of the discount.

A 30 per cent discount is available at Stage 1, which means from “the period from commencement of an investigation until the FCA has:

(a) a sufficient understanding of the nature and gravity of the breach to make a reasonable assessment of the appropriate penalty; and

(b) communicated that assessment to the person concerned and given them reasonable opportunity to reach agreement as to the amount of the penalty”

(DEPP 6.7.3).

A 20 per cent discount was available at Stage 2, which meant from the end of Stage 1 until the expiry of the period for making written representations (or the date on which written representations were sent in response to a warning notice).

A 10 per cent reduction was available at Stage 3, which meant from the end of Stage 2 and the date when a decision notice is given.

Under the revised scheme, the FCA will retain its discretion to agree a discount after the end of the current Stage 1. The same fixed discount of 30 per cent will only be applied where a focused settlement agreement to contest penalty is reached during Stage 1.

Comment

It is unclear how this change may impact on negotiations between the FCA and subjects of enforcement proceedings in practice but there is a concern that this change could increase the pressure on the subject of a FCA investigation to settle at an early stage of an investigation. The risk of not settling in Stage 1 may become too great for any subject without access to considerable resources. This may cause particular issues in larger, complex cases where the subject is under a huge time pressure to maximise the financial benefit of settling, frequently without the ability to test and challenge the assumptions that have been made by the FCA in their draft Warning Notice Unless the FCA retain and use their discretion to provide a generous settlement discount after Stage 1 there will be minimal incentive for a person to settle after the end of Stage 1, which could lead to an increase in such cases being challenged.

It is clearly right that the maximum discount should be available in focused-resolution agreement cases where only the penalty is being contested. In partly-contested cases where some facts or issues of liability are in dispute with the FCA, a discount of up to 30 per cent, at the discretion of the RDC, will be available.

More generally, this change needs to be viewed in tandem with the proposed extension to the partly-contested cases process, which will, in principle, allow the investigated person to test parts of the FCA’s case beyond Stage 1. Depending on how it is used in practice, the discretionary nature of any discount on offer after that point may in practice render this option too high risk to be viable for many subjects.