Chris Brennan follows on from his panel discussion at the Financial Services Regulation and Disputes Summit to explore the options for reforming investigations and enforcement.
The closing panel of the recent Legal Business Financial Services Regulation and Disputes Summit was asked to discuss how they would approach the establishment of a new regulatory enforcement body. This article picks up on some of the themes discussed.
The idea behind the panel session was not (just) to pick holes in the models adopted by the current regulatory enforcement agencies. Rather, the intention was to draw out ideas for alternative models or approaches to enforcement. It is all too easy to accept the current approach as generally right on the basis that it has always been done that way. In reality, the approach to regulatory enforcement is constantly evolving, and new practices emerge, sometimes without a great deal of scrutiny or consultation. Those changes can have a significant impact on the fairness or efficiency of the process. It is therefore worth sitting back and taking a fresh look at why we need regulatory enforcement, what it should be seeking to achieve and how it should function.
The role and remit of enforcement – the why
This has been the topic of much discussion. The debate often centres around the question of whether, or to what extent, an agency is enforcement-led. In 2005, the chair of the Financial Services Authority (FSA) noted: ‘The FSA is not – and will not become – an enforcement-led regulator.’ By 2012, the chair of the Financial Conduct Authority (FCA) noted that this position ‘has changed’. It has never really been clear what it means to be an enforcement-led regulator, but the emphasis tends to change with the political winds of the time. To truly dissect the role of enforcement involves a jurisprudential debate around the various theories of crime and punishment, which is beyond the scope of this short article. At the most basic level it is clear that enforcement is necessary to deter wrongdoing, punish the wrongdoers and obtain redress for those affected. The situation becomes more complicated when enforcement is used to pursue public policy objectives or where it is deployed as a substitute for rulemaking. That is not to say that either purpose cannot be a natural by-product of enforcement, but it should not be the central rationale. The particular problem with trying to set standards through enforcement outcomes is that settled cases tend to make for bad law. While the English common law system of defining standards and duties through case law has proven very successful, it is based on a robust judicial process, something which rarely comes into play in regulatory enforcement outcomes.
The problem with losing sight of the role of enforcement is that it is all too easy for regulatory action to become an objective in itself. The temptation being to measure the success or failure of an enforcement function simply by reference to the amount of financial penalties or conviction rates. It is hard to conceive of any benefits from setting expectations or targets around the number or type of disciplinary outcomes. The pressure to compete with enforcement agencies in the US has led to huge fine inflation, but there is very little evidence of its impact on behaviours. Similarly, placing pressure on enforcement to perform at a certain level, whether through comparisons with prior years or otherwise, risks creating an unnecessarily litigious, win-at-all-costs mentality. Increasing fines and taking an aggressive approach to enforcement can force those under investigation to adopt a correspondingly combative stance and thereby make achieving the right outcomes more difficult.
The vast majority of regulated businesses will be quick to accept where mistakes have been made and will want to work with a regulator to agree an appropriate penalty, redress arrangements or other outcome. In these cases, enforcement should be there to respond to events in a neutral, measured manner and with the objective of seeking to achieve the right regulatory outcome through a fair and transparent process. A more aggressive approach may well be necessary in cases of more egregious, deliberate or criminal conduct, but for many cases it is simply not appropriate and can prove counterproductive.