An updated set of enforcement referral criteria has been published by the FCA in response to recommendations made by HM Treasury at the end of last year. The FCA will use these updated criteria to determine which cases should be referred to the FCA's Enforcement Division for investigation. The recommendations by HM Treasury were not driven by a desire to push the FCA to investigate cases different to those that are currently investigated- rather the purpose of the recommendations was to deliver greater transparency to the process.
Whether greater transparency will actually be delivered by these changes and whether transparency might result in a different profile of case being investigated in the future remains to be seen.
The importance of the referral criteria
The FCA has reaffirmed its belief in credible deterrence as being key to changing firms' and individuals' behaviour. It has also confirmed that there is unlikely to be a substantial increase in the numbers of cases that will be investigated. As such it is to be assumed that the FCA is unlikely to refer cases save where it is confident that the investigation will result in an outcome (though the FCA insists that when it opens an investigation, it has not already decided that there have been breaches by the relevant firm or individual). As a consequence of the fact that the FCA is likely to only investigate cases where it is confident of the outcome, the decision whether or not to refer a firm or individual to Enforcement is a critical one.
When will the FCA use the referral criteria
The FCA will use the referral criteria in circumstances where an enforcement investigation might lead to the FCA:
- taking disciplinary action to fine, publicly censure, suspend and/or restrict firms/individuals who have breached our requirements; and/or
- making a prohibition order
The overarching question for the FCA
The overarching question that the FCA asks itself is "Overall, is an enforcement investigation likely to further the FCA's aims and statutory objectives?" This is in fact much the same question that would be asked under the old referral criteria.
Consequently the FCA is expected to consider before any enforcement action is started, whether a particular case will advance its objectives and whether enforcement action is the most efficient and effective way of achieving the FCA's statutory objectives (protecting consumers, enhancing market integrity and promoting competition). The FCA has suggested that when taking these decisions it is mindful of the fact that the cost of enforcement is very high for all concerned. Consequently it will consider if any of its other tools are more appropriate before starting an enforcement investigation, though it must be remembered that some of the other tools available to the FCA are extremely expensive and intrusive. Skilled person reviews for example will, in most circumstances, cost firms in excess of £100,000, as well as being particularly time intensive.
When will the FCA believe that enforcement action is likely to increase its aims and objectives?
Whilst the new referral criteria are more detailed and granular than the referral criteria they have replaced it appears that the critical questions to be answered are much the same as before. In particular the FCA has set out the following questions that it will consider when deciding whether enforcement action will further its aims and statutory objectives:
- the strength of the evidence and the proportionality and impact of opening an investigation
- what purpose or goal would be served if the FCA were to end up taking enforcement action in the case; and
- relevant factors to assess whether the purposes of enforcement action are likely to be met
Whilst the FCA has provided additional guidance about how it will go about answering these questions, which gives us a slightly better idea of what questions the FCA might ask itself, there is no greater clarity around how the FCA will go about answering these questions.
It is questionable whether the new referral criteria have genuinely increased the levels of transparency around the decision to refer cases to Enforcement. In part this is because there is very limited clarity around how the FCA would answer the questions set out in the criteria, but also this is because the FCA has such a wide discretion to deviate away from these criteria. This is demonstrated by the referral criterial which state that they "are not intended to be exhaustive" and that "additional considerations may apply in certain cases".
Ultimately it seems that these new referral criteria have not changed this aspect of the Enforcement process in any substantial way. As such firms should assume that if a case would have been a prime candidate to have been referred to Enforcement under the old rules, it will still be likely to be referred now.