The FCA has published its Approach to Enforcement document, one of a series of documents seeking to articulate its "Mission".
Much of the Approach will be familiar from previous FCA publications and speeches by Mark Steward, FCA Enforcement Director, in particular the emphasis on achieving substantive justice rather than focusing solely on deterrence. There are a number of new developments or changes in emphasis, which we summarise and comment on below.
Types of misconduct
The FCA identifies a "broad spectrum" of potentially serious misconduct, perhaps to demonstrate that it is not narrowly focused on retail bank mis-selling and insider dealing. This follows Mr Steward emphasising, in a September 2017 speech, the FCA's work in investigating market disclosures by listed firms. Types of misconduct mentioned in the Approach are:
- misconduct resulting from a lack of integrity;
- serious failings in firm systems and controls, including governance and senior managers' failings;
- mis-selling of unsuitable products to consumers;
- anti-competitive behaviour;
- financial crime, including insider dealing, market manipulation, false market information and money laundering;
- failure to make proper disclosure in primary markets; and
- unauthorised persons or firms carrying on regulated activity without FCA authorisation, including investment scams.
Conduct of investigations
The Approach emphasises the benefits of increasing the likelihood of detection as well as investigating efficiently. The latter involves acting where there is serious misconduct and stopping investigations where it is clear there is no serious misconduct. Mr Steward has previously said that he is comfortable with opening a greater number of investigations than the FCA has in the past, in the knowledge that many will need to be closed without taking formal action. In September 2017 he announced a 75 per cent increase in open investigations.
However, there is a perception in the industry that this approach has led to many investigations drifting for months, and often then being closed. The greater number of investigations has not yet resulted in a greater number of public outcomes. Unless and until the FCA can show that it is achieving results, the success of its approach must be regarded as unproven.
In a positive move towards increased accountability the FCA proposes to measure the timeliness of its investigations and actions. The FCA further proposes that both during and at the end of any investigation, whatever the outcome, the FCA will get feedback from subjects of investigations to continually improve its processes.
Encouragement of remedial action
The Approach states several times that firms which voluntarily, proactively, and speedily take remedial action will receive lower sanctions. The FCA will review what steps the firm or individual has taken to address the harm and to cooperate with it, including, where relevant, in cooperating with any variation of permission or with the imposition of a requirement under Part 4A of FSMA. Conversely, the FCA will impose more severe sanctions on those who fail to address harm.
It remains to be seen how this will work in practice. At the start of an investigation a firm may well not have sufficient factual details to conclude whether or not it has done anything wrong, let alone whether there has been customer or market detriment or how extensive any such detriment is. Firms should not be penalised for failing to remediate in this situation. The increasing likelihood of one or more senior managers also being under investigation is likely to complicate matters further.
The FCA has started the long-promised review of its penalties policy and plans to publish a consultation paper later this year. Though some commentators hope for a move away from the very large penalties of the post-crisis era, it is worth remembering the genesis of this review. It was originally recommended by the Parliamentary Commission on Banking Standards, which said in 2013:
"To provide greater incentives to maintain high levels of professional standards, both the FCA and the PRA should be prepared to review again their penalty setting framework in the future to allow for a further substantial increase in fines."
The FCA is also starting work on a fuller review of the whole of the Enforcement Guide and aims to publish a consultation paper on this in 2019.