On 1 February 2017, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) published a policy statement which outlines the changes that will be made to the regulators’ enforcement policies and processes (“Policy Statement”).1 The FCA and the PRA have said that the changes are aimed at “strengthening the transparency and effectiveness of their enforcement decision-making processes.”2
Key Changes
The FCA has already implemented some of the proposals it discussed in the course of consultation. For example:
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When a decision to refer a matter to enforcement for investigation is made, the FCA will set out in writing (and give to the subject under investigation at the time a Memorandum of Appointment of Investigators is issued) a succinct summary of the potential breaches, an explanation of the matters giving rise to those breaches and an explanation of the criteria it has applied in coming to the decision to refer.
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The FCA now publishes an annual review of the RDC (the first of which was annexed to the FCA’s most recent annual report). The annual review considers matters such as the extent to which the RDC membership includes expertise appropriate to the areas in which the FCA is likely to take action and operational performance.
In addition, the FCA confirmed that the following proposals will come into effect on 1 March 2017:
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This will allow a person under investigation to agree to some elements of a case (e.g., the facts, liability and/or appropriate penalty) and contest the other elements before the RDC while retaining the ability to obtain a discount on the penalty that reflects the extent to which the issues had been agreed.
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This means that, in order to obtain a discount to the penalty, a firm or individual under investigation must settle with the FCA by the end of Stage 1 of the enforcement process (i.e., prior to a Warning Notice being issued). However, the FCA’s introduction of partly contested cases means that the subject under investigation can still obtain a discount to the penalty without settling all elements of the FCA’s case.
The PRA has said that it intends to publish a short guide to its enforcement procedures (including its referral criteria) and an additional policy statement on the establishment of an Enforcement Decision-Making Committee. It will also conduct a review of its approach to settlement.
What You Need to Do
Financial services firms and individuals that are currently, or that expect to be, subject to FCA and/ or PRA investigation should ensure that they understand the changes outlined in the Policy Statement. They are strongly encouraged to speak to their advisers early and to consider with their advisers whether their approach in existing enforcement matters remains appropriate.
Background
Consideration of changes to the regulators’ enforcement decision-making processes was placed in the spotlight in 2014 when Treasury published its Review of enforcement decision-making at the financial services regulators (“Enforcement Review”). A year later, it reappeared on the reform agenda with the regulators’ publication of (i) a joint report into the failure of HBOS plc and (ii) Andrew Green QC’s Report into the FSA’s enforcement actions following the failure of HBOS (the latter more commonly known as the “Green Report”).
In April 2016, the regulators published a joint consultation paper, which outlined their proposals in connection with the implementation of recommendations made in the Enforcement Review and the Green Report (“Consultation Paper”)4. The Policy Statement follows from the regulators’ consideration of submissions to the Consultation Paper. In total, there were 13 submissions to the Consultation Paper.
1 See Policy Statement FCA PS17/1 / PRA PS2/17: Implementation of the Enforcement Review and the Green Report, which is available here: https://www.fca.org.uk/publication/policy/ps17-01.pdf.
2 FCA press release “FCA and PRA publish final changes to enhance enforcement decision-making processes,” 1 February 2017.
3 The FCA operates a discount scheme for early settlement (set out in DEPP 6.7) where a discount of 10 percent, 20 percent or 30 percent is applied, depending on the stage of the proceeding (Stage 1, 2, 3 or 4) at which a settlement is reached.
4 See Consultation Paper FCA CP16/10 / PRA 14/16: Proposed Implementation of the Enforcement Review and the Green Report, which is available here: https://www.fca.org.uk/publication/consultation/cp16-10.pdf.
