UK: The New Regime: What You Need To Know About Handling An FSA Investigation

Whether or not the FSA decides to follow the SEC’s lead and clamp down on commission practices in the UK after it takes over the regulation of insurance intermediaries on 14 January 2005, it is extremely important that regulated businesses and individuals are aware of the scope of the FSA’s investigation and enforcement powers. The handling of an FSA investigation can have a critical impact on its outcome.

The FSA’s information gathering and investigation powers derive predominantly from sections 165 to 177 of the Financial Services and Market Act 2000 (FSMA 2000) and the FSA’s policy and procedures are set out in detail in the Enforcement (ENF) and Decision Making (DEC) Manuals of the FSA Handbook. The scope of powers and range of penalties (disciplinary, civil and criminal) and their application by a regulator bound by legislative provisions and accountable to the Treasury presents a stark change to the enforcement regime which existed under the non-statutory self-regulatory General Insurance Standards Council (GISC) regime.

When exercising its enforcement function (as with all other of its functions and powers), the FSA must have in mind its four statutory objectives: market confidence; public awareness; the protection of consumers; and the reduction of financial crime. On this basis, the FSA has stated that it has chosen not to adopt a "zero-tolerance" approach to enforcement, but a "risk-based" approach which means it concentrates on those cases that are "significant in terms of effect on consumers and markets".

Examples of where the investigation powers may be exercised include where there are circumstances to suggest that a firm or approved person has acted in a way which has:

• prejudiced the interests of consumers;
• breached the requirements of FSMA 2000 and its rules;
• meant a firm no longer meets the threshold condition for authorisation or an approved person no longer meets the requirements of the fit and proper test;
• meant a firm is being used for the purposes of financial crime or money laundering;
• suggested there is concern about the ownership or control of the firm; or
• meant the conduct of regulated activities by the firm are a cause of serious public concern.

The key powers the FSA has to conduct investigations are broad, allowing the FSA to:

• gather information and documentation;
• appoint a "skilled person" to gather evidence and report;
• appoint investigators;
• conduct interviews; and
• assist overseas financial regulators.

FSMA 2000 imposes a statutory restriction on the use of confidential information received by or from the FSA, contravention of which may result in a criminal fine and/or custodial sentence. There is protection for documents and communications which attract legal professional privilege. Failure to cooperate with or giving false information to FSA investigators is a criminal offence which can attract a criminal penalty and a custodial sentence. The same criminal penalties apply to persons who (in relation to any requirement under FSMA 2000 and its rules, not just enforcement requirements) knowingly or recklessly give the FSA information which is misleading in a material particular.

Following an investigation, if the FSA concludes that a breach of its rules has occurred or an offence been committed, and that enforcement action would be appropriate in the circumstances, the procedure is as follows:

• the FSA issues a Preliminary Findings letter;
• comments on the Preliminary Findings letter from the subject of the investigation;
• the FSA refers the matter to the Regulatory Decisions Committee (RDC), (in theory, an independent decisionmaking body of the FSA), recommending that a Warning Notice be given;
• a Warning Notice is issued;
• representations may be made to the RDC by the subject of the investigation;
• Decision Notice issued;
• rights of appeal may be exercised to the Financial Services & Markets Tribunal (the decision) and, in certain circumstances, the Court of Appeal and the House of Lords (matters of law);
• if negotiations or appeal rights are unsuccessful or not exercised, a Final Notice is issued. The content of a Final Notice will usually be publicised with an FSA press release and a copy posted on its website.

Offences exist under the regime which carry various disciplinary, civil and criminal penalties which include: private warnings; public censure; financial penalties; variation of, imposition of terms on or withdrawal of a firm’s authorisation; withdrawal of an individual’s approval or the banning of an individual from the industry through the use of a prohibition order; restitution orders; applying to court for freezing orders, injunctions and insolvency orders; criminal fines and custodial sentences.

Settlement through without prejudice negotiations and/or mediation is available in certain circumstances, although it should be borne in mind that negotiation or mediation with the FSA is an entirely different experience from negotiating or mediating with another commercial party. Being a regulator exercising statutory powers and functions, the FSA is not always in a position to compromise in the same way.

Potential bad publicity is an important consideration. The FSA’s general policy on publicity during the course of an investigation is that it "will not normally make public the fact that it is or is not investigating a particular matter, or any of the findings or conclusions of an investigation." In exceptional circumstances, the FSA may make a public announcement regarding an investigation, examples being where the matter under investigation is the subject of "public concern, speculation or rumour" and publicity is desirable to allay such concerns; or where publicity is unavoidable. If the FSA does not believe that such circumstances exist, there should be no publicity until the publication of the Final Notice stating the enforcement action taken.

In reality, it is generally fairly difficult to challenge the basis on which the FSA is exercising its powers and the handling of the requests reflects this. In the majority of cases, a cooperative, pro-active and constructive approach is the key, and given that FSA personnel are unlikely to possess an encyclopaedic knowledge of any industry, FSA concerns may well be allayed at an early stage through sensible information and document disclosure coupled with a detailed explanation of the issues in question.

All in all, being the subject of (or even peripherally involved in) an FSA investigation can be a time consuming, expensive, intrusive and stressful experience. However, the experience can be improved through sensible management including:

• Conflicts – always identify and manage potential conflicts between the firm and individuals (i.e. employees) from the outset of an investigation. There is more likelihood of achieving an acceptable outcome if the firm and individuals are unified;
• PR & Publicity – it is important to control the publicity element from an early stage given that the FSA is beginning to use publicity in respect of its investigations on a more regular basis;
• Legal Representation – specialist lawyers exist and, unless they have the necessary contentious regulatory experience, it can be potentially dangerous to rely on your corporate legal advisers as they may be conflicted i.e. they may have advised on the matter under investigation. Separate representation may also be necessary for the firm and the key individuals;
• Handling – be flexible in your dealings with the FSA Enforcement Division and be pro-active and constructive; and
• Decision Making and Strategy – form views and, hence, a strategy early.