UK: FW's Top Tips On What To Do When Faced With An FSA Investigation

Last Updated: 23 April 2012
Article by Peter Wright and Deepak Arora

This article was written for and first featured in Bloomberg Law Reports®, UK Financial Services Law, Vol. 3, No. 12

What to Do When the FSA Comes Knocking on the Door

The Financial Services Authority (FSA) is continuing to focus its attention on individuals who work in the London markets. The recent expansion of the FSA's requirement to record telephone conversations and electronic communications made from traders' mobile devices highlights this focus. Its aim is to heighten oversight of and help deter and detect acts of market abuse and/or insider dealing. As recent action shows, the FSA is increasing the number of criminal and regulatory insider dealing and market abuse investigations and individuals are now increasingly likely to find themselves on the receiving end of the FSA's disciplinary powers.

Individuals often fear an investigation by the FSA's enforcement division. It can be a nerve-racking, uncertain, complex and often both a professionally and personally disruptive experience.

However, by planning ahead and adopting a few practical tips, the experience need not be quite so traumatic. The key is in understanding and preparing for the process and knowing what is expected.

Tip 1 – Conduct: Be Ready & Be Helpful

The FSA will only come knocking should it suspect some out of the ordinary activity. If a large number of shares in a company are purchased just before a public takeover announcement, the FSA's market monitoring team may start asking questions of those involved or who have dealt recently in the shares. The way that a person deals with the investigators will set the tone of the investigation from the start. You may be unknown to the FSA, and as in any situation, first impressions are vital. Some important points to remember are:

  • Active involvement at an early stage will help build a "regulatory rapport" with the FSA and help create confidence that the target of the investigation is engaging properly with the regulator. This could impact positively on the development of any enforcement action, or indeed whether it is necessary for an investigation to be conducted.
  • If the investigation's target is an Approved Person he is governed by the Statements of Principle and Code of Practice for Approved Persons (APER) in the FSA Handbook. These require the FSA to be dealt with in an open and co-operative manner, and this obligation continues during an investigation. The worst thing a person can do is to be defensive, disruptive, unhelpful and non-cooperative. In the worst case this could become the basis for regulatory action itself.
  • While unregulated individuals are not subject to APER, if an unregulated person becomes embroiled in an FSA investigation into market issues, it is still important to create the right impression to help minimise the risk of an investigation turning into substantive enforcement action. In the worst case scenario where enforcement action is actually taken, the right approach still could help secure valuable credit at an early stage in the eyes of the investigation team and help to mitigate any future sanction the regulator may seek to impose.

Tip 2 – Understand the Investigation

To fully prepare for, engage in and respond to an investigation, it is vital to identify and understand the possibilities and potential consequences of the investigation. The FSA could be planning a criminal insider dealing investigation, a civil market abuse case or a failure to meet market standards.

In a regulatory case, a scoping discussion ordinarily maps out and sets the tone for the investigation – who is under investigation, why, key issues to be investigated and what documentary evidence the FSA will require. It is an invaluable opportunity to have an
active involvement in and management of the investigation and ensure the investigation team really gets to know the target, his role and his abilities. It follows the issuance of a Notice of Appointment of Investigators to an individual, and will usually be the first physical meeting with the FSA.

An individual must use the scoping discussion to clarify any holes in his understanding of the process or the exact subjects under investigation. It is intended to be a two-way process that can be used to gain a better understanding of the issues involved and to ensure the FSA does not overstep the bounds of its own investigation. The target should not be afraid to ask questions to clarify what the FSA expects or requires.

In FSA investigations where scoping discussions are not conducted, which often happens in matters with a criminal dimension, the process will be different. If there is the potential for a criminal investigation, then early engagement with skilled advisors is critical to ensure that the subject of an investigation responds appropriately.

Tip 3 – Interviews: Fail to Prepare, Prepare to Fail

Interviews represent an important stage in any FSA investigation. They are the first time the FSA enforcement team will meet with key individuals and gather information. The team will assess interviewees' demeanour, and their opinions will form the basis of decisions made further along the investigation process. Therefore, preparation is key to a successful set of interviews.

  • Interviews can be conducted on a voluntary, compelled or under caution basis. Whichever type of interview is conducted, the target must prepare diligently. When preparing for interviews, one should review all necessary information that is relevant to the investigation and/or has been provided to the FSA, and familiarise oneself with the facts and what the target has direct knowledge of. From the outset, he should start to compile a pack of documents that supports the case should it be required or would be beneficial to have to hand at a later date at short notice.
  • The exact topics and supposed breaches under investigation should be understood, so that interviewees are able to understand what is being asked of them and able to provide focussed and tailored answers. The subject of an investigation into a supposed case of insider dealing should make sure he has full knowledge and details of when he bought the shares in question, why he bought them, how he gained the knowledge that led to the purchase and, if advice was sought from an internal compliance officer, when that advice was taken and what the advice consisted of. Be clear as to what is denied or accepted in terms of the alleged misconduct – very rarely do investigations take place that are completely unwarranted.
  • An interview is formal and tape-recorded, and may take place over several hours or several days in large investigations. There is nothing wrong with asking for time to think about the questions being asked or the answer given, or for time to review documents again to refresh one's memory. Such requests will not be viewed negatively. It is important to review the post-interview transcript thoroughly to ensure it reflects accurately what was asked and answered during the interview. Any undetected inconsistencies that transpire at a later date could be held against the target at later stages.

Tip 4 – Challenging the Regulator: Reasonable and Sensible Challenges

It is all too easy to adopt an overly litigious approach to any FSA investigation. This often creates a poor impression with the FSA and can have a detrimental impact on any eventual decisions taken. However, while the target must be open and co-operative, that does not mean that he should "roll over," and he may challenge and engage with the FSA without being obstructive. If the FSA's questions or document requests are unreasonable or unfair, the target should not hesitate to ask constructive questions or respectfully "push back" for fear of not satisfying his positive obligations under APER. Should the FSA take a view of standard market behaviour that is incorrect or unreasonable, explain this to the FSA and present them with supporting evidence.

  • By assisting and engaging with the FSA in the enforcement process, the target could help alleviate any detrimental outcomes for his future career. For example, very few enforcement cases proceed to the end of the process and the FSA provides strong incentives to settle cases. It is possible to obtain a discount off financial penalties of up to 30 percent should the case reach an early settlement.

The more active, helpful and co-operative the target is, the more useful he will be, and the more likely the FSA will want to settle the case at an early stage. In June 2011, the FSA banned Barnett Alexander from working in the City for five years and imposed a financial penalty of £700,000 for market abuse for manipulation of the price of spreadbets linked to shares on the LSE; this figure took into account a discount of 30 percent for early settlement.1 Had Mr Alexander not co-operated with the FSA at an early stage and admitted his wrongdoing, he would have faced a fine of £1 million, in addition to the restitution of profits that the FSA ordered.

Tip 5 – Reflect, Learn and Educate

If a person becomes involved in a regulatory investigation, then as with any experience, the process and outcomes can provide valuable lessons.

An unusual example of such reflection has been shown by Mr Alexander. Following the disciplinary sanction imposed on him he has expressed a desire to train would-be traders about his shortcomings, how to avoid the loopholes in many firms and how to avoid making the same mistakes he did. He has proclaimed a need for greater clarity and guidance to assist self-employed traders to work out what is and what is not permitted by law.

Whilst this is an unusual approach for someone who has been banned from the industry, there are lessons that can be learnt by all parties to an FSA investigation. For example, if you or your client became involved in an FSA investigation you should consider whether you adopted best practice and whether you could have addressed regulatory concerns at an earlier stage or in an alternate manner to mitigate the adverse impact of an investigation.

Conclusion

An individual under investigation will never be the driving force of an FSA investigation. That said, it is possible to influence its outcome and achieve a desirable result. The key to maximum impact is to be open, honest and properly engaged with the FSA.

Eventual fines imposed or public messages released can be controlled by how the investigation goes. Enforcement cases that are widely publicised often involve the most serious of breaches and are intended to demonstrate the consequences of not meeting regulatory standards. What the public do not read about are the majority of cases which are not pursued by the FSA or which reach settlement at an early stage. This can happen if a person plays his cards correctly.

As soon as a regulatory problem arises, detected by the FSA or otherwise, individuals should seek legal and expert advice from those with the knowledge and expertise of such investigations, to formulate a clear strategy and provide guidance through the regulatory framework.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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