UK: FSA’s Enforcement Process Review

Last Updated: 19 August 2005
Article by Simon Morris, Maxine Cupitt and Sarah Redlich

The Financial Services Authority ("FSA") has recently published its Enforcement Process Review ("Review"), stemming from criticism made by the Financial Services and Markets Tribunal in the Legal and General case and also adverse comments made over the conduct of FSA’s splits investigations. Led by David Strachan, FSA’s director of retail firms and sector leader for insurance, the proposal is to implement the recommendations – intended to ensure that the Enforcement process is seen as fair – by year-end.

The Review focuses on the operation of FSA’s decision-making power within the Enforcement process, especially the decision to commence disciplinary action reserved to the Regulatory Decisions Committee ("RDC"), an FSA Board committee separate from executive management. The Review did not consider the role of the wholly independent Financial Services & Markets Tribunal ("FSM Tribunal"), nor the criteria for taking Enforcement action.

FSA has taken on board many of the comments received from firms and legal advisers alike during the consultation phase and states that it has sought to make the Enforcement process more transparent, and to achieve a higher degree of consistency in the way cases are handled and decisions reached. Most important, it is proposed to increase the separation between the RDC and Enforcement division and to make Enforcement and the firm, or individual, under scrutiny more equal participants before the RDC. Overall the Review’s recommendations bode well for the industry, although it remains to be seen how these are applied and interpreted in practice.


Full Article

The Financial Services Authority ("FSA") has recently published its Enforcement Process Review ("Review"), stemming from criticism made by the Financial Services and Markets Tribunal in the Legal and General case and also adverse comments made over the conduct of FSA’s splits investigations. Led by David Strachan, FSA’s director of retail firms and sector leader for insurance, the proposal is to implement the recommendations – intended to ensure that the Enforcement process is seen as fair – by year-end.

The Review focuses on the operation of FSA’s decision-making power within the Enforcement process, especially the decision to commence disciplinary action reserved to the Regulatory Decisions Committee ("RDC"), an FSA Board committee separate from executive management. The Review did not consider the role of the wholly independent Financial Services & Markets Tribunal ("FSM Tribunal"), nor the criteria for taking Enforcement action.

FSA has taken on board many of the comments received from firms and legal advisers alike during the consultation phase and states that it has sought to make the Enforcement process more transparent, and to achieve a higher degree of consistency in the way cases are handled and decisions reached. Most important, it is proposed to increase the separation between the RDC and Enforcement division and to make Enforcement and the firm, or individual, under scrutiny more equal participants before the RDC. Overall the Review’s recommendations bode well for the industry, although it remains to be seen how these are applied and interpreted in practice.

Current Enforcement procedure – and criticisms

FSA commences disciplinary action to punish a firm or an individually approved person with a fine and a public reprimand; FSA follows a variant of this process when seeking to refuse, or terminate, individual approval or to require a firm to take stated steps, such as to compensate investors. The Review is principally concerned with the process for taking disciplinary action against firms, and for that reason we concentrate on this topic.

If, following an investigation, Enforcement staff consider that disciplinary action is justified, they present the matter to the RDC to decide whether to commence disciplinary action by issue of a Warning Notice. The decision whether or not to issue a Warning Notice is taken by the RDC following a meeting with Enforcement staff and consideration of FSA’s investigation report, any response prepared by the firm and a case review paper containing legal and policy advice. Many firms expressed concern during the Review that this case review paper was not made available to them. The Warning Notice is the disciplinary charges, setting out the conduct that FSA challenges, the rules or principles allegedly breached and the proposed disciplinary action.

A firm that has received a Warning Notice will have at least 28 days in which to make representations to the RDC. These may be made orally, in writing or both, and the firm’s intention will normally be to persuade the RDC to change its mind and reduce the proposed fine or withdraw the Warning Notice. Where a firm makes representations, the RDC (and sometimes Enforcement staff) may ask questions, but will not normally challenge the firm’s representations or make any response.

After considering the firm’s representations, the RDC will reach a decision. This will usually take the form of a Decision Notice, which is FSA’s decision to uphold the original case and penalty, sometimes amended in light of the firm’s representations. More unusually, the RDC may issue a Notice of Discontinuance, indicating that it has been persuaded to abandon the case.

A firm or individual may, within 28 days of a Decision Notice, refer the mater to the independent FSM Tribunal, which considers the whole matter afresh and decides what action FSA should take.

Firms expressed concern during the Review that:

  • FSA sets "enforcement priorities" that might result in FSA taking Enforcement action where use of a supervisory tool might be more appropriate
  • they did not have access to, and so could not comment on, Enforcement’s case review and other FSA papers that could influence the RDC’s view
  • Enforcement staff had too much influence over the RDC – they prepare the brief and advise the RDC on issuing the Warning Notice, attend the firm’s oral representations and then give further commentary and advice on the issue of a Decision Notice
  • the same RDC that had decided to issue the Warning Notice would usually hear the firm’s representations and decide on the Decision Notice, creating the impression that it had already made up its mind before the hearing
  • the Decision Notice often did not reflect points made by the firm in its representations to the RDC.

The core changes

FSA has kept its Enforcement process under continual review, and in July 2004 completed its end-to-end process review. Principally intended to speed up and simplify processes rather than to protect firms, its main recommendations were the implementation of a faster process for referring cases to Enforcement for investigation and shorter time targets for each stage of the process. The Review addresses a different purpose – how to appear fairer to firms while remaining efficient.

Although FSA considers that its current procedures fully meet statutory requirements, it has clearly recognised the importance of addressing the concerns expressed by many firms that they are not always treated fairly while in Enforcement. The Review has therefore recommended several core changes to the Enforcement process, both to increase separation and transparency between Enforcement and the RDC, and also to make the FSA more accountable and open to firms during the Enforcement process. FSA also confirms that investigations must be of the highest quality and the evidence must properly support the breaches alleged. These changes have enhanced the process, rather than radically changed it, and can be summarised as follows. Some changes can take effect immediately while others – principally those concerning formal decision-making and the penalty discount scheme – require consultation (see CP05/11) and are expected to be implemented by year-end.

Improved consistency in case referral

The Review states the importance of FSA maintaining consistency within each of the referring divisions of Supervision and across the FSA in applying the criteria for whether or not disciplinary action should be taken. The delivery of a consistent approach is already assisted by Enforcement Relationship Managers ("ERMs") who interface between Supervision and Enforcement, and the Review recommends that a forum be established where the ERMs’ Supervision counterparts can share good practice with them. There should also be a fuller description of the responsibilities of ERMs and their counterparts in Supervision and FSA should draw up procedures in relation to the Supervision-Enforcement interface to promote a consistency of approach. The Review also assures firms that, once Supervision informs a firm that it will not be referring a matter to Enforcement, that decision will not be reviewed in the absence of any new information.

Separation of Enforcement and the RDC

The key concern among firms was that the RDC relies on undisclosed confidential legal and policy advice from Enforcement in making its decisions and is, therefore, not receiving an impartial view of the case. The Review recommends that the RDC has its own team of legal advisers who will conduct a legal case review to help the RDC reach an impartial and objective view and, when appropriate, challenge the Enforcement view. This legal team will additionally assist the RDC if the case goes before the FSM Tribunal.

A further recommendation is that the RDC no longer takes part in settlement negotiations and only deals with the contested cases. This should address the concern that a firm cannot hold "without prejudice" settlement negotiations with the RDC because it remains responsible for deciding the case. Only FSA senior staff and the firm will now take part in settlement negotiations.

Constitution of the RDC

It is proposed that where a firm makes representations to the RDC following issue of a Warning Notice, the panel should include two new members additional to those who agreed to issue the Warning Notice. This is a welcome development, as it will help to overcome firms’ fear that seeking to persuade the RDC to change its mind is an uphill struggle. The actual composition of the RDC panels should be a matter for the Chairman or Deputy; at the Warning Notice stage it consists of both of them and two other members and, at the decision-making stage, two further new members will now be brought in.

Disclosure of communications

While FSA considers that current procedures are adequate to explain FSA’s case to firms and disclose the underlying evidence – a number of firms might disagree! – the Review makes a significant recommendation intended to create a clearer perception of a "level playing field". This is that all substantive communications between the Enforcement case team and the RDC, whether oral or written and including the case review paper, but not material containing FSA or third party confidential information, should be disclosed to the firm. This will remove the inherent unfairness of a firm having to address the RDC in ignorance of what FSA has said about it. Legal advice that the RDC receives will, like a firm’s own legal advice, be privileged and normally non-discloseable.

Conduct of the RDC oral representations meeting

Another key proposal is stopping the practice of Enforcement staying behind after a firm has made oral representations to discuss them with the RDC. This is particularly welcome as firms feel that it is unfair for Enforcement to enjoy greater access to the RDC than they do.

It is envisaged that, under the new procedures, the RDC representations meeting will be "livelier" than at present with more interaction between the RDC, firm and Enforcement. It should also be more focused because the RDC will give an indication of the key issues, as set out in the parties’ submissions, that it would like clarified at the meeting. This is also welcome because firms often feel that, without any response from the RDC, they cannot tell if their points are being understood, let alone agreed. In addition, either party will be able to make further submissions following the hearing and, if so made, these will be disclosed to the other party. The RDC will remain master of the procedure for the oral representations meeting, and the Review puts down a reminder that this meeting is not intended to be overly formal or adversarial, and that witnesses will not be heard.

Lastly, the Decision Notice should deal with the key points made by a firm when making representations to the RDC after issue of a Warning Notice.

Feedback on the FSA’s Enforcement procedures and subsequent decision-making

The Review recommends that, no later than two months after the conclusion of an Enforcement case, FSA should usually offer those concerned the opportunity to comment on their experience of the procedure and the decision-making. Perhaps unsurprisingly, this will concentrate on the handling of the practical and procedural aspects of the case rather than its outcome.

Accountability; publication of additional information about the RDC

As part of the Review’s drive to achieve greater transparency, it has recommended that further information is placed on FSA’s website about the operation of the RDC and its makeup, together with statistics on the number of cases it has completed and those where it has disagreed with Enforcement.

Confirmation of FSA’s stance in a number of areas

The Review paper also confirms FSA’s stance on the Enforcement process in a number of areas. While the overall practice and policies are unchanged, FSA’s explanations and clarifications help further to demystify the process. These areas include:

FSA’s risk-based approach to Enforcement

The Review has confirmed that FSA will retain its risk-based approach, and will continue to focus its limited resources on issues likely to have the greatest impact on its statutory objectives, as opposed to pursuing every rule breach. Selective use of the Enforcement tool is borne out by the statistics: according to the Review, 106 Enforcement actions have resulted in a published disciplinary outcome, involving 59 authorised firms, 38 approved persons and eight listed companies. In addition, there are 12 Enforcement cases pending at the FSM Tribunal as against a total population of 10,200 authorised firms, some 165,000 approved persons and 2,877 listed companies.

Selection of cases for Enforcement

The Review confirms three drivers for Enforcement action with the net effect that FSA is more likely to identify rule breaches, and hence take Enforcement action, against large groups in relation to its selected priority topics:

  • first, where Supervision selects themes, such as treating customers fairly, complaints handling or conflicts, this is usually chosen because of perceived sectoral weaknesses, and thus is likely to produce additional potential cases of non-compliance for consideration by Enforcement. In other words, Supervision’s focus will often determine Enforcement’s workload
  • next, a crucial factor in the selection process is the importance of "sending out a message" to a particular sector or the industry as a whole. All other things being equal, Enforcement will tend to select those cases that are most likely to send out a clear signal to the industry. This means that a large firm with graphic or significant breaches will often be a suitable candidate for Enforcement
  • lastly, the Review states that in practice the majority of Enforcement actions actually taken have been against "high impact" firms, namely large firms in either size or reputation, who have a large number of investors or volume of activity.

What the Review does not answer – and perhaps could never answer – is the concern of firms that are subject to Enforcement but have standards no different from their peers who have managed to avoid investigation.

Influence of the firm’s overall relationship with FSA in using the Enforcement tool

The Review indicates that if a firm has a strong track record in taking its senior management responsibilities seriously, has been open and communicated the problem with FSA, and taken prompt remedial action where necessary, this may influence FSA’s decision to refer the case to Enforcement. FSA’s website shows examples of cases in which it has taken a decision not to commence Enforcement action on the basis of the way the firm has conducted itself. This is, of course, posited on the basis that the firm accepts that it has done wrong; in practice, many Enforcement actions concern conduct that a firm considers is acceptable but which FSA challenges.

Separation of Supervision from the Enforcement investigation phase

The Review highlights the clear division between the supervisory relationship with the firm and the conduct of the investigation and notes that firms value this. However, the Review also includes a reminder that Supervision may need to brief the Enforcement case team on the firm’s history and compliance record, Supervision’s approach to the subject matter of the investigation, and the status of current issues within Supervision.

Involvement of FSA Senior Management

The Review confirms that the involvement of senior FSA management should continue in cases that are high impact, precedent-setting or require significant commitment of FSA resources.

Settlement

It is clear from the Review that the FSA is still keen to promote and facilitate settlement wherever possible. While no consultation responses seem to have made this suggestion, the Review proposes a fine "discount system" where settlement is achieved early with a sliding scale of discount depending at which of four particular points settlement is achieved. Offers of fine reductions if a firm accepts settlement are already fairly common practice; the Review has simply formalised this practice. It states that the system is intended to save resources, get messages out to the market sooner and assist in the public perception of timely and effective action. But the key justification that settlement results in consumers getting compensation earlier is flawed. In many cases there is either no consumer loss or the firm has already agreed to pay it when required and, in any case, the disciplinary process cannot directly require firms to compensate.

Firms’ concern is not usually the size of the fine, which will rarely cause them significant financial detriment, but FSA’s view of their liability in the first place and the reputational damage that can result from adverse publicity. While the Review states that firms can continue to challenge alleged rule breaches and proposed penalty while considering early settlement, the financial encouragement to settle highlights FSA’s continuing desire that firms accept Enforcement’s case rather than challenging it.

Stages of the Procedure

The Review will result in changes to the Enforcement procedure and additionally current steps have been clarified.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 19/08/2005.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.