ENFG 2 Conduct of typical enforcement investigations

The FCA’s approach to exercising its enforcement powers is guided by the following principles:

1. (1)

   The effectiveness of the regulatory regime depends to a significant extent on maintaining an open and cooperative relationship between the FCA and those it regulates.

2. (2)

   The FCA will seek to exercise its enforcement powers in a manner that is transparent, proportionate, responsive to the issue and consistent with its publicly stated policies.

3. (3)

   The FCA will seek to ensure fair treatment when exercising its enforcement powers.

4. (4)

   The FCA will aim to change the behaviour of the person who is the subject of its action, to deter future non-compliance by others, to eliminate any financial gain or benefit from non-compliance and, where appropriate, to remedy the harm caused by the non-compliance.

Our investigation opening criteria are on our website at www.fca.org.uk/about/how-we-regulate/enforcement/investigation-opening-criteria. For information about publicity, including during FCA investigations, see ENFG 4 .

The FCA will always give written notice of the appointment of investigators to the person under investigation if it is required under section 170 of the Act. The FCA is not always required to give written notice of the appointment of investigators. However, it will normally notify the persons that they are under investigation when the FCA exercises its statutory powers to require information from them, providing such notification will not, in the FCA’s view, prejudice its ability to conduct the investigation effectively.

In certain types of investigations, the FCA may not know the identity of the perpetrator or may be looking into market circumstances at the outset of the investigation rather than investigating a particular person. These investigations could relate to potential insider dealing, market abuse, misleading statements and impressions offences, breaches of the general prohibition, the restriction on financial promotion or the prohibition on promoting collective investment schemes. In those circumstances, the FCA will give an indication of the nature and subject matter of its investigation to those who are required to provide information to assist with the investigation. As soon as a person becomes the focus of the FCA’s enquiries, the FCA will consider whether it is appropriate to notify that person that they are under investigation.

If a decision to open an enforcement investigation into an individual or firm is made, the FCA will, considering the criteria applied in coming to the decision, give the reason for the referral, a summary of the circumstances and potential breaches at the start of the investigation or when otherwise notifying the person under investigation.

For cases involving firms, approved persons or conduct rules staff, the FCA will determine on a case-by-case basis whether to hold scoping discussions with the firm or individuals concerned but will generally do so when specifically requested. Where scoping discussions are appropriate, they will normally be held close to the start of the investigation. The purpose of these discussions is to give the firm or individuals concerned in the investigation an indication of: why the FCA has appointed investigators (including the nature of and reasons for the FCA’s concerns); the scope of the investigation; how the process is likely to unfold and an indication of the likely timing, if possible, of the key milestones and next steps in the investigation; the individuals and documents the team will need access to initially and so on. There may be a limit, however, as to how specific the FCA can be about the nature of its concerns in the early stages of an investigation. The FCA team for the purposes of the scoping discussions may include the nominated supervisor if the subject is a relationship-managed firm.

Throughout the investigation process, there will be an ongoing dialogue with the firm or individuals. We will aim to give periodic updates at least on a quarterly basis covering the steps taken in the investigation to date as well as the next steps in the investigation and indicative timelines. Where the nature of the FCA’s concerns changes significantly from that notified to the person under investigation and the FCA, having reconsidered the case, is satisfied that it is appropriate in the circumstances to continue the investigation, the FCA will notify the person of the change in scope.

There are several ways by which the FCA gathers or receives information for its investigations – for example, by using its statutory powers under the Act or other legislation, requesting information from others (national or international authorities), and receiving voluntary information from others (firms, individuals, whistleblowers, other authorities or agencies).

The FCA has various powers to gather information and appoint investigators. These include, under Part XI of the Act, powers to compel the production of documents and provision of information, to compel attendance at an interview to answer questions, and to require the production of a report by a skilled person. Some of these powers can support both the FCA’s supervisory and enforcement functions – for example, under sections 122A, 122B, 165 and 166 of the Act. In any particular case, the FCA will decide which powers, or combination of powers, are most appropriate to use, having regard to all the circumstances. The FCA also has powers to gather information and appoint investigators on behalf of an overseas regulator on request.

Information may also be provided to the FCA voluntarily. For example, firms may at times commission an internal investigation or a report from an external law firm or other professional adviser and decide to pass a copy of this report to the FCA . Such reports can be very helpful for the FCA in circumstances where enforcement action is anticipated or underway. The FCA’s approach to using firm -commissioned reports in an enforcement context is set out in ENFG 3.6 .

The FCA’s standard practice is to use statutory powers to require the production of documents, the provision of information or the answering of questions in interview. This is for reasons of fairness, transparency and efficiency. It will sometimes be appropriate to depart from this standard practice. For example:

1. (1)

   For suspects or possible suspects in criminal or market abuse investigations, the FCA may prefer to question that person on a voluntary basis, possibly under caution. In such a case, the interviewee does not have to answer but, if they do, those answers may be used against them in subsequent proceedings, including criminal or market abuse proceedings.

2. (2)

   In the case of third parties with no professional connection with the financial services industry, such as the victims of an alleged fraud or misconduct, the FCA will usually seek information voluntarily.

3. (3)

   In some cases, the FCA is asked by overseas regulators to obtain documents or information or conduct interviews on their behalf. In these cases, the FCA will consider with the overseas regulator the most appropriate method for obtaining evidence required – for example, by obtaining it voluntarily.

If a person does not comply with a requirement imposed by the exercise of statutory powers, they may be held to be in contempt of court. The FCA may also choose to bring proceedings for breach of Principle 11, Statement of Principle 4 or COCON 2.1.3R as this is a serious form of non-cooperation.

The FCA will not bring enforcement proceedings against a person for failing to be open and cooperative with the FCA simply because, during an investigation, they choose not to attend or answer questions at a purely voluntary interview. However, there may be circumstances in which an adverse inference may be drawn from the reluctance of a person (whether they are a firm or individual) to participate in a voluntary interview. If a person provides the FCA with misleading or untrue information, the FCA may consider acting against them.

Delays in the provision of information and/or documents can have a significant impact on the efficient progression of an investigation, and so the FCA expects persons to respond to information and document requirements in a timely manner to appropriate deadlines. When an investigation is complex (and the timetable allows), the FCA may decide to issue an information or document requirement in draft, allowing a specified period (of usually no more than 3 business days) for the person to comment on the practicality of providing the information or documentation by the proposed deadline. After considering any comments, the FCA will then confirm or amend the request.

Once it has formally issued a requirement (whether or not this has been preceded by a draft), the FCA will not usually agree to an extension of time for complying with the requirement unless compelling reasons are provided to support an extension request.

The type of interview (eg, being voluntary or compelled) is a decision for the FCA. A person required to attend an interview using statutory powers has no entitlement to insist that the interview takes place voluntarily. If someone does not attend an interview required under the Act, they can be dealt with by the court as if they were in contempt (where the penalties can be a fine, imprisonment or both).

Similarly, a person asked to attend an interview on a purely voluntary basis is not entitled to insist that they be served with a requirement. A person is not obliged to attend a voluntary interview or to answer questions put to them at that time. But they should be aware that, in an appropriate case, an adverse inference may be drawn from the failure to attend a voluntary interview, or a refusal to answer any questions at such an interview.

Where the FCA interviews a person, it will allow the person to be accompanied by their own legal adviser. Depending on the particular facts of the case, the FCA may refuse the attendance of a particular legal advisor, where it may reasonably be assessed as potentially prejudicing the investigation or any other ongoing investigation – for example, where that legal adviser has a conflict of interest or owes a duty of disclosure to another person (including the interviewee’s employer).

The FCA will also, where appropriate, explain what use can be made of the answers in proceedings against the person. Where the interview is recorded, the person will be given a copy of the audio of the interview once available and, where a transcript is made, a copy of the transcript.

Individuals suspected of a criminal offence may be interviewed under caution. These interviews will be subject to all the safeguards of the relevant Police and Criminal Evidence Act Codes and are voluntary on the part of the suspect. The FCA will warn the suspect at the start of the interview of their right to remain silent (and the consequences of remaining silent) and will inform the suspect that they are entitled to have their own legal adviser present. The FCA will also give a cautionary warning in similar terms to interviewees who are the subject of market abuse investigations.

If a suspect has been interviewed by the FCA using statutory powers, before they are re-interviewed on a voluntary basis (under caution or otherwise), the FCA will explain the difference between the 2 types of interview. The FCA will also tell the individual about the limited use that can be made of their previous answers in criminal proceedings or in proceedings in which the FCA seeks a penalty for market abuse under Part VIII of the Act.

Where a suspect has been interviewed under caution, and the FCA later wishes to conduct a compulsory interview with them, the FCA will explain the difference between the 2 types of interview and will notify the individual of the limited use that can be made of their answers in the compulsory interview.

On occasion, where the police have a power of arrest, the FCA may make a request to the police for assistance to arrest the individual for questioning by the FCA (FCA investigators do not have powers of arrest) – for example:

1. (1)

   where it appears likely that inviting an individual to attend on a voluntary basis would prejudice an ongoing investigation or risk the destruction of evidence or the dissipation of assets; or

2. (2)

   where a suspect declines an invitation to attend a voluntary interview.

Where the FCA has appointed an investigator in response to a request from an overseas regulator, it may, under sections 131FA or 169(7) of the Act, direct the investigator to allow a representative of that regulator to attend, and take part in, any interview conducted for the purposes of the investigation.

The factors that the FCA may consider when deciding whether to make a direction under section 169(7) include the following:

1. (1)

    the complexity of the case;

2. (2)

    the nature and sensitivity of the information sought;

3. (3)

    the FCA’s own interest in the case;

4. (4)

    costs, and the availability of resources; and

5. (5)

    the availability of similar assistance to UK authorities in similar circumstances.

Under sections 131FA and 169(9) respectively, the FCA is required to prepare a statement of policy with the approval of the Treasury on the conduct of interviews attended by representatives of overseas regulators. The statement is set out in DEPP 7.

The FCA resolves many enforcement cases by settlement. Early settlement has many potential advantages as it can result, for example, in consumers obtaining compensation earlier than would otherwise be the case, the saving of FCA and industry resources, messages getting out to the market sooner and a public perception of timely and effective action. The FCA therefore considers that it is in the public interest for matters to settle, and settle early, if possible. It can also be advantageous to subjects of investigations as it will save resources and time and bring the dispute to an end.

The FCA’s policy for settlement is set out in DEPP 5 and the discount scheme for early settlement is set out in DEPP 6.7. General information regarding the settlement process can be found on the Enforcement section of the FCA’s website at www.fca.org.uk/about/how-we-regulate/enforcement/settlement-mediation-enforcement-cases.

Settlement discussions between FCA staff and the person concerned are possible at any stage of the enforcement process if both parties agree.

When the FCA has a ‘sufficient understanding of the nature and gravity of the breach to make a reasonable assessment of the appropriate penalty’ (as set out in DEPP 6.7.3G), it will normally send a letter to the subject of the investigation to commence the settlement process (a ‘stage 1 letter’).

The FCA will aim to give 28 days’ notice prior to the beginning of the settlement process, or stage 1, to allow the parties involved to make administrative arrangements – for example, ensuring that key staff can be available to participate where necessary in any settlement discussions. Where appropriate, the FCA will offer a preliminary without prejudice meeting to explain the FCA’s view of the misconduct (including the key factual and legal bases for our view), and to give the firm or individual an opportunity to identify where they believe there are errors in the factual basis and to indicate the extent to which they agree with the outline findings.

There is no set form for a stage 1 letter, though it will always explain the nature of the misconduct, the FCA’s view on the sanction and the period within which the FCA expects any settlement discussions to be concluded. In some cases, a draft statutory notice setting out the alleged rule breaches and the proposed sanction may form part of the letter, to convey the substance of the case team’s concerns and reasons for arriving at a particular level of sanction. The FCA will identify the key evidence on which its case relies at the commencement of stage 1. While the FCA will identify the key evidence that underpins our outline findings, the FCA will not generally provide evidence where that evidence is already in the possession of the firm or individual.

The FCA considers that 28 days following a stage 1 letter will normally be the ‘reasonable opportunity to reach agreement as to the amount of penalty’ before the expiry of stage 1 contemplated by DEPP 6.7.3G. Extensions to this period will be granted in exceptional circumstances only. Factors that will be taken into account in considering a request for extension will include the extent to which factors outside the firm’s or individual’s control will have a material impact on their ability to engage in settlement negotiations within the period set out in the stage 1 letter.

Enforcement cases often involve multiple parties – for example, a firm and individuals in the firm. Enforcement action may be appropriate against just the firm, just the individuals or both. In some cases, it will not be possible to reach an acceptable settlement unless all parties are able to reach agreement.

The settlement discount scheme does not apply to civil or criminal proceedings brought in the courts, or to public censures, prohibition orders, withdrawal of authorisation or approval, limitations of the period for which any approval is to have effect, or the payment of compensation or redress.

The FCA will engage senior management in discussions (either heads of department or directors), liaising where appropriate with the settlement decision makers, attending a without prejudice meeting during discussions or arranging for the attendance of an appropriately senior FCA representative.

A firm or individual may agree to resolve part of a case by entering into a focused resolution agreement with the FCA. Information about focused resolution agreements and the process is in DEPP 5.1.8AG.

Except where the FCA has issued a warning notice, and the FCA has subsequently discontinued the proceedings, the Act does not require the FCA to provide notification of the termination of an investigation or subsequent enforcement action. However, where the FCA has given a person written notice that it has appointed an investigator and later decides to discontinue the investigation without any present intention to take further action, it will confirm this to the person concerned as soon as it considers it is appropriate to do so, bearing in mind the circumstances of the case.