ENFG 3 Other matters relevant to enforcement investigations

Before a case is referred to the RDC, it will be subject to a legal review by a lawyer who has not been a part of the investigation team. A lawyer who has not been a part of the investigation team will also review warning notices before they are submitted to the settlement decision makers.

The FCA will, in appropriate cases, take enforcement action on the basis of the Principles alone (see DEPP 6.2.14G).

The FCA wishes to encourage firms to exercise judgement about, and take responsibility for, what the Principles mean for them in terms of how they conduct their business. But we also recognise the importance of an environment in which firms understand what is expected of them. So we have indicated that firms must be able reasonably to predict, at the time of the action concerned, whether the conduct would breach the Principles. The FCA will not take enforcement action unless it was possible to determine at the time that the relevant conduct fell short of our requirements.

To determine whether there has been a failure to comply with a Principle, the standards we will apply are those required by the Principles at the time the conduct took place. The FCA will not apply later, higher standards to behaviour when deciding whether to take enforcement action for a breach of the Principles. However, where conduct falls below expected standards, the FCA considers that it is legitimate for consequences to follow, even if the conduct is widespread within the industry or the Principle is expressed in general terms.

The conduct rules in COCON set minimum standards of individual behaviour in financial services. Where senior managers have failed to meet our standards, the FCA will, where appropriate, bring cases against individuals as well as, or instead of, firms . The FCA believes that deterrence will most effectively be achieved by making these individuals realise the consequences of their actions. The FCA’s policy on disciplinary action against senior management and against other individuals under section 66 of the Act is set out in DEPP 6.2.4G to DEPP 6.2.9-BG . The FCA’s policy on prohibition and withdrawal of approval is set out in ENFG 5 .

The FCA uses guidance and other materials to supplement the Principles or other rules where it considers that this would help firms to decide what action they need to take to meet the necessary standard.

Guidance is not binding on those to whom the FCA’s rules apply. Nor are the variety of materials (such as case studies showing good or bad practice, FCA speeches and generic letters written by the FCA to chief executives in particular sectors) published to support the rules and guidance in the Handbook. These materials are intended to illustrate ways (but not the only ways) in which a person can comply with the relevant rules. If a firm has complied with the Principles and other rules, it does not matter whether it has also complied with other material the FCA has issued (see DEPP 6.2.1G(4)).

Guidance and supporting materials are, however, potentially relevant to an enforcement case and a decision maker may take them into account in considering the matter. Examples of the ways in which the FCA may seek to use guidance and supporting materials in an enforcement context include, but are not limited to:

1. (1)

   helping to assess whether it could reasonably have been understood or predicted at the time that the conduct in question fell below the standards required by the Principles;

2. (2)

   explaining the regulatory context;

3. (3)

   informing a view of the overall seriousness of the breaches;

4. (4)

   informing the consideration of a firm’s defence that the FCA was judging the firm on the basis of retrospective standards; and

5. (5)

   being considered as part of expert or supervisory statements in relation to the relevant standards at the time.

The extent to which guidance and supporting materials are relevant will depend on all the circumstances of the case. It is for the decision maker – whether the RDC, Tribunal or an executive decision maker – to determine this on a case-by-case basis.

The FCA may take action in areas in which it has not issued guidance or supporting materials.

The FCA believes that industry guidance and industry codes of conduct have an important part to play in a principles-based regulatory environment, and that firms and individuals may choose to follow such guidance, and firms to have regard to such codes, as a means of seeking to meet the FCA’s requirements and to conform to proper standards of market conduct. This will be true especially where industry guidance and industry codes of conduct have been ‘confirmed’ or ‘recognised’ by the FCA – see DEPP 6.2.1G(4) and DEPP 6.2.1G(4A).

However, FCA-confirmed industry guidance, FCA-recognised industry codes and non-recognised codes are not mandatory. The FCA does not regard adherence to industry guidance, or to industry or market codes, as the only means of complying with applicable FCA rules and Principles.

Industry guidance may be relevant to an enforcement case in similar ways to those described at ENFG 3.4.3G . The specific status of FCA -confirmed industry guidance will be considered when the FCA assesses the relevance of industry guidance in its investigations.

The FCA recognises that there are good reasons for firms to carry out their own investigations. This might be for, for example, disciplinary purposes, general good management, or operational and risk control. A firm needs to know the extent of any problem, and it may want advice about immediate or short-term measures it needs to take to mitigate or correct any problems identified. The FCA encourages this proactive approach and does not wish to interfere with a firm’s legitimate procedures and controls.

A firm’s report – produced internally or by an external third party – may also be useful to the FCA where there is an issue of regulatory concern. Sharing the outcome of an investigation can potentially save time and resources for both parties, particularly where there is a possibility of the FCA taking enforcement action in relation to a firm’s perceived misconduct or failing. This does not mean that firms are under any obligation to share the content of legally privileged reports they are given or advice they receive. It is for the firm to decide whether to provide such material to the FCA. But a firm’s willingness to volunteer the results of its own investigation, whether protected by legal privilege or otherwise, is welcomed by the FCA and is something the FCA may take into account when deciding what action to take, if any. (The FCA’s approach to deciding whether to take action is described in more detail in DEPP 6.2.)

Work done or commissioned by the firm does not prevent the FCA from using its statutory powers – for example, to require a skilled person’s report under section 166 of the Act or to carry out a formal enforcement investigation. A report commissioned by the firm cannot be a substitute for regulatory action, although it may help the FCA decide on the appropriate action to take – for example, by narrowing the issues or removing the need for certain work.

The FCA invites firms to consider, in particular, whether to discuss the commissioning and scope of a report with FCA staff where:

1. (1)

   firms have informed the FCA of an issue of potential regulatory concern, as required by SUP 15; or

2. (2)

   the FCA has indicated that an issue or concern has or may result in an enforcement investigation.

The FCA’s approach in commenting on the proposed scope and purpose of the report will vary according to the circumstances in which the report is commissioned; it does not follow that the FCA will want to be involved in discussing the scope of a report in every situation. But if the firm anticipates that it will proactively disclose a report to the FCA in the context of an ongoing or prospective enforcement investigation, the potential use and benefit to be derived from the report will be greater if the FCA has had the chance to comment on its proposed scope and purpose.

In certain circumstances the FCA may prefer that a firm does not commission its own investigation (whether an internal audit report or a report by external advisers) because action by the firm could itself be damaging to an FCA investigation. This is true in particular of criminal investigations, where alerting the suspects could have adverse consequences. For example, where the FCA suspects that individuals are abusing positions of trust within financial institutions and that an insider dealing ring is operating, it might notify the relevant firm but would not want the firm to embark on its own investigation: to do so would alert those under investigation and prejudice ongoing monitoring of the suspects and other action. Firms are therefore encouraged to be alive to the possibility that their own investigations could prejudice or hinder a subsequent FCA investigation and, if in doubt, to discuss this with the FCA. The FCA recognises that firms may be under time and other pressures to establish the relevant facts and implications of possible misconduct, and will have regard to this in discussions with the firm.

Nothing in ENFG 3.6.1G to ENFG 3.6.6G extends or increases the scope of the existing duty to report facts or issues to the FCA in accordance with SUP 15 or Principle 11.

Where a firm does conduct or commission an investigation, it is very helpful if the firm maintains a proper record of the enquiries made and interviews conducted. This will inform the FCA’s judgement about whether any further work is needed and, if so, where the FCA’s efforts should be focused.

How the results of an investigation are presented to the FCA may differ from case to case. The FCA will take a pragmatic and flexible approach when deciding how to receive the results of an investigation. However, if the FCA is to rely on a report as the basis for taking action or not, it is important that the firm should be prepared to give the FCA underlying material on which the report is based as well as the report itself. This includes, for example, notes of interviews conducted by the lawyers, accountants or other professional experts carrying out the investigation, etc.

The FCA is not able to require the production of ‘protected items’, as defined in the Act, but it is not uncommon for there to be disagreement with firms about the scope of this protection and whether certain documents attract privilege. If a firm decides to give a report to the FCA, the FCA considers that the greatest mutual benefit is most likely to flow from disclosure of the report itself and any supporting papers. A reluctance to disclose these source materials will, in the FCA’s opinion, devalue the usefulness of the report and may require the FCA to undertake additional enquiries.

Firms may seek to restrict the use to which a report can be put, or assert that the report attracts legal privilege. The FCA will accept reports or other materials on a limited waiver of privilege basis as set out below but without agreeing the fact or extent to which they are legally privileged.

The FCA understands that the concept of a limited waiver of legal privilege is not one which is recognised in all jurisdictions: the FCA considers that English law does permit such ‘limited waiver’ and that legal privilege could still be asserted against third parties notwithstanding disclosure of a report to the FCA. However, the FCA cannot accept any condition or stipulation which would purport to restrict its ability to use the information in the exercise of the FCA’s statutory functions. In this sense, the FCA cannot ‘close its eyes’ to information received or accept that information should, for example, be used only for the purposes of supervision but not for enforcement.

This does not mean that information provided to the FCA is unprotected. The FCA is subject to strict statutory restrictions on the disclosure of confidential information (as defined in section 348 of the Act), breach of which is a criminal offence (under section 352 of the Act). Reports and underlying materials provided voluntarily to the FCA by a firm, whether covered by legal privilege or not, are confidential for these purposes and benefit from the statutory protections.

Even in circumstances where disclosure of information would be permitted under the ‘gateways’ set out in the Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001, the FCA will consider carefully whether it would be appropriate to disclose a report provided voluntarily by a firm. If the FCA contemplates disclosing a report voluntarily provided by a firm, the firm will normally be notified and given the opportunity to make representations about the proposed disclosure. The exceptions to this include circumstances where disclosure is urgently needed, where notification might prejudice an investigation or defeat the purpose for which the information had been requested, or where notification would be inconsistent with the FCA’s international obligations.

A need for a joint investigation with the PRA may arise where either the FCA or the PRA identifies circumstances which suggest that a firm or individual has committed misconduct that adversely affects both regulators’ statutory objectives. In such cases, the regulators will determine whether they should carry out separate but coordinated investigations, or whether it would be more appropriate for one of the regulators to carry out an investigation, keeping the other informed.

In such cases, the FCA will attempt to ensure that the subject of the investigation is not prejudiced or unduly inconvenienced by the fact that there are 2 investigating authorities. The FCA and PRA investigation teams will keep each other and their respective supervisory teams informed about the progress of the investigation. Discussions with the firm or individual under investigation should normally occur with the representatives of both regulators present.

Both the FCA and the PRA will seek to ensure that, as far as possible, their respective processes (whether for contested or settlement decision-making) occur in a coordinated and timely manner in a joint investigation. For example, the regulators will, where appropriate, endeavour to settle a joint investigation into a relevant firm or individual simultaneously.

The FCA views cooperation with its overseas counterparts as an essential part of its regulatory functions. Section 354A of the Act imposes a duty on the FCA to take such steps as it considers appropriate to cooperate with others who exercise functions similar to its own. This duty extends to authorities in the UK and overseas. In fulfilling this duty, the FCA may share information which it is not prevented from disclosing, including information obtained in the course of the FCA’s own investigations, or exercise certain of its powers under Part XI of the Act.

The FCA has various powers to assist overseas regulators, including to conduct investigations on their behalf, to compel the production of documents and provision of information, and to compel attendance at an interview to answers questions.

Decisions about whether to apply to the civil courts for:

1. (1)

   injunctions (or in Scotland, interdicts);

2. (2)

   restitution orders; or

3. (3)

   insolvency orders,

under the Act, or other enactments giving the FCA the power to apply for such orders, will be made by an executive director or a director in Enforcement.