On 1 February, the UK's Financial Conduct Authority announced important changes to its enforcement process, most of which will take effect on 1st March. Polly James (pictured), a partner at the City law firm of Berwin Leighton Paisner, hopes that these changes will make the enforcement process fairer in future.

Since HM Treasury published its enforcement process review report more than two years ago, we have been waiting in hope (rather than expectation) to see some constructive changes to the FCA enforcement process that would make it seem to be stacked less heavily in favour of the regulator.

The existing enforcement process has too often proved itself to be unjustifiably regulator-friendly, with the FCA benefiting from the rising pressure upon firms and individuals (as fines have risen) to settle at the earliest possible stage in return for a 30% settlement discount. The structural advantages that the FCA has built into the enforcement process for itself since 2005 (when the 'executive' settlement discount was introduced) have given an unhealthy degree of power to its Enforcement Division, which it has not always exercised responsibly.

Recently, there have been signs of discomfort about this in the upper echelons of the FCA. Mark Steward, the current Director of Enforcement and Market Oversight, has been vocal about the need for the regulator to approach enforcement investigations with a genuinely open mind, rather than focusing on finding evidence that supports the case that it wants to open. CEO Andrew Bailey’s 'mission statement' in October echoed some of these thoughts.

Grounds for hope

That was in 2016. Today, there are more tangible grounds for hope because the FCA is promising real structural change. The recent statement by the Prudential Regulation Authority and the FCA about their policy for implementing HM Treasury’s enforcement process review set out a new mechanism (to be introduced on 1 March) whereby firms and individuals will be able to secure settlement discounts while continuing to contest key aspects of their cases with the regulator. This is even to be the case if they are arguing their cases before the Regulatory Decisions Committee (RDC), an FCA panel which operates separately from the Enforcement Division.

Structural changes

Under the current executive settlement process, any firm or individual subject to FCA enforcement action stands to receive a 30% discount on the fine that the FCA would otherwise levy if he or it settles the case during 'Stage 1' - a period that starts when he or it receives a "draft warning notice" from the regulator and ends 28 days later. Very rarely, exceptional circumstances might justify an extension. If no settlement is reached then, there remains a right to settle for a 20% discount during Stage 2. Once Stage 2 has ended (on the last day for making written representations to the regulator in response to a warning notice), there is a final chance for the firm or individual to negotiate 10% off the financial penalty if settlement is reached during Stage 3, which ends on the date when the FCA publishes a decision notice.

The new settlement process retains the Stage 1 settlement period and also introduces the concept of a "focused resolution agreement" under which the target of the investigation (to whom the regulator always refers as a 'subject') and the FCA can agree on some aspects of the case but disagree on others, and the 'subject' can still retain a proportion of the settlement discount despite not reaching agreement with the FCA on everything. The discount varies. It will be 30% if the facts and breach are agreed upon, with only the penalty being contested. If both liability and penalty are contested, the discount will be between 15% and 30% (depending upon how much has been agreed between the FCA and the firm/person under investigation).

We expect this to make a real difference for firms and individuals under investigation by the FCA who have good defensive arguments to make, but who would previously have been under irresistable pressure to jettison those arguments in order to settle at an early stage and secure a 30% discount.

Cultural changes

The regulator's policy statement also makes it clear – quite rightly - that it will no longer be acceptable for the FCA to start an enforcement investigation with a pre-determined view of the likely outcome. It emphasises “the value of enforcement investigations as a forensic review of what has happened, which then allows us to consider whether (and, if so, what) action should be taken by the FCA as a result.”

However, the FCA will have to undergo significant cultural changes before this new approach to enforcement becomes a reality. In our experience, it has long been normal for FCA enforcement investigators to come into a new case with a clear view of the result – or at least the range of results – that they want from it. This cultural change will be at least as challenging to implement at the FCA as the aforementioned structural challenges to the executive settlement procedure.

Other process changes

The policy statement also sets out a number of more minor process-related changes that ought to make life slightly less intolerable for firms and individuals who are on the receiving end of enforcement investigations. A promise of regular case updates, 28 days’ notice of the beginning of the Stage 1 settlement discount window, and more information in the Memorandum of Appointment of Investigators about the nature of the allegations and the relevant facts that the FCA is relying upon so far - all these developments are very good news. However, all this has to happen in the context of a clear commitment by the FCA to complete investigations – particularly those into individuals’ conduct – more speedily. Such investigations routinely take 2-3 years; the FCA ought to give much greater thought to the effect that its actions are having on potentially innocent people's health, careers and family lives. It has a moral duty to ensure that its present emphasis on individual accountability does not have a blinkering effect, causing it to ignore the human suffering that regulatory enforcement action can inflict.

Further changes that ought to happen

The proposals have fallen short in one important area. It is not at all unusual to see the FCA's Supervision Division referring cases to its Enforcement Division on the strength of 'investigation reports' (which can be produced internally or externally) that criticise the conduct of individuals without affording those individuals any right of reply. This is patently unfair. Even if the FCA keeps its word in relation to investigating matters fully before considering what result may be appropriate, this practice threatens to expose people to an arduous enforcement process unfairly and without good reason. The FCA ought to impose a blanket ban upon itself, promising not to investigate individuals for enforcement purposes without giving them a right of reply solely because of the contents of a report. This small change in policy would, without a doubt, make the enforcement process far fairer.

* Polly James can be reached on +442034003158 or at polly.james@blplaw.com