This article contains some practical tips from a law firm specialising in financial disputes and contentious regulatory matters about how to deal with the Financial Conduct Agency in the context of an investigation. Laurence Lieberman and Paul Glass of Taylor Wessing point the way through the minefield.

This article contains some practical tips from a law firm specialising in financial disputes and contentious regulatory matters about how to deal with the [tag|FCA|]Financial Conduct Agency[/tag] in the context of an investigation. [tag|Laurence Lieberman|]Laurence Lieberman[/tag] and [tag|Paul Glass|]Paul Glass[/tag] of [tag|Taylor Wessing|]Taylor Wessing[/tag] point the way through the minefield.

Why Should Private Banks Prepare for Regulatory Investigations?

The eye-watering fine that the FCA imposed on [tag|JP Morgan|]JP Morgan[/tag] over the London Whale saga shows that the regulator is not slackening in its drive to investigate rule-breaches and punish the perpetrators. As is also well known, the enforcement spotlight is now pointed squarely at the private banking and wealth management industry. Firms should bear in mind recent comments from Clive Adamson, the director of supervision at the FCA, to the effect that lawyers should not attend meetings between a regulated firm and the FCA. It is crucial, therefore, for the regulated entity in question to minimise risk to itself while dealing with regulators in such a way that they feel that they are getting the co-operation they require.

When the First Letter Hits the Mat

Should a firm in the private wealth industry find itself facing an investigation by the FCA as a precursor to enforcement action, it must bear in mind the recent shift in regulators' attitudes towards greater co-operation than ever before on pain of stiffer penalties. By 'investigation' we mean a line of FCA enquiry that goes beyond a typical ARROW visit. Such an investigation, however serious it eventually turns out to be, usually starts out with an initial letter of some sort. In it, the FCA will set out the alleged rule-breaking activity that it will uncover at the firm if it makes its case. It will typically contain a description of the work that the FCA has been doing in the relevant field and the problem that it wishes to tackle. Then it should explain why it is concerned about the conduct in question, state the legal basis for the potential breach and the sanctions if the breach is proved.

The regulators can investigate matters beyond the ambit laid down in their initial letter. It is the job of the lawyer to keep the investigation as focused as possible. The regulator may ask about one subject and then move into a new area; with the right strategy, the private bank and its lawyers can curb this.

When Should Lawyers Come to Meetings Between a Private Bank and the Regulators?

There are plenty of reasons why a private bank or wealth/asset management firm might have to hold meetings with the FCA and it is not necessary for lawyers to attend them all. Some meetings will be regular updates with the firm's allocated point of supervisory contact at the FCA; if there is no issue that might be considered out of the ordinary for such a meeting, there is no reason for lawyers to attend, although it is usually worth running through the agenda and discussing the issues briefly with lawyers beforehand.

However, if a bank is to hold any meeting with the FCA that either relates to an investigation by the FCA or at which the bank is reporting information to the FCA that may lead to an investigation or may bring regulatory failure to light, it is important to involve lawyers (and if appropriate, other professional advisers) at an early stage. The bank's approach to the first meeting can influence the way in which the FCA treats a matter and might even have a bearing on whether it decides to undertake an investigation. Legal advice about potential problems, how to deal with the regulator and how to search for or remedy breaches of the rules should be a key part of a firm's early response to such meetings and can have a weighty influence on the investigation.

A lawyer's presence at the first meeting does not necessitate his or her attendance at all subsequent meetings. Indeed, their absence can help to facilitate rapport between the relevant business people in the firm and the regulators who are running the investigation, which may lead to a better working relationship and consequent benefits. Of course, any critical 'staging post' meetings may require lawyers, particularly if they touch on issues such as settlement, redress or admissions of breach.

How to Prepare for and Approach a Meeting with a Regulator

In advance of an initial meeting with the FCA, the bank must identify the relevant issues and think of ways to guide the meeting in the least damaging direction. It is also important to have a plan for what to do next. Much depends on not making extravagant promises to the FCA about the times when it will be receiving follow-up information; it is always better to lower expectations than to raise them. If the bank needs an extension of time to conduct a proper internal investigation, and these can be very lengthy, it should ask for it. The length of time should be enough for the firm to reach preliminary conclusions at least but not so long as to irritate the FCA with unnecessary delays that it might take to be intentional. Often, as a precursor to a meeting, the FCA will write to the targeted firm to set out its views about the rules it might be breaking and ask for a formal written response within a tight time-frame. Again, the firm should make sure to obtain an extension if it needs one. If it has the opportunity to investigate properly, it will be able to provide the regulator with a far more meaningful response.

The FCA will usually remind firms of their duty to deal with it in an open and co-operative way, often at the start of a meeting. It is important to comply with that requirement. However, the regulated entity in question will often benefit by trying to steer meetings towards certain areas and away from others, while keeping the discussions confined to the precise issues. It is possible to do this while still complying with regulatory obligations and being co-operative. It is, however, also vital not to misinform the FCA, as the JP Morgan fine demonstrates.

It is equally important to ensure that everyone the bank sends to the meeting can discuss the issues at an appropriate level of detail while being prepared to admit that certain areas still require further investigation. The presence of someone senior enough from the organisation, whether on the business side or the compliance side, shows the FCA that the organisation is taking the issue seriously. The level of necessary seniority at a private bank tends to vary according to the stage that FCA inquiries have reached and the nature of the investigation. The presence of the head of UK business is always well received, especially at pivotal 'staging post' meetings. If the enquiry is about something sector-specific such as insurance products, it is a good idea to make sure that the head of the bank's insurance business is at the important meetings. Alternatively, and particularly in the case of private banks, the regulators would, for example, welcome the presence of the head of client service. Often the firm will want its chief compliance officer or a senior legal representative to be present as well.

If the meeting is, in effect, an informal 'interview' conducted by the FCA in the course of an investigation, the presence of a lawyer is essential. It is vital before the interview to discuss what the interviewee is prepared to respond to, what he or she will say and to consider whether he or she should take their own independent legal advice. The interviewee's interests will not necessarily be the same as those of the firm.

Inadvertent Admissions During Interviews

It is important to note that an interviewee, whether authorised to carry on a controlled function or not, must comply with the duty to co-operate. It is permissible, however, for anyone to query a question if he or she believes it to be unfair or unclear in some way. Senior managers, compliance officers and their legal advisers at private banks are entitled to try to ensure that interviews stick to their advertised subjects. The FCA, according to its own normal practices, should notify the interviewee of the subjects that the interview will cover in advance and the bank should ask the regulator to provide copies of any documents that he will have to discuss at the meeting.

This does not necessarily mean that the interview will stay within its original bounds; the FCA can (and often does) move on to territory for which the interviewee has not prepared, which can lead to an unguarded response. The bank should therefore consider additional areas of exposure in advance and then prepare the interviewee for any questions that might rove farther afield than the expected subject of the interview.

Similarly, when the FCA turns from looking at a corporate breach of the rules to a personal breach, it can put the interviewee in a position of conflicting interests – or at least might give rise to the perception of such a conflict – and can lead to inadvertent admissions if he or she has not been prepared for this eventuality.

Generally speaking, the interviewee should be reasonably forthcoming but should also be prepared to hold firm if the subject matter strays beyond its original subject or subjects. 'Holding firm' does not mean refusing to answer questions on a certain subject; it is instead an appeal to reason. The interviewee might, for example, say “I don't have the information to answer that question,” or “I'm not in a position to say right now,” stating his reason why that is the case, or “I don't understand why that's relevant.”

It is also perfectly acceptable for an interviewee to answer a question by saying “this is not within my personal knowledge” or “this is a question about somebody else's job and not mine.” He or she can also object to answering if the question impinges on legal privilege, for example if it could lead to revealing information about advice received from a lawyer, or if it might impinge on the right to avoid self-incrimination. When such questions come up, the lawyer can and should ask the FCA to allow his client's representative to go away and consider this-or-that issue as long as this does not become the standard response to most questions.

Problems Caused by Turnover of Staff

It will often be the case that staff who have information that is relevant to an investigation have left the regulated entity. This can itself lead to further avenues of investigation from the FCA, as it may uncover weaknesses in the systems and controls the bank has for the recording and maintenance of information. Turnover of staff also creates the following problems.

• Loss of 'personal' knowledge and knowledge of conversations or meetings which may augment written records.
• The risks involved in the FCA interviewing former staff who no longer feel loyal to the bank.
• Inconsistent approaches to dealing with issues – no matter how carefully a regulated entity drafts its processes, there will always be some inconsistency which the FCA may seek to exploit.
• An inability to rebut points which are not dealt with in written records.

As early as possible, it is important for the bank to pinpoint places where there are likely to be gaps in people's knowledge or information due to staff turnover and work out how best to deal with the issue. For example, can any former employees be contacted? Did they leave the business on good terms? If so, they may be willing to highlight further areas of concern. Did they leave on bad terms? If so, what are they likely to say in an interview with the FCA, and can anything be done to offset the damage? The ideal tactic here is to write a post-departure co-operation clause into employment contracts or compromise agreements. It is rare but not unheard-of for staff to be contractually obliged to co-operate with or help the private bank in various ways for a period of two years or so.

How to Handle Interactions

In our experience, the FCA takes the view that if lawyers are present at an interview with its investigators, they should say as little as possible. The regulators are not necessarily interested in what the lawyers for the private bank have to say; they want to hear from the individual they are interviewing. It is always a bad idea for the lawyer to try to answer the questions for the interviewee and, in effect, lead the meeting. Sometimes, of course, regulators try to 'rattle' interviewees by besieging them with many questions at once. In this case it is the lawyer's job to try to calm things down or clarify the individual questions and deal with them one at a time. If the FCA asks the interviewee to talk about someone else's conduct, it is acceptable for the lawyer to intervene and remind the interviewer that the interviewee is present to talk about himself or the firm.

That said, it is always appropriate for a lawyer to intervene if he considers a line of questioning to be inappropriate, irrelevant, or relating to matters outside the scope of the meeting. If a point needs clarifying or the interviewee has got facts wrong in his answer, this should be discussed with the interviewee and/or raised with the investigator as appropriate. There may be areas into which the regulated entity does not want the interviewer to stray and it can sometimes be easier for the lawyer to try to steer things away from those areas than the interviewee.

Damage might occur to the bank when a line of questioning leads the interviewee into justifying his or her own behaviour, but in a way which harms the regulated entity itself. Proper preparation can prevent the natural tendency to try to exculpate oneself in a way that might damage the firm. If the interview is about the firm's conduct, it is acceptable for the employee to explain that he or she is present to explain the firm's conduct, not his or her own. If necessary, the lawyer can always ask for an adjournment.

One area in which to tread carefully is where, for example, the issue is an abrogation of the systems and controls (SYSC) sourcebook and the interviewee is in the compliance department. The interviewer could draw his attention to his own involvement by, for example, stating that it is obvious from an intercepted email that he failed to take account of something. Instead of embarking on an exercise in exculpation, the interviewee might say “well we can talk about what I did in my personal role, but as I understand it that is not the purpose of today's session. Can you confirm that?”

An Art and not a Science

In short, there is an art to handling regulatory investigations well. It is appropriate and necessary for senior managers and their legal teams to co-operate with the FCA to the correct degree, but it is also important to know when and how to 'push back.' It is important for banks to persuade the FCA to focus specifically on the conduct that it wants to scrutinise. It is vital for a private bank or asset management firm to use lawyers with enough experience and judgment, but those lawyers must, equally, work in close partnership with the firm.

Laurence Lieberman is a partner in the Disputes and Investigations team at international law firm Taylor Wessing. He can be reached on +44 (0) 207 300 4069 or at L.Lieberman@taylorwessing.com
Paul Glass is a senior associate in the same team. He can be reached on +44 (0) 207 300 7000 or at p.glass@taylorwessing.com