The FCA’s objectives include protecting consumers, ensuring the integrity of the UK financial system and promoting effective competition, to ensure that markets function well.
It has extensive powers to investigate companies and individuals for matters including breaches of FCA rules (for example, failure to conduct business with due care and skill, or appropriate systems and controls), insider dealing, market manipulation and other forms of market abuse, breaches of anti-money laundering rules, mis-selling and infringements of competition law.
The ramifications of an FCA investigation can be extremely serious for any business and it is essential to proceed with the utmost care and appropriate legal advice.
The FCA has a range of tools to gather information and investigate. These include powers to require companies and individuals to produce information and documents, compel individuals to attend interviews, and appoint (or require a company to appoint) a third-party ‘skilled person’ to undertake an investigative, monitoring or remedial review (at the company’s expense).
The FCA can also carry out ‘dawn raids’ (that is, unannounced visits to a company’s premises to search for information).
Where it identifies breaches, the FCA can impose stringent sanctions and penalties, including public censures, unlimited financial penalties, and suspensions, restrictions and disciplinary prohibitions on companies and individuals.
Initial stages of an investigation
An investigation may originate in several ways. First, the FCA will generally appoint investigators and (unless it could prejudice the investigation) send a notice and Memorandum of Appointment of Investigators to the relevant business or individual.
On receiving this, the key points to analyse will be the outline reasons for the appointment, the relevant period and the specific breaches under investigation.
This will often be followed by ‘scoping discussions’ between the investigators and the target of the investigation. The aim of these discussions is to indicate the nature of, and reasons for the FCA’s concerns, the scope of the investigation, the likely timing of key milestones and the types of documents and individuals to which the FCA will require access.
In practice, it is often difficult for the FCA to impart much specific information at these meetings, but they can provide an important opportunity for an investigation subject to acquire potentially valuable information at an early stage.
Companies should also consider whether it would be appropriate to conduct an internal investigation in relation to the issue(s) identified by the FCA. If so, it will be important to engage carefully with the FCA to avoid prejudicing its investigation (for example, if an internal investigation could alert individuals suspected of wrongdoing).
Where companies or individuals identify problems, appropriate remedial action should be taken, without waiting for a FCA investigation to end. The FCA has indicated that it is likely to “give substantial credit to wrongdoers who speedily address wrongdoing”, when deciding on appropriate enforcement action.
At all times, companies and individuals should bear in mind legal obligations to disclose information proactively to the FCA in certain circumstances.
Information gathering and interviews
The FCA will use its investigative powers to require individuals and companies to produce specific documents and other information by particular deadlines.
These requests can be time-consuming and onerous, for example extending to electronic written communications of all types (including instant messaging), audio recordings, trading or sales data, and any other information sources.
The FCA can also compel individuals to attend interviews with investigators and answer their questions. Anyone invited to an interview can attend with legal counsel (which is highly advisable). The interview will generally be recorded and the FCA may share in advance a pack of documents (which should be carefully studied), and subsequently a transcript.
The FCA is obliged to act fairly and reasonably, and it is important to be aware of certain limitations on its investigative powers. In particular, the FCA cannot compel the production of information protected from disclosure by legal professional privilege, or use evidence compelled from a person against them in criminal proceedings.
After completing its investigation, if regulatory action is recommended, the FCA will usually send a preliminary investigation report to the investigation subject, who will then have the right to respond. However, in exceptional circumstances and cases of urgency, the FCA can dispense with this.
Statutory enforcement notices
The FCA (in many cases, the Regulatory Decisions Committee) will determine whether, on the basis of the investigations, to issue an enforcement notice. In most enforcement actions, the FCA will issue a ‘warning notice’, describing the action the FCA proposes to take and its reasons.
In certain cases, access will be given to material referred to in the notice (for example, certain correspondence and key materials relied on). The recipient may then make representations in writing or in person (or both) within a period (at least 14 days) specified in the notice.
If, having considered the representations, the FCA decides to proceed with enforcement action, it will issue a ‘decision notice’. Thereafter, the company or individual has the choice whether to accept the findings or dispute them by referring the matter to the Upper Tribunal (which may ultimately involve a public hearing).
If the decision notice is accepted, or after the determination of the Upper Tribunal, the FCA will issue a ‘final notice’.
The degree of publicity of the FCA’s findings in the statutory notices will be a key consideration for a company or individual under investigation. In broad terms, the FCA may publish information about a warning notice, where it considers this appropriate, including identifying any company under investigation (but generally not individuals).
The FCA will normally publish a decision notice if the investigation subject refers the matter to the Upper Tribunal. The full text of a final notice is ordinarily published on the FCA website.
At any stage in the enforcement process (once the FCA believes it has sufficient understanding of the issues under investigation), parties may seek to engage in settlement discussions. Therefore, throughout an investigation, companies and individuals should keep under review the scope for, and advantages and disadvantages of, settlement.
For example, a potential discount of 30 per cent on any proposed penalty is available if settlement is reached in ‘stage one’, which ends after the FCA has communicated its assessment of the relevant conduct and allowed a reasonable opportunity to reach agreement on the penalty.
The FCA may also agree to a “focused resolution agreement” where the parties agree on “one or more, but not all, of the issues relevant to a proposed enforcement action”. For example, if a company or individual agrees with the FCA’s position on all relevant facts, but not all breaches, the available discount will be 15 per cent to 30 per cent (if settlement is reached in stage one).
Finally, it is important to be aware that, other than in exceptional circumstances, settlements that lead to a final notice will result in some degree of publicity.
William Charles is a partner and Vasiliki Katsarou is an associate in the litigation & arbitration group at Milbank
