Regulatory enforcement proceedings The aim of this note is to give practical guidance on the likely course of enforcement proceedings instituted by the FCA. Set out below is an overview of the process. Separate sections give substantive guidance on the issues likely to arise. Clearly FCA enforcement actions can be brought in relation to a very broad range of underlying conduct. The specific issues will dictate how an enforcement action is likely to proceed. Advice on tactics and strategy in the particular enforcement will depend on a range of factors, including: the underlying subject matter and the facts, the firm s previous record with the FCA in relation to the particular issue and more generally, the involvement of any individuals in the enforcement process, whether the underlying issue is one which is high on the FCA s agenda, enforcement actions against other firms based on similar facts and whether the matter has been, or is capable of being, remediated. This section can, of its nature, only give an overview of the issues in general terms. 1
REGULATORY ENFORCEMENT OUTLINE OF FCA ENFORCEMENT PROCESS Investigation Preliminary findings letter Settlement discussions No further action Staff Decision Recommendation to initiate proceedings Regulatory Decisions Committee No further action Consider staff recommendation Warning notice Alleged breaches Reasons for proposed action Proposed sanction Mediation No further action Oral and/or written representations Decision Notice Alleged breaches. Reasons for decision. Proposed sanction. Right to require referral to Tribunal Decision not agreed. Referred to Tribunal Final Notice Upper Tribunal (Tax & Chancery Chamber) Decision not agreed. Appeal to the Court of Appeal 2
1 Preliminary Findings Letter The Preliminary Findings Letter is usually prepared at, or close to, the completion of the FCA s investigation and sent to the person under investigation. Note that this part of the process is not mandatory and may be omitted, exceptionally, where it is not practicable to do so (for example in a case of great urgency) or would serve no useful purpose, or where the subject of the investigation consents to no letter being sent. The Preliminary Findings Letter sets out the facts which the FCA considers relevant to the issues under investigation and the subject of the investigation is invited to confirm that the factual record there set out is complete and accurate. The Letter often gives a good indication of how the FCA views the facts in terms of regulatory breaches. It will normally annex the investigators preliminary report. The response Settlement discussions Is usually due within 28 days, though longer may be negotiated. Ordinarily, a firm will wish to respond, and it may well be that the Principle 11 duty of co-operation means that the firm will have little choice. The response may be critical in how the FCA views the matter. It is an important opportunity to influence the FCA s thinking on whether disciplinary proceedings are justified and what the appropriate sanctions might be. The focus of the response is usually on the facts, though drafted with a clear eye to the possible/indicated regulatory breaches. It is vital that the response is completely accurate as to the facts. It is important to deal with the issues, but generally wrong to anticipate arguments which are not yet and may never be made. This letter is not a place for overt advocacy. It is important to recognise that admissions will be relied on by the FCA in the enforcement process. The tone should be measured and reasonable. If the facts are not dealt with in the response to the Preliminary Findings Letter it will be difficult, later in the enforcement process, to raise and rely on those facts without running the risk that they are discounted and/or credibility is to some extent compromised. The response will be seen by the Regulatory Decisions Committee. Can be initiated by the Firm following receipt of the Preliminary Findings Letter. Even where this is contemplated, it will still ordinarily be important to ensure that there is clarity about the background facts. Following the receipt of the response, the FCA will decide whether to recommend the institution of enforcement proceedings. 3
2 Referral to the Regulatory Decisions Committee Following the Preliminary Findings Letter exercise, Enforcement staff have the power to decide to take no further action. If they decide to proceed with the matter as an enforcement case, it is referred to the Regulatory Decisions Committee with a recommendation that action be commenced. This referral may take some time in complex cases. All substantive communications between the Regulatory Decisions Committee and the Enforcement team are disclosed to the subject of the investigation. The Regulatory Decisions Committee may decide that further action is not warranted. The Regulatory Decisions Committee may decide that a Private Warning is appropriate, usually if there has been a contravention but full enforcement proceedings would not be the right response. It expresses the Regulatory Decision Committee s concerns about the particular conduct. If the Regulatory Decisions Committee decides that enforcement action is appropriate, a Warning Notice will be issued. Meetings of the Regulatory Decisions Committee are in private. The Regulatory Decisions Committee has power to require persons to attend before it and provide information. It is not a tribunal and will make decisions based on all the information before it, which may include views of the FCA staff about the evidence. 4
3 The Warning Notice The Warning Notice On receipt Access to material Sets out the action which the FCA proposes to take (ie the penalty). Gives the reasons for that action. States whether the statutory right of access to FCA material applies (and if it does, describes its effect and states whether any secondary material exists). The recipient is entitled to make representations and usually 14 days are allowed for this. Longer may be requested from the Regulatory Decisions Committee. Mediation may be considered. There is an FCA mediation scheme. Settlement may again be considered (whether or not through mediation). The recipient has a right of access to the material on which the Regulatory Decisions Committee relied in reaching its decision to send the Warning Notice. There is also a right of access to secondary material ie material which might in the opinion of the FCA be likely to undermine that decision. There are exceptions to this right in the case of privileged material, where the public interest points against disclosure, material intercepted pursuant to a warrant relating to the interception of communications (or which would show the existence of such a warrant) or where it would be unfair to disclose the material taking into account the prejudice which the disclosure would cause to the commercial interests of a third party as compared to the likely significance of the disclosure for the recipient of the notice. If material exists but access is refused on the grounds of privilege, public interest or unfairness, the FCA must so notify the recipient of the notice and give reasons. Third parties The Warning Notice may be served on third parties as well as on the person to be disciplined (if, under section 393 FSMA 2000, the third party is mentioned in the Warning Notice and the regulator giving the notice is of the opinion that the Warning Notice is prejudicial to the interests of the third party). A third party so served has the opportunity to make written or oral representations to the Regulatory Decisions Committee in response. Publicity Representations The FCA may publish information about a matter to which a warning notice relates (s.391(1)(c) FSMA 2000). The FCA has indicated that a statement will normally be published where a warning notice has been issued. The recipient of the Warning Notice may make written or oral representations to the Regulatory Decisions 5
Committee. An oral hearing has to be requested, or the matter will simply be dealt with on the basis of written submissions. Any representations must be factually accurate and carefully checked. The style and tone of the representations will vary with the case. Even though there is in theory another step in the process the Tribunal generally at the point of these representations, it will be appropriate to address all relevant arguments. All depends on the facts. It may be appropriate, for example, to admit some of the FCA s case, but dispute other aspects. Or it may be that argument is limited to the sanction. If there is to be a meeting at which oral representations are to be made, parties may be legally represented, although it may also be an opportunity for a senior individual to be able to make representations on behalf of the firm. 6
4 Decision Notice The Decision Notice Third parties Publicity Is issued once the representations have been considered. Specifies the reasons for the decision. States whether the statutory right of access to FCA material applies and if so, states whether any secondary material exists. Describes and explains the right to take a matter to the Tribunal. May be served with the Decision Notice if it affects them. May be given to the Decision Notice. In practice, the FCA will publish a copy of the Decision Notice where the recipient elects to refer this to the Upper Tribunal. 7
5 The Final Notice The Final Notice Publicity Will be served by the FCA where the recipient of the Decision Notice has not referred the matter to the Tribunal within the 28-day period from the date of the Decision Notice. If the matter is referred to the Tribunal and the FCA is successful, the Final Notice is issued at the conclusion of that process. Sets out the terms of the statements, orders, penalties and gives the date on which these are to come into effect. May be given to the Final Notice. 8
6 Reference to the Tribunal There is a right on the part of a person served with a Decision Notice to refer the matter to the Upper Tribunal (Tax and Chancery Chamber). Reference has to be made within 28 days, or such longer period as is agreed. The reference has the effect of staying the Decision Notice. The Reference Notice Directions Statements of Case Defence The Hearing Sets out the issues for the Tribunal to consider. Will be served on the FCA. The Applicant can seek directions for the further conduct of the matter once the Reference Notice is served. The Tribunal can make directions at any time, and there may be a hearing to consider what directions would be appropriate. The FCA must file a statement of case within 28 days of the Reference Notice. It sets out all the facts and matters upon which the FCA relies in support of its case and the reasons why the FCA took the action it did. The FCA must also serve a list of the documents on which it relies and of those which it believes may undermine its case. Must state the grounds on which the applicant relies in its reference identifying all the points in the Statement of Case which are in dispute. Is usually due 28 days after the Statement of Case. The applicant must also serve a list of the documents relied on. Following receipt of the Defence, the FCA must consider whether there are any other documents which might help the applicant s case and if so make them available. The procedure is within the discretion of the Tribunal. Parties will often be legally represented. Parties may call evidence, and cross-examine witnesses. Is usually in public. Is a complete re-hearing of all the matters in issue. 9
The burden of proof is on the FCA. The standard of proof is the civil standard (balance of probabilities, with cogent evidence being required for more serious allegations eg those involving dishonesty). The decision Costs Appeals Is public. May be awarded against a party who has acted vexatiously, frivolously or unreasonably. Where the Tribunal considers that the decision of the FCA which was the subject of the reference was unreasonable. A decision may be appealed to the Court of Appeal (and ultimately the Supreme Court). An appeal is available only in relation to a point of law. Can only be brought with the permission of the Tribunal or the Court of Appeal. May result in the matter being remitted to the Tribunal. 10
7 Settlement Nature of the process Timing Discount for early settlement Mediation It is open to the person who is subject to enforcement proceedings to seek to settle at any time. A final notice is still published recording the breaches and penalty but it is the product of a negotiated settlement. Negotiations can be on a without prejudice basis. Discussions can be started at any time. It is expected that these discussions be initiated by the firm. The FCA is keen that settlement be explored as early as possible. Generally, however, it is not realistic to expect a settlement before the FCA can be confident that it properly understands the facts and issues. This may mean that the investigation has to run for a period of time in any event. To encourage settlement there is a discount in the penalties which apply depending on the stage at which settlement is reached. That said, the discount is from the level of penalty suggested by the FCA, so it is not possible to predict with scientific accuracy what a financial penalty should be and/or what credit has been given for early settlement. The discount applies only to the penalty element and not to that which reflects the disgorgement of profit. The scale is: 30% for settlement at an early stage that is during the period in which the FCA seeks to understand the breach and determine the appropriate penalty, inform the firm of the penalty and discuss it with them. 20% if agreement is reached before written representations are made to the Regulatory Decisions Committee. 10% if agreement is reached before a Decision Notice is issued. Thereafter, no further discount applies if settlement is reached. Is available as a process to try to reach a settlement. It is available after the Warning Notice is served. It is a confidential, without prejudice process. The mediation scheme is administered independently of the FCA, by CEDR (Centre for Dispute Resolution). Costs are shared equally between the parties. 11
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