FCA and PRA joint policy statement regarding enforcement decision-making

The Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”) have published a joint policy statement on the proposed implementation of HM Treasury's (“HMT”) review of enforcement decision-making at the FCA and the PRA and Andrew Green QC's report into the FSA's enforcement actions following the failure of HBOS plc (see here for the joint policy statement). The policy statement outlines the amendments to the FCA’s Glossary, the Decision Procedure and Penalties manual and the Enforcement Guide.

Background

The joint policy statement has its origins in the regulatory response to the financial crisis of the last decade.

HMT Review and the Green report

On 18 December 2014, HMT published its Review of enforcement decision-making at the financial services regulators (the “Review”) (see here). The focus of the Review was on the transparency, fairness, effectiveness and speed of the FCA’s and PRA’s enforcement decision-making processes. The Review made a number of recommendations to the FCA and PRA with a view to improve decision-making at both regulators.

On 19 November 2015, the PRA and the FCA published two reports: (1) A joint report into the failure of HBOS plc (see here); and (2) Andrew Green QC’s Report into the FSA’s enforcement actions following the failure of HBOS (the “Green Report”) (see here). The Green Report made four recommendations, three of which were relevant to the Review recommendations, namely: (1) pre-referral decision-making, (2) continuing dialogue between enforcement and supervision during an investigation, and (3) informing the subject of an investigation about the matters under investigation.

FCA and PRA joint consultation paper

On 14 April 2016, the FCA and PRA published a joint consultation paper on proposals to implement the recommendations made in the Review and the Green Report. The joint policy statement, published on 1 February 2017, reflects the outcome of this consultation process.

Amendments to enforcement policies and processes

The joint policy statement indicates the changes that the FCA and PRA have made (or will be making) in respect of enforcement policies and processes. These are as follows:

• how decisions are made whether to refer an issue to Enforcement and Markets Oversight or the Regulatory Action Division for investigation;
• the provision of more information to the subject of an investigation (whether individual or corporate) about why they have been referred for investigation;
• regular updates throughout an investigation, as well as ensuring there is increased engagement with the subject;
• effective levels of dialogue between Enforcement and Supervision during an investigation; and
• producing more detailed guidance on the process for joint FCA and PRA investigations.

Other changes include the following:

• The FCA is introducing a process for partly contested cases. According to the FCA, this will allow a person under investigation to agree certain elements of a case (whether penalty, facts, liability or a combination of these issues) and contest the other elements before the Regulatory Decisions Committee.
• The FCA is providing a mechanism for those under investigation to proceed more directly and quickly to the Upper Tribunal.
• The FCA is abolishing penalty discounts at Stage 2 and 3 of settlement, and retaining the same panel that gave the warning notice to hear representations and decide whether to give a decision notice.

Next steps

The FCA’s proposals that have not already been put into practice will be implemented by the amendments to the FCA Handbook . The majority of these will came into effect on 31 January 2017. Two proposals that are potentially of most interest will come into effect on 1 March 2017:

• the introduction of partly contested cases, and
• the abolition of Stage 2 and 3 discounts to penalty in settlement

See Appendix 1 of the policy statement for the instrument providing for the consequential amendments to the FCA Handbook, namely the Decision Procedure and Penalties Manual and Enforcement Guide (Review) Instrument 2017 (FCA 2017/4).

The PRA will be issuing a policy statement later this year to explain in further detail its enforcement processes.