Charities and internal investigations
Senior Managers Regime – the FCA predicts more enforcement litigation in the new regime
On 19 January 2017, Mark Steward, Director of Enforcement and Market Oversight at the Financial Conduct Authority (“FCA”), delivered a speech on the ‘Practical implications of US law on EU practice’. The speech (which is available here) provided an interesting insight into, amongst other things, the FCA’s views on the interaction between the Senior Manager’s Regime (“SMR”) and the regulator’s enforcement work.
Mr Steward addressed three key topics in his speech:
The Senior Manager’s Regime
As set out on our website the SMR aims to improve accountability for individuals working in financial services. The SMR has been in force since 7 March 2016. Under the SMR, The FCA (and, where applicable, the PRA) require firms to map out the roles of their senior managers and to allocate responsibilities to them so as to make them individually accountable.
The SMR and a different dynamic
In his speech, Mr Steward argued that a “different dynamic” had been created by the SMR. He explained this as follows:
“First, we don’t expect senior managers to agree so readily to pay high fines to resolve cases. We expect there will be more contest and more litigation.
Secondly, firms may well be reluctant to spend such high sums to resolve investigations where those resolutions do not also resolve cases against senior managers who may also be in our cross-hairs.
And thirdly, there lurk latent tensions in the way in which firms may self-report misconduct or cooperate with the FCA where senior managers in the firm may also be or become subjects of investigation for the same matters”.
Mr Steward continued by noting that:
“Firms are often eager to provide us with their own investigation reports, either to persuade the FCA not to investigate or to influence the scope of the investigation. These reports are often helpful starting points, but as I have said to a number of colleagues who work in this area, I see these reports as having limited determinative value.
Leaving aside the concerns about the forensic rigour of internal investigation reports, there is an inherent conflict of interest as the reports have been commissioned by and prepared for senior management who may well be part of the problem”.
Early detection … rather than early settlement
Mr Steward’s speech reflects a broader change in approach at the FCA’s enforcement division. As he explained, the FCA is seeking to make early detection, rather than early settlement, its primary focus. We have commented on this previously in the context of Financial Crime Return reporting requirements (see here). As we explained, the FCA is increasing its capacity to collect data from regulated entities so as to pinpoint those firms that have issues with their financial controls. This is reflected by Mr Steward in his speech:
“What is more fundamental and important is how quick we are at detecting serious misconduct and then investigating, thoroughly and fairly, so that where serious misconduct can be established, we are able to tackle both its causes, through sanctions, and its consequences, via remedies, reparation and redress”.
Fines….size really does not matter
In light of the above, Mr Steward argued that the “size of fines” imposed by the FCA did not demonstrate “anything significant about the FCA’s enforcement effort”. Thus, the marked reduction (some 97%) in the aggregate level of fines imposed over the past five years was misleading. Mr Steward was at pains to stress that the era of “light touch” regulation had not returned.
In some respects, the approach outlined by Mr Steward was to be expected. Arguably, the FCA has over recent years been moving towards a more sophisticated approach to its enforcement activity, tackling bigger targets and engaging in more complex litigation. However, there remain some unresolved issues in the FCA’s broader approach to investigating alleged wrongdoing at regulated firms. For example, on the one hand, the FCA’s Director in Enforcement (Wholesale, Unauthorised Business and Intelligence), Jamie Symington, has spoken previously about the apparent worth of properly conducted internal investigations in the context of FCA oversight activities. On the other hand, Mr Steward has stressed (through this latest speech) that such internal investigations are often inadequate from the perspective of the regulator. This inconsistency does not assist companies when deciding whether conducting an internal investigation will help or hinder their position with the regulator. In the long run, the FCA is likely to have more enforcement successes, and encourage greater compliance amongst firms, if it adopts a consistent corporate approach.
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