Financial regulators' proposed changes to enforcement are unlikely to incentivise early settlement, says expert

Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, was commenting on planned improvements to enforcement processes put forward by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) for consultation. The regulators' proposals form part of their response to an internal review and separate independent review of enforcement action taken by the then Financial Services Authority following the failure of HBOS plc in 2008, as well as an earlier Treasury review of the regulators' enforcement processes.

The main changes on which the FCA is consulting include the introduction of a streamlined "focused resolution agreement" in partly-contested cases, through which a firm or individual can agree on all relevant facts and accept the regulator's conclusions on regulatory breaches, but refer the action that the regulator plans to take to the internal Regulatory Decisions Committee (RDC) for review. The PRA will consult on changes to its own procedures separately, once the Bank of England and Financial Services Bill has passed through the UK parliament.

However, the FCA does not intend to further incentivise settlement by firms and individuals earlier in the enforcement process without "balanc[ing] the desirability of the matter concluding quickly with the need to ensure that the full extent of the misconduct is understood", according to the consultation paper.

Ruck, a financial enforcement and regulation expert at Pinsent Masons, said that the planned introduction of the focused resolution agreement was a "significant change" to the regulators' current approaches.

"Unfortunately the current proposal is not for an agreed statement of facts, or similar, to be agreed between the parties and for all parties to then appear before the RDC to make representations," he said. "Instead, the FCA will issue a warning notice upon which the party subject to the notice can make representations to the RDC separately."

"What remains unclear is how much transparency this provides regarding the FCA and RDC's discussions at the point of issue of a warning notice. One can only hope any changes will provide for greater transparency around penalty setting and any calculation of financial penalties," he said.

"The question as to whether firms or individuals placed under investigation will be willing to make admissions at a scoping meeting at the outset of an investigation, and what additional incentive, if any, will be offered for doing so is likely to be a key factor in the FCA and PRA progressing enforcement action with the limited resource they have available. It is unlikely that the current penalty discount will incentivise such admissions, as the same reduction will be available at a much later stage in the investigation when all parties have had the opportunity to carefully consider the existence or extent of any regulatory failing. The FCA and PRA will likely need to consider the notion of additional credit for firms and individuals who seek to make such early admissions," he said.

Currently, firms and individuals that settle enforcement action at what is known as 'stage 1', without contesting any aspect of the case against them, are given a 30% discount on any fine imposed by the FCA. The paper proposes extending this 30% discount to fines confirmed by the RDC once it hears a case against a firm or individual that has accepted a focused resolution agreement.

The FCA revised its enforcement action criteria last year to take account of the Treasury review, which recommended that that it explicitly consider whether enforcement action was the correct course of action in every case. The new criteria reflect the fact that enforcement action is an "expensive and resource-intensive" option, but confirm that the FCA will base its decision on whether this is the most "efficient and effective" way for the regulator to meet its statutory objectives.

However, it has now proposed to publish more examples of cases that were not referred to enforcement because of the firm or individual's "cooperation and subsequent remedial action" in response to the breach. It also intends to publish more information about its early intervention work where it is legally able to do so, and is seeking views on how it should publish that information and the level of detail it should include.

"It is important that people have confidence in the enforcement process and that it is used fairly, efficiently and effectively," said Mark Steward, the FCA's director of enforcement and market oversight. "We believe that our proposals will achieve the aim of the recommendations, which was to enhance the FCA's capacity to deal with misconduct swiftly, fairly and robustly, and we welcome any comments on our approach to implementation."

The consultation closes on 14 July 2016.