FCA scraps 'graduated discount scheme' for settlement of enforcement cases

The FCA said it will do away with its "graduated discount scheme" in a new policy statement (67-page / 459KB PDF) it has issued jointly with the Prudential Regulation Authority (PRA), which outlines some reforms to their approaches to enforcement.

Under the new policy, if a firm or an individual does not settle an FCA enforcement investigation within 'stage 1' of that investigation, or agree a "focused resolution agreement" during stage 1, they will not be eligible for any early settlement discount.

At the moment subjects of an investigation can obtain a 20% discount from penalties by settling during stage 2 of investigations, and a 10% discount for stage 3 settlements.  Firms that settle cases during stage 1 will be eligible for a 30% discount on penalties.

The FCA's new approach is being introduced despite negative responses from the industry outlined in responses to the regulator's consultation on the plans last year. Those against the change argued that investigation subjects should not be penalised for testing the FCA's case beyond stage 1.

Investigation subjects are likely to face increasing pressure to settle within the 28 day time limit for stage 1 settlement or risk a substantially higher fine following a challenge against the FCA before the Regulatory Decisions Committee (RDC), an internal panel of experts that hears FCA cases and decisions before they are made public, or Upper Tribunal.

The FCA confirmed that extensions to the 28 day time limit will only be applied in exceptional cases.

In its policy paper, the FCA also confirmed a more flexible approach to focused resolution agreements. Under the changes, companies subject to an FCA investigation will be able to agree certain elements of a case and contest the remaining elements before the RDC.

Under the new policies, companies will still be able to obtain a discount on the penalty that will reflect the extent the issues have been agreed, up to maximum of 30%. Not only will companies be able to contest penalties, they will also be able to contest the FCA's factual findings and/or the allegations against them.

Previously, there was no formal mechanism for only part of an enforcement case to be put before the RDC.

Michael Ruck, a financial enforcement and regulation expert at Pinsent Masons, the law firm behind Out-Law.com, said the focused resolution agreement reforms should increase flexibility and help the resolution of cases at an earlier stage and lower cost. However, under this new procedure, the RDC will decide the sanction imposed and any discount applied. Ruck said this means that entering into a focused resolution agreement will not necessarily secure the usual 30% discount for settling at stage 1, unless only the penalty is being challenged.

"The reforms should broadly enhance the transparency of the enforcement process for firms and individuals, and hopefully address concerns felt by subjects that their arguments are not properly considered by the regulators during the investigation process," Ruck said. "The changes should also help address the common criticism that subjects are not adequately informed about the investigation's progress."

"However, the FCA and PRA have retained significant flexibility in terms of application. The changes are guidance not formal rules, and so their practical impact will largely depend on how the enforcement teams at the FCA and PRA implement them. However, additional guidelines that are to be published by the FCA and PRA should help ensure a more consistent approach," he said.

In its paper, the FCA declined to introduce guidelines as to how it will exercise its discretion when deciding whether to refer a firm or individual for enforcement. Instead, the FCA said it will publish anonymous examples of cases where it decided not to investigate or take enforcement action, particularly when a firm or individual's exceptional cooperation and subsequent remedial action has been a major factor in the decision.

According to the new policy guidance, once a company or individual has been referred for enforcement the FCA or PRA will give them a written summary of the alleged regulatory breaches and underlying circumstances.

"This should help aid the transparency of the referral process," Ruck said. "However, the decision to refer is on the basis of investigation reports that criticise the conduct of individuals, and investigation subjects still won't have the opportunity to reply to the allegations during the referral process."