Implementation of the FCA / PRA enforcement review and the Green Report

Posted: 21st February 2017

Background

On the 1st February 2017, the FCA and the PRA published their Policy Statement on ‘The Implementation of the Enforcement Review and the Green Report’ (referred to as PS17 / 1 and PS2 / 17 by the FCA and PRA respectively).

The publication confirms the final changes designed to strengthen the transparency and effectiveness of the enforcement decision making processes.

The Policy Statement responds to the comments received from the Consultation Paper CP16 / 10 – ‘Proposed implementation of the Enforcement Review and the Green Report’, and relays the changes that will be made to the current enforcement policies and procedures.

Mark Steward, Director of Enforcement and Market Oversight at the FCA, said:  “It is essential that our enforcement decision making processes command public confidence and operate both efficiently and fairly. The changes set out in the PS are designed to achieve just that and reflect the views of stakeholders who responded to our consultation.”

Key Points from the policy statement

The policy statement addresses three main areas:

Referral decision making

• The Enforcement and Market Oversight (EMO) and Supervision functions work together in the enforcement referral process to identify the right regulatory response; this will continue but will be kept under review
• The FCA has amended the Enforcement Referral Document (ERD) to include a table that sets out reasons why a firm or individual is not to be referred for investigation. The ERD also has to be signed by the Head of Department
• The FCA will endeavour to publish more information around early intervention work where it is legally able to do so

Cooperation between the regulators in enforcement investigations

• The FCA and PRA will meet quarterly to keep each other informed on the progress of investigations
• The FCA and PRA will provide more guidance around the conduct of joint investigations
• The FCA and PRA will identify the information requested by each regulator within joint information requests
• Scoping meetings are to take place between both regulators once they are in a position to share their indicative plans on the direction of the investigation and timetabling of key milestones. The FCA and PRA will adopt a flexible approach to the timing of scoping meetings

Subjects’ understanding and representations in enforcement investigations

More information will be included in the Memorandum of Appointment of investigators, or accompanying documents, however:

• Explanations for referral should link expressly to the published referral criteria
• Summaries will be provided of potential breaches and an explanation of the matters that are said to have given rise to those breaches will be included
• Explanation of the criteria under which the decision to refer was reached will be provided
• The FCA will give clarity as to who is carrying out which elements of the work so that the roles in the investigation and supervisory function are clear
• Periodic and regular updates are to be provided to subjects about the progress of investigations. These updates will be delivered by letter or phone call but can be done face-to-face if the subject requests it
• The FCA will now allow contest on penalty only in front of the Regulatory Decisions Committee (RDC)
• The FCA has confirmed it will no longer apply discounts for early settlement at stages two and three of the enforcement process, meaning that a discount of up to 30% will only be available to firms at stage one

Regulatory next steps

The following proposals will come into force on the 1st March 2017:

• The introduction of partly contested cases
• The abolition of stage 2 and 3 discounts to penalty settlements

During 2017 the PRA will issue a policy statement following on from its consultation on the establishment of the Enforcement Decision Making Committee and a short guide to the PRA’s enforcement processes.

Considerations for firms

At this stage, firms should be familiarising themselves with the proposed rule changes ahead of the 1st March. The amendments to the existing enforcement process are very much centred on increasing transparency for firms under enforcement to ensure the direction of travel is clear.

One potential consequence is a reduction in instances of intervention, or where intervention is sought it will have been more clearly explained to the subject.

Traditionally, firms have been incentivised to settle with the FCA over enforcement due to the discount available and monetary and reputational risks inherent in challenging the regulator in the courts. Firms threatened with enforcement will need to consider whether, given the extra information at their disposal, they are in a better position to evidence that their approach was compliant.

Read the full Policy Statement