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Fessing Up To The Regulator

Lee Werrell,  CEO of Compliance Consulant.org, Concludes His Practical Guide to Managing A Regulatory Crisis (For Part I, Click Here)

In the last issue of IFA Magazine we looked at how your first responses to the discovery of an error ought to shape up. In this article we’re going to consider how you should take the situation forward. And yes, there’s no option but to…

Tell the Regulator

How to go about it? Well, initial contact is best made by telephone, because in this way the regulator’s Compliance Consultant Logoimmediate reactions can be assessed. You may have a preference as to who makes the call. However, consider establishing the Head of Compliance, accompanied with a representative of senior management (company secretary, risk director etc.) as the firm’s supervisory contact.

This is the person with whom the regulator will have a relationship. If the matter is exceptionally serious or complex, contact might be better executed at a director or even executive committee level. If the firm does not have a relationship manager, the call should be directed to the most appropriate area – and not through the general call centre.

The follow-up letter can also come from Compliance – but, depending on the nature of the crisis, the form which a written report should take may be prescribed by SUP 15.

The regulator can then decide if it needs to take further action and that could be:

  1. Investigation: This will normally be for the purposes of gathering information, and the regulator is certainly empowered to do so. The regulator may decide to appoint investigators, or to require the compilation of a report by a skilled person.

    An investigation might arise in situations where the firm is unable to give it the full story, or where it appears unwilling to be open. Alternatively it could be where the regulator’s confidence in management is lacking and where it does not consider it capable of adequately resolving the situation.

    Then again, it could be that there is some evidence of significant actual or potential investor loss or even evidence of financial crime – or that the regulator considers that there may have been a breach of rules or principles. Ultimately, the regulator will investigate if the issue reported to it is relevant to a regulatory strategic priority.

  2. Requiring risk mitigation or remedial actions: The regulator rarely uses its powers of require firms to pay redress, because the FCA is usually able to get firms to agree voluntarily to offer customers redress often as part of the negotiations surrounding a disciplinary enforcement case – or, sometimes, through its supervisory contact. In extreme and uncooperative cases, the FCA could seek to enforce the redress it considers to be due a number of ways.

 

  1. Taking disciplinary action: Ultimately, the FCA is committed to achieving its ‘credible deterrence’ through the exercise of its enforcement powers. The regulator will not merely take action to punish a firm or an individual approved person, but may also seek to make the punishment a deterrent for others by publicising its action. A further objective may be to eliminate any financial gain or benefit from non-compliance and where appropriate, to remedy the harm caused by the non-compliance.

Both regulators place considerable weight on senior management responsibilities, and they believe that action against these individuals of significant influence functions is a greater deterrent than action against firms alone. This is part of the change to competence as a responsibility in management, as well as compliance of the rules.

Regulator’s Investigation

Both regulators (the FCA or the PRA) can commence an enforcement investigation if they consider that there are good reasons, or if they believe that an offence has been committed. These are often conduct issues and, therefore it’s the FCA that is the more likely to issue a Notice of Investigation – a formal letter of appointment of investigators, detailing the powers invoked and the scope of the investigation. However, no letter may be issued if it is considered to frustrate the investigation.

The regulator will normally hold a scoping meeting with the firm and the investigators. The FCA will typically explain its concerns, the expected timetable, and the process involved, along with interviews and documents that are pertinent to the investigation.

This is an opportunity for firms to ask questions, as well as to emphasise their commitment to co-operation and to confirm the enhancements and remedial actions that they have already taken.

The FCA (or PRA) may require the appointment of a Skilled Person under S166 of the FSMA. ‘Skilled Persons’ are typically specialist firms that perform a specialist investigation role, completing a report for the regulator on their evidence-based findings. Typically, these will always involve systems and controls, governance and management information, and capital adequacy.

The regulators may rely on the Skilled Person’s Report before deciding any further enforcement or disciplinary action.

Documentation

The regulators will often call for documentation under S165 of the FSMA. Documentation may also be required for the investigators as well as any previously requested.

It is important that you issue a “Non-Destruction Order” to your staff, to the effect that that no documentation is destroyed or deleted from files. Not only could this help to mitigate any allegations; conversely, deletion might be seen as indicating a secretive and poor culture.

Interviews: Who Is Likely To Be Called Forward?

Interview attendance is compulsory – and the regulator, to ensure fairness and transparency, will enforce its powers of compulsion, applying to both witnesses and suspects. This means that the interviewees have to answer all questions asked – and it effectively means that they have no right to silence.

Preparation time is provided in advance, and typically so are the documents and details of the scope of the interview; however, sometimes surprises are introduced. Coaching and advice is available from selected sources, and there are a number of points that should be borne in mind as well as actions to be taken in your favour.

What Is The Best Way To Respond To A Continuing Investigation?

If the regulator believes there is sufficient evidence, it will normally issue a PIR (Preliminary Investigation Report) which will include draft charges – although this may have been preceded by a settlement approach inviting a discount for any fine levied.

The firm should prepare a response in a succinct and effective way, challenging any areas of factual error or unsubstantiated judgement or assumption. Interpretation here is key – and remember, a shock response ‘fired from the hip’ can be catastrophic in situations where a legitimate extension to any response timetable could be argued.

If Offered, Should You Settle?

Tempting as it may be to settle, firms would do well to remember that the regulator will not enter into commercial negotiations simply in order to put a case to bed.

Any firm would be advised to settle where it accepts that the case against it is essentially correct. Several advantages exist for settlement from a firm’s perspective – not only does a quick resolution end the uncertainty, but perhaps more importantly it can lead to the capping of costs and the restoration of positive relations with the regulator. Not to mention, of course, that the firm gains some influence over the content and timing of the public announcement.

There is also a potential financial advantage – the regulator will lower the proposed fine, dependent upon the stage of the process where agreement is reached.

You also have the option of bringing in the Regulatory Decision Committee (RDC).

Who Are the Regulatory Decision Committee?

The RDC is an FCA Board committee that ultimately takes important enforcement decisions. It decides whether to issue the Warning Notice that commences the formal disciplinary process against firms. The RDC is made up of a Chairman (who is an FCA employee but is independent of the management structure and with no other responsibilities) and who is a senior and respected legal practitioner; plus a number of experienced industry and public interest representatives.

As such, they will take some collective persuading that they should withdraw or reduce the warning notice or reduce the proposed fine. That said, any document that you may choose to send to the RDC should be concise and setting out logical and well-articulated arguments supported by fresh or re-interpreted evidence. Repeating points that have already been made and argued against will honestly fail to make much impact.

Alternatively, any firm or an individual facing disciplinary proceedings, who does not settle, can meet with the RDC to make an oral representations in response to an FCA Warning Notice.

Do I Have To Do This?

You don’t have to make oral representations if you think that your point of view can be adequately expressed in writing. But many firms have found it advantageous to meet the RDC in person to put across their case.

Does The PRA Follow The Same Procedure?

The PRA follows the Warning Notice, Decision Notice and Final Decision Notice procedure provided for under FSMA, in the same way as the FCA does. However, the PRA has established four decision making committees (“DMC”) to issue these statutory notices.

The DMC members are all PRA employees and are part of its executive management structure, apart from non-executive members of the PRA Board. The PRA will ensure that the level of seniority of the DMC is appropriate to the importance, complexity and urgency of the decision. Essentially the DMC is selected for the correct level of seniority of the firm in question. Ultimately the PRA will decide itself into which category a decision falls.

Just as with the FCA, any recipient of a Warning Notice has the right to make oral and written representations to a Warning Notice and to refer a Decision Notice to the Tribunal.

In Conclusion

This two-part article has been a précis of the best ways to deal with a regulatory crisis based on experience and recent enforcement rule changes. Having been appointed as Skilled Persons, this provides valuable insights into the process and procedures of the disciplinary process. My team at Compliance Consultant has published documents on the enforcement process as well as S166 and how to respond to them as well as given talks on the subject.

 

 

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