Member Article

In the policy statement PS21/16 issued at the end of November 2021, the Financial Conduct Authority (FCA) set out its new approach to decision makers when issuing statutory notices.

The policy statement confirmed that the FCA has changed the way in which it makes decisions in respect of:

• Contested applications for FCA authorisation
• Cases where a decision to cancel a firm’s permissions is made
• Starting civil proceedings including seeking an injunction
• Starting criminal proceedings, such as a prosecution for insider dealing
• Using the FCA’s powers to vary or limit a firm’s permissions
• Using the FCA’s powers to impose requirements on a firm.

Despite receiving a significant number of responses to its consultation on the proposed changes which expressed concerns about the proposals, the FCA has chosen to proceed with the changes as originally proposed. The key change is the ability of the FCA to take decisions on the issues above without reference to the Regulatory Decisions Committee (RDC) under its revised Executive Procedures.

There has long been a concern that the FCA is an unaccountable body that is both investigator, judge and jury with little oversight. Although the RDC was never truly independent, it was seen by many as something of a check on the FCA’s executive decisions. The significant reduction in the RDC’s role places a question mark on whether the regulatory process is fair.

Previously, representations (either orally or in writing) could be made by persons under investigation to the RDC. Oral representations to the decision makers will now only take place in exceptional circumstances which means that in the majority of cases, only written representations will be permitted. The FCA has made it clear that supervisory notices will take immediate effect with representations being considered after that action has been taken. Further, those on the receiving end will be forgiven for thinking that they are unlikely to get very far making representations when they are made to those that have decided that regulatory action is required.  The proposal also envisages that the legal advisers advising the staff  who make recommendations to take action will also be advising the executive decision makers on implementing that recommendation.

The FCA considers that it needs to change its approach to take swift and proactive action when necessary. The problem, however, is that the demotion of an independent body like the RDC may very well promote groupthink where FCA staff are convinced of the merits of their position (influenced by strategic objectives set by the executive) and the executive decision makers want to be seen to be supporting the team with the result that there is a lack of internal challenge. Given that the FCA has expressed its intention to “test its powers to the limit” the reduction in the level of oversight that the RDC does provide is of concern.

In many instances, regulated firms will have to accept the outcome of a decision, no matter how unfair. Few firms have the desire or resources to refer matters to the Upper Tribunal and even when the FCA gets matters wrong, it benefits from a statutory immunity except where it acts in bad faith.

Variation of permissions

The ability to vary permissions or impose requirements will need to be exercised proportionately and fairly by those who now have the direct power to sanction such actions. Such regulatory interventions can be the death knell for otherwise viable businesses.

Regulated firms and individuals are already having to deal with a wide range of fundamental changes in areas such as consumer duty, operational resilience and the review of the appointed representative’s regime – all of which are directed at consumer protection. Good firms will still get matters wrong on occasions but taking regulatory action should not be the default position of overzealous supervisors where matters can be remedied fairly and promptly by the firm taking the appropriate action.

Criminal proceedings

In the context of criminal proceedings, it will be interesting to see the extent to which the FCA will take on more challenging cases Simple cases involving insider trading are one thing but complex matters where the firms or individuals have the financial ability to defend themselves are another. In As we have seen with Serious Fraud Office cases, it only needs one or two unsuccessful prosecutions and questions will be raised about the process and wasted costs. The FCA has yet to prove itself as an effective prosecutor of genuinely complex cases.

Civil proceedings

The ability of the FCA to move more swiftly is to be welcomed on the civil side. If the FCA identifies demonstrable and ongoing harm to consumers – for example a fraudulent investment scheme – the speed in obtaining freezing injunctions or other protective measures to secure assets can make a fundamental difference to the ability to obtain recompense, especially in cases involving unregulated activity where there is no fall back on the Financial Services Compensation Scheme. Issuing proceedings and obtaining restitution orders is of little benefit if the funds have already gone and the money trail is cold. The court system provides an effective forum for scrutinising the FCA’s conduct and validating the evidence on which it relies when advancing its case.

Final thoughts

Regulators should strive to ensure that any regulatory or disciplinary process is fair and transparent and be seen to be such. It is clear that respondents to the consultation have deep reservations about the approach the FCA now proposes to take. The FCA’s decision to ignore those concerns and press on may come back to haunt it in the future if something goes wrong and the decision-making process inevitably comes under scrutiny.