FSA reforms its enforcement process

The policy aimed at making the Financial Services Authority’s enforcement process more transparent and fair takes effect today.

The new policy reflects those recommendations of the FSA’s Enforcement Process Review, published this summer, which required changes to the FSA Handbook.

The majority of recommendations did not need to be consulted on and the FSA implemented a number immediately. A cross-FSA team is on schedule to implement the remainder of the recommendations by the year-end.

The Review was commissioned in February by the FSA Board after aspects of its enforcement process were criticised by the Financial Services and Markets Tribunal, and because it was evident that many affected by enforcement actions had doubts about the fairness of the process.

Margaret Cole, director of enforcement at the FSA, says: “We are making good progress in the implementation of the Enforcement Process Review which will, we believe, bring greater clarity and transparency to our work.

“Whilst we are on track for all the Review recommendations to be implemented by the year-end, I want to be clear that I see this as a process of continuous improvement – we recognise that the industry we regulate does not stand still and that we cannot afford to either. So we will keep what we are doing under regular review and where we see room for improvement we will make the necessary and appropriate changes.

“Honest and constructive feedback from all our stakeholders was crucial to the review process and consultation on the new rules, and it will be essential to keeping the enforcement process relevant and up-to-date.”

The FSA asked for views on several key changes to the Handbook. These received broad support although there are some changes to policy and clarifications as a result of feedback.

In summary there were no significant objections to the proposals for allowing the FSA Executive to refer some ‘change in control’ decisions to the Regulatory Decisions Committee or for the FSA Executive to take warning notice decisions on authorisation and approval cases.

There was also support for the proposal that ‘straightforward’ decisions (late payment of fees or failure to submit regulatory returns, for example) be taken by an RDC of fewer than three members; however, the text has been clarified to make clear that if the firm makes representations after the warning notice is issued, the matter will be heard by full RDC procedures.

The FSA will publish information about the types of case being decided under these procedures.

There was general support for the recommendation that the FSA executive should agree settled cases, leaving the RDC to decide contested cases. There was, though, also a suggestion that the RDC should have an informal role in settled cases.

The review set out clear reasons why a complete separation between the executive and the RDC is necessary and the FSA continues to believe that rationale is correct and is therefore continuing on the basis that the RDC will have no role in settlement. The FSA says it recognises the need to ensure consistency in decision making and regular discussions between the RDC and the FSA Executive will take place to achieve this.

The proposal that the FSA should introduce a scheme giving discounts to financial penalties for early settlement provoked mixed feedback. Some respondents disagreed with the scheme, others supported it but had thoughts on the detail of what discount was given and when.

The FSA is proceeding with the scheme as it believes the principle of giving specific incentives for early settlement is a sound one. However, in the light of feedback, it has changed the discounts for the three stages to 30%, 20% and 10% (from 30%, 15% and 5%).

The Handbook changes are effective immediately. The discount scheme for early settlement will apply only to cases where investigators are appointed on or after October 20 2005.

At the same time as consulting on Handbook changes, the FSA has been implementing the other Review recommendations. The Enforcement Division has already introduced a number of important changes to its process to reflect some of the key recommendations.

For example, the practice of sending out preliminary investigation reports for comment before cases are taken to the RDC has been standardised.

Legal reviews are now carried out on all cases before the RDC stage by lawyers who have not been part of the investigation team.

A cross-FSA team is working on implementing the remaining recommendations, both in Enforcement and elsewhere.

Substantial progress has also been made in strengthening the objectivity of the RDC and separating more clearly the preparation of an enforcement case from those who make decisions. In particular, the RDC now has its own dedicated legal function in place, and this will be strengthened by the year end. This means that the Enforcement

Division no longer gives legal advice to the RDC but now makes submissions which are also automatically disclosed to the firm or individual under investigation.

The composition and size of the RDC is also under review and a smaller committee with a number of new members will be in place by December.

Tim Herrington, chairman of the FSA’s Regulatory Decisions Committee, says: “The RDC has implemented new procedures for oral representations hearings which ensure that they are conducted on a more interactive basis and we have already received positive feedback from some who have experienced these hearings.

“It remains though an administrative process which combines fairness with a quicker and more cost-effective method of resolving regulatory disputes than can be achieved under a judicial model.”