In mid-April 2019, the Financial Conduct Authority (FCA) announced that it was reviewing the way it operates. In a statement it said that the exercise of extracting Britain’s financial services industry from the EU provided an opportunity to think about the future of regulation in the financial sector.
In its 2019/20 business plan, the watchdog states:
“Technology, different consumer needs and new business models were transforming the financial services industry.
“As the UK leaves the EU, we believe it is time to review how we regulate to ensure it keeps pace”.
The investigative and enforcement powers of the FCA are wide-ranging. Since the 2008 financial crisis, public scrutiny of banks and other financial institutions has been high, and the regulatory body is under enormous pressure to deliver results.
For directors, Chief Financial Officers and Chief Compliance Officers, being investigated by the FCA presents a tangible risk to the reputation and investor and shareholder confidence in the company.
In 2016, a consultation paper entitled: Proposed Implementation of the Enforcement Review and the Green Report was published. This, coupled with the appointment of Mark Steward, Director of Enforcement and Market Oversight, has changed the FCAs approach to investigations. Prior to these two events, investigations, except for suspected market abuse, were usually only launched where it was concluded that a “public outcome” was likely. A report by Andrew Green QC published in November 2015 remonstrated this approach.
In the past four years, the threshold for investigating organisations has lowered considerable. For example, in 2015 the watchdog had 97 open investigations. This rocketed to 437 by March 2018. In addition, the chances of individuals being investigated as well as the company has increased.
Another significant development is that criminal and regulatory investigations are now run in parallel, even if the possibility of a criminal conviction is low.
This new approach means those in the financial services industry must be alive to the powers of the FCA and seek expert advice if a compliance breach occurs.
The power to appoint an investigator
Under section 167 of the Financial Services and Markets Act 2000 (FSMA), an “investigating authority” may, if it considers that there is a good reason for doing so, appoint one or more competent persons (usually members of the investigating authority’s staff) to conduct general investigations into the businesses of certain persons. The investigating authority is either the Secretary of State or the FCA.
The general powers of an investigator extend to the nature, conduct or state of the business, a specific aspect of the business, or the ownership and control of a recognised investment exchange (RIE) or and authorised person. However, this can be extended (with written notice) to including:
- The business of any person who currently is – or who has been at any relevant time – a member of the group of which the person under investigation is part.
- A partnership of which that person is – or who has been at any relevant time – a member
If the investigation concerns a specific breach or contravention of a rule, principle or the fitness or propriety of an individual, investigators will be appointed by virtue of s168 (1) or (4) FSMA.
You may not be aware that you are under investigation for some time. This is especially the case if you are suspected of market abuse and/or criminal activity. If the investigation relates to general concerns under s167 FSMA you must be given notification. The same applies to investigations subject to s168 (1) or (4) FSMA unless it is believed notification would prejudice the investigation (for example, documents being destroyed).
If the investigation is by virtue of section 168(2) FCMA, there is no requirement that notification be provided to the subject. The first time you become aware of the investigation is when you are asked for documents or information.
Regardless of when you are informed of an FCA investigation, it is crucial you seek legal advice immediately. This includes preparing for a ‘scoping meeting’. Remember, investigators will want to provide as little information as legally possible about the matter they are looking into. But the scoping meeting is the ideal time to obtain the knowledge required to build a robust defence. An experienced legal advisor understands this and will help you prepare a strategy so you get as much information as possible during the meeting.
One of the FCA’s most fearsome powers is the dawn raid. As soon as such an event occurs, contact your Barrister or Solicitor immediately. They will take the following actions:
- Establish which regulatory body conducted the raid and on which office premises.
- Mobilise teams of lawyers to the required locations.
- Contact in-house legal and compliance teams and liaise with them.
- If arriving during the raid, accompany investigators taking notes of what is examined, the questions asked and answers provided.
If it takes some time for your legal team to arrive, it is crucial you:
- Act calmly and do not obstruct the investigators in any way. Be open and transparent but do not answer any questions until your legal team arrive on the scene.
- Take the investigators to a meeting room, or somewhere on premises away from staff and customers.
- Send an email to all staff saying they are not to discuss the investigation internally or externally unless expressly permitted to do so.
- Send a copy of the search warrant to your Barrister or Solicitor.
- Check the warrant carefully and if any defects are spotted, discuss it with your Barrister or Solicitor over the phone prior to allowing entry. Such defects may deem the raid unlawful.
- Try to politely delay the investigators until your legal team arrives. They may continue regardless, however.
Never leave an investigator alone in in your premises. Note everything they do, say and touch.
The power to prosecute
The FCA has the power to prosecute individuals, bodies corporate and partnerships for a variety of offences, including but not limited to:
- Carrying on or purporting to carry on a regulated activity without authorisation or exemption in breach of the general prohibition in section 19of FSMA (section 23, FSMA).
- Making false claims to be authorised or exempt in breach of section 24 of FSMA.
- Communicating an invitation or inducement to engage in investment activity in breach of the financial promotion restriction in section 21of FSMA (section 25, FSMA).
- Carrying on, or purporting to carry on, business in contravention of a consumer credit prohibition (section 203(9), FSMA).
- Providing false or misleading information to an auditor or actuary (section 346, FSMA).
- Disclosing confidential information in contravention of the statutory restrictions under sections 348and 350(5) of FSMA (section 352, FSMA).
When deciding whether to prosecute, the FCA follows the Full Code Test set out in the Code for Crown Prosecutors. The regulator will ask itself:
- Whether there is sufficient evidence to provide a realistic prospect of conviction of the defendant on each criminal charge.
- Whether, having regard to the seriousness of the offence and all the circumstances, criminal prosecution is in the public interest.
In cases involving money laundering the FCA will also have regard to whether the person has complied with the document issued by the Joint Money Laundering Steering Group (JMLSG) entitled “Prevention of money laundering/combating terrorist financing: Guidance for the UK Financial Sector”.
If the prosecution is successful, penalties can include a fine and/or prison sentence.
The FCA is investigating more matters than ever before. Regardless of whether you feel you have breached compliance or committed an offence it is imperative to seek legal advice if you suspect or become aware of an investigation. Trying to manage things on your own can lead to unnecessary adverse consequences and reputational damage.
Tanveer Qureshi is a Legal 500 barrister, specialising in ASA compliance, business to business fraud, health and safety, food standards, civil litigation, and corporate crime. If you require legal representation, please contact directly on 020 3870 3187.