FCA confirms what we've suspected for some time: more investigations; not necessarily more enforcement action
Published on 9th Oct 2017
The FCA’s approach to enforcement means that you are increasingly likely to be subject to an investigation and that this will occur in circumstances where you do not have the luxury of investigating the matter yourself in an environment protected by litigation privilege.
On 20 September 2017, the FCA published a speech by the FCA’s Director of Enforcement and Market Oversight, Mark Steward, delivered to the AFME European Compliance and Legal Conference 2017. He used the opportunity to highlight the approximate 75% increase in the number of FCA investigations over the past year, as a result of three factors:
- more investigations into capital market disclosure issues;
- the extension in scope of the reporting regime for firms, brought about by the Market Abuse Regime; and
- the FCA’s change in approach when deciding whether to open an investigation.
The latter factor is one that we have been experiencing for some time, with the FCA apparently operating a lower threshold than had traditionally been the case for deciding whether to open an investigation. This is unsurprising given the widespread criticisms of the FCA in not sufficiently investigating who was responsible for the collapse of HBOS.
What is the test for the FCA opening an investigation?The statutory power for the FCA opening an investigation is set out in section 167 of the Financial Services and Markets Act 2000. This provides that the FCA can open an investigation “if it appears to [the FCA] that there is good reason for doing so“. There is no requirement that the FCA has reasonable suspicion that a regulatory breach has occurred (albeit that Mr Steward did indicate that the FCA will investigate if it suspects that serious conduct may have occurred). Nor is there any requirement in the legislation for there to be a good prospect that enforcement action will be taken as a result. This is in contrast to section 168 of FSMA, in relation to certain offences and market abuse, where there must be “circumstances suggesting that” market abuse or the relevant offence has been committed, although there is still no requirement that there be a good prospect that the FCA will find market abuse to have been committed. |
The lowering of the FCA’s threshold was also reflected in the FCA’s 2017 Mission Statement, which emphasised the importance of enforcement investigations as a diagnostic tool and that the launch of an investigation does not automatically assume that “a sanction is inevitable or even likely“.
Mr Steward, however, did indicate that the FCA will only investigate where it suspects that serious misconduct may have occurred. His view of what is serious amounts to behaviour that is “not trivial, technical or officious which implies also a rational and objective basis to investigate, where the circumstances give rise to real harm or risk of real harm caused by suspected misconduct“.
So what does that mean in practice?
It will likely mean that the FCA will continue to open a greater proportion of investigations than historically. However, by corollary, it will also likely mean that the FCA will close a greater proportion of investigations without taking enforcement action. Of course, the positive outcome of a closed investigation will not undo the time and effort (and stress for the individuals involved) expended while the investigation is pending.
What it also means is that it is vital that appropriate advice is taken immediately (or before) an investigation is started, to ensure – if possible – that the investigation goes in the right direction: it is more difficult to change the investigators’ perspective of a particular set of facts than to ensure that the investigators’ perspective is the right one in the first place.
Finally, but critically, the FCA lowering the bar on the launch of investigations means that (as we have always expressed concern and caution about), the mere fact that an FCA investigation is being undertaken will not be enough to ensure that litigation privilege applies to documents created in relation to that investigation. Rather, it would need to become clear that disciplinary proceedings of some shape or form would inevitably follow for the “litigation reasonably in prospect” requirement of litigation privilege to apply. This is echoed by Mr Steward who noted that “the function of an investigation is essentially diagnostic, to enable us to understand, when serious misconduct may be an issue, what has really happened and what we need to do about it. It is a fundamentally different process to litigation, where we have a view about what has happened. When we are investigating, we have not concluded any view about what has happened. Importantly, while all litigation we conduct should be premised on a proper investigation of the evidence, an investigation does not mean litigation is inevitable“.
This approach is consistent with the views expressed by Mrs Justice Andrews in the criminal context in SFO v ENRC. And of course, this is just one part of the test for litigation privilege to apply. To be privileged, documents would also need to be created for the dominant purpose of conducting those adversarial proceedings (rather than, for example, for internal reporting purposes) and, following ENRC, this would not include the purpose of avoiding those proceedings (for example, for the specific purposes of seeking to settle the matter with the FCA).
The result of all of this is that when it comes to an FCA investigation, the only source of legal privilege that is likely to be available for the documents and communications relating to that investigation is legal advice privilege. This will only cover communications between a lawyer and their (narrowly defined) client, for the purposes of giving/receiving legal advice (rather than merely fact-finding). Accordingly, this requires extreme caution in who communicates with whom and what about in connection with the investigation.
