The review has considered:
- The processes followed by supervisors, enforcement staff and decision-makers when considering possible breaches of statutory or regulatory requirements and the nature and extent of the communications and interactions between them;
- The role and involvement of senior FSA management throughout these processes;
- The options for a fair procedure under which regulatory decisions are made by people separate from the investigators; and
- The accountability of decision makers to the FSA Board.
An Issues Paper in March set out in more detail the parameters of the review and the specific points that it intended to consider. These considerations were addressed within the context of the need to maintain an administrative decision-making process which involves neither excessive cost nor disproportionate time. The review did not consider the role and processes of the Financial Services and Markets Tribunal, which is wholly independent of the FSA.
The key principles that have driven the review's recommendations are that the FSA should provide:
- a clear articulation of the FSA's overall approach to the use of enforcement;
- sufficient checks and controls during the investigation phase to help deliver balance and fairness;
- transparency for those subject to enforcement action about the case they have to answer and the evidence on which it is based; and
- clarity as to the separation (required by the Financial Services and Markets Act 2000) between those who investigate a case and those who decide.
These principles apply in the context of FSA decision making, which will remain an administrative process and which does not (and cannot) replicate the processes of a court of law or a tribunal. The FSA must take the decisions itself in a fair process; it cannot – as some have suggested – confer its decision-making responsibilities on a wholly independent body.
Callum McCarthy, FSA chairman, said:
"This has been a full and careful review of the FSA's enforcement processes and the FSA Board has accepted its recommendations entirely.
"We believe that they will bring greater clarity as to why certain cases are subject to enforcement action and that those affected will have a better understanding of the case to which they must respond. The recommendations will establish much more clearly the separation between those who prepare an enforcement case and those who make decisions on the case. In particular, the Regulatory Decisions Committee will no longer take legal advice from the Enforcement Division. Moreover, the Enforcement Division will no longer have direct access to the RDC without the substance of such discussions being disclosed to the other party in the case.
"To preserve the RDC's independence, settlement decisions will be made by the FSA Executive. There will also be explicit incentives for early settlement.
"Finally, we will provide opportunities for those subject to enforcement procedures to comment on the process afterwards and, hence, for the FSA to continue to learn from this. We will also publish fuller information about our enforcement record and processes.
"It is worth re-emphasising that the FSA is not – and will not become – an enforcement-led regulator. We regard enforcement as a regulatory tool to be used selectively. But when it is used, it must be seen to be fair and combine fairness with reasonable speed and reasonable cost. These changes are designed to achieve this."
The review's principal recommendations are:
- There should be no change to the FSA's risk-based approach, in that it cannot attempt to pursue every rule breach and so selects cases according to their seriousness and how they fit with its priorities. In the light of this, those investigations that are undertaken must be of a consistently high quality and any breaches alleged must be properly supported by evidence. The review recommends that before a case is referred to the decision-makers there should be a thorough legal review by lawyers in the Enforcement Division who are not part of the investigation team.
- There must be clear separation between those who investigate possible rule breaches and those who decide whether the conduct in question should be sanctioned. Currently, this is achieved by having the more fundamental and contentious regulatory decisions made by the Regulatory Decisions Committee (RDC). The review recommends that the RDC is maintained, that its membership should continue to comprise practitioners and non-practitioners, all of whom act in the public interest rather than as representatives of a particular group or sector, and that the FSA Board maintain its current policy of not intervening in, or otherwise attempting to influence, the RDC's individual decisions.
- In recognition of considerable concern about the current practice whereby the Enforcement case team provides undisclosed legal advice to the RDC and is able to discuss the case with the RDC following the representations made by the subject of regulatory action, the review recommends three significant measures to strengthen the RDC's objectivity. These are:
- the creation of a small, dedicated legal function to assist the RDC in its decision-making, meaning that the RDC will no longer have to look to the Enforcement Division for legal advice and support. Confidential communications between Enforcement and the RDC will therefore cease;
o all substantive communications (whether oral or written) between the Enforcement case team and the RDC will be disclosed, to deal with criticism that those subject to enforcement action are not completely clear as to the case that they have to meet; and - the current practice whereby the Enforcement case team has direct access to the RDC after the conclusion of the representations meeting, without the firm or individual being present, will end. Instead, RDC representation meetings will be conducted on a more interactive basis than now. Any further submissions to be made either by the case team or the firm or individual involved will be disclosed to the other party.
These recommendations will inevitably introduce greater formality into the FSA's decision-making process, but not to the extent that the process will be indistinguishable from that operating in a court or tribunal. The process will continue to be capable of being operated with a degree of informality, as befits its nature
- the creation of a small, dedicated legal function to assist the RDC in its decision-making, meaning that the RDC will no longer have to look to the Enforcement Division for legal advice and support. Confidential communications between Enforcement and the RDC will therefore cease;
- The review recommends that the principle of separation should be extended to cover cases that are settled rather than decided by the RDC. At present, the RDC is involved in settlements, including setting 'settlement parameters' for the FSA staff tasked with conducting the settlement negotiations, and approving the terms of the settlement. The involvement of the RDC in cases which are settled by agreement, rather than being contested, risks blurring its role and undermining the objectivity which the RDC may subsequently need to bring to a case should it fail to settle. The review recommends that settlement decisions, in future, be the sole preserve of the FSA Executive, with the RDC deciding matters only in the absence of agreement. In making settlement decisions, the FSA's Executive decision makers must, like the RDC, take an appropriate regulatory decision having regard to the FSA's statutory objectives. This will include for example giving proper regard to any questions of consumer redress.
- The review recommends introducing an explicit discount system for those who settle their cases early in the proceedings. Early settlement is in the public interest. Settlements result in consumers obtaining compensation earlier than would otherwise be the case and save resources for both the industry and the FSA. The maximum discount will be 30% of the financial penalty that would otherwise have been recommended to the RDC, having first taken account of the seriousness of the breach and the extent to which the firm had co-operated following the breach.
- The review recommends that the FSA should seek feedback from those involved in an enforcement case. Shortly after the conclusion of an enforcement case, the FSA should usually give those concerned an opportunity to comment on the practical and procedural handling of the case.
- In order for both the FSA and stakeholders to assess how well the improved process is operating, the review recommends that the FSA publish an annual performance account for enforcement.
- In the case of the rejection of applications for authorisation and approval by firms, the review recommends that the FSA Executive, rather than the RDC, take the decision to issue a warning notice but that representations and the final decision continue to be taken by the RDC.
The FSA is now consulting on those recommendations which require changes to the FSA Handbook. Consultation Paper 05/11, issued in conjunction with this report, contains the relevant draft Handbook text. It expects all the changes to be implemented by the end of the year. Some of the recommendations will be adopted with immediate effect (in particular, those concerned with legal review and more transparency and separation in the RDC process). Much of the remaining implementation work will be led by Margaret Cole, who joined the FSA earlier this week as director of the Enforcement Division and by Tim Herrington, who took up his position as chairman of the Regulatory Decisions Committee in February.
Background
1. The full report of the review team may be found here and the Consultation Paper may be found here on the FSA website. The original announcement setting out the scope of the review may be found here and the Issues Paper, published in March 2005 may be found here.
2. This is the most fundamental review of the FSA's enforcement and decision-making process since FSMA came into effect in December 2001. It was set up with the aim of it being careful, thorough and wide-ranging, taking in every stage of the process. Consistent with this aim, it invited comments on an Issues Paper which covered the enforcement process in its entirety. Although the review was not, in the formal sense, a consultation, the views put by those who responded to the Issues Paper and in discussions with many interested parties, including the Financial Services Consumer Panel, Practitioner Panel and Smaller Businesses Practitioner Panel, were carefully considered. The Financial Services and Markets Tribunal was also contacted to ask whether it wished to make further views known to the review; however, it did not think it appropriate to do so, in accordance with its usual practice and in order to preserve its complete independence from the FSA.
3. The review team reported on a monthly basis to a committee of the FSA Board – comprising Callum McCarthy, John Tiner and three non-executive FSA Board members: James Crosby(chief executive, HBOS plc), Hugh Stevenson (chairman, Equitas Limited) and Clive Wilkinson (chairman of the Heart of England NHS Foundation Trust). Tim Herrington (chairman of the RDC) was co-opted to the committee and Michael Brindle QC and David Pritchard (recently retired deputy chairman of Lloyds TSB) acted as advisers to the committee. The review updated the FSA Board on its progress each month.
4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection for consumers; and fighting financial crime.
5. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.
