19 January 2004
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23 April 2014
In December, the Financial Services Authority (FSA) published a statement on its enforcement website outlining the approach that it will adopt when deciding whether to use its statutory powers when conducting investigations. While nothing in the statement would suggest that the FSA has changed its practice, it in fact marks a significant change in the way in which its Enforcement Division will investigate matters in the future.
Until now, the FSA’s general approach has been to request that firms produce information and documents voluntarily. Similarly, people whom the FSA wished to interview during an investigation were generally asked to attend interviews on a voluntary basis. This was because the FSA preferred to take a less formal approach, and it was felt that, by not exercising a statutory power, the evidence obtained was less likely to be subject to legal challenge.
However, the previous approach was not without its difficulties. In hybrid criminal/regulatory investigations (for example, when investigating allegations of market abuse, market manipulation or insider dealing), an authorised firm asked to provide the documents, or an approved person asked to attend an interview, was often faced with the dilemma as to whether they should comply voluntarily with the FSA’s request. This was because they were under a regulatory obligation to cooperate, but at the same time they had a privilege against self-incrimination in the context of any criminal or market abuse proceedings.
Therefore, the FSA and those being investigated spent much time and effort reconciling the tension between these two conflicting principles and considering whether compulsory powers were appropriate for use in each particular case. Moreover, some banks were understandably reluctant to provide information on a voluntary basis for fear it may give rise to civil claims from customers for breach of confidentiality. Being compelled to provide information would almost certainly provide protection against such claims.
The FSA has now sought to resolve these difficulties. Henceforth, its standard approach when conducting investigations will be to exercise its statutory powers as a matter of routine to compel attendance at interviews and the production of documents.
The FSA says this is “for reasons of fairness, transparency and efficiency”. Those who do not comply with a statutory notice without a reasonable excuse are potentially liable to be fined or even imprisoned (as if they were in contempt of court).
In practice, however, authorised firms and approved persons are more likely to face disciplinary proceedings if they fail to comply with a statutory notice, on the basis that they have not been cooperative with the FSA, as required under the regulator’s principles for businesses and principles for approved persons. Indeed, the FSA’s announcement states, unsurprisingly, that it views a failure to comply with a requirement imposed by exercise of its statutory powers as a “serious form of non-cooperation”.
The FSA has stressed that the exercise of compulsory powers does not indicate that an individual is seen as uncooperative, or that they are necessarily suspected of anything. The use of statutory powers will become standard practice, and adverse inferences should not necessarily be drawn from their use.
However, a person cannot expect to receive credit for cooperation if their interview is conducted under compulsion. An individual who attends a voluntary interview, and who chooses to answer questions at such an interview, may receive credit for cooperation should they later be found to have committed a regulatory offence. The use of compulsory powers on a routine basis may therefore mean that, in the future, fewer people are able to gain credit for cooperation in providing documents and attending interviews.
It could be argued that the FSA’s use of compulsory powers is nothing new. After all, these powers have been available to the regulator since the Financial Services and Markets Act 2000 came into force. However, in reality these powers tended only to be used when information was not provided voluntarily. The use of its compulsory powers as standard practice, therefore, represents a major change in the FSA’s approach to the enforcement process.
Many will view this development as a further case of the FSA flexing its sizeable muscles. Indeed, the FSA’s director of enforcement has acknowledged that this may be the market perception. There have been several other examples of this tougher approach in recent months. These include the FSA’s much-publicised arrangement with the City of London Police to arrest suspects in criminal cases; the £2m fine levied on Abbey for inadequate anti-money laundering controls; and the £150,000 fine recently imposed on the former chief executive officer of a bank. At the very least, the new policy certainly reflects a greater confidence on the FSA’s part to use its full powers.
This change of approach may also result in a shift in the timing of the commencement of investigations. Previously, the FSA often carried out preliminary fact-finding enquiries on a voluntary basis before initiating a formal investigation. The FSA’s new reliance on its compulsory powers may result in formal investigations being initiated somewhat earlier, as compulsory powers will usually only be exercised once an investigation has been commenced.
There are still some circumstances in which the FSA will almost certainly not use its compulsory powers. For example, where the authority wishes to interview third parties with no professional connection to the financial services industry, such as the victims of an alleged crime or fraud. Similarly, the FSA may decide not to use its compulsory powers in certain cases where it is asked (as it frequently is) by an overseas regulator to assist it with an investigation. The FSA has said that, in such cases, it will have to consider with the overseas regulator the most appropriate method for obtaining evidence for use in the relevant country.
A further important example of where the FSA will depart from its standard practice of using statutory powers is when it wishes to interview someone as a suspect in connection with an alleged criminal offence or an allegation of market abuse. In this type of circumstance, provided the FSA has reasonable grounds to suspect that the interviewee has committed an offence, the interview will take place under caution. If the interviewee refuses to attend the interview, although they may refuse to answer questions, the FSA may ask the police to arrest them in order to put the allegation to them. If the FSA does not have reasonable grounds to caution, the interview can only be voluntary and compulsory powers will not be used, as the evidence obtained would be inadmissible in any subsequent criminal or market abuse proceedings. This again provides greater certainty because, in a hybrid criminal/regulatory investigation, the interviewee will have a better idea as to whether they are being interviewed as a suspect or merely as a witness.
On balance, I believe this change in policy is to be welcomed and I expect that the financial services industry generally will support it. While it may make the process rather more legalistic and formal, it removes the uncertainty that existed under the previous voluntary regime. Despite the severe penalties that individuals and firms may face for non-compliance, at least they will know with certainty what is required of them and the potential consequences of not complying.
Sidney Myers is head of Allen & Overy’s regulatory investigations group