22 July 2016 - Post by:Sarah Hitchins
‘Don’t trample over the crime scene’. That was the message from Mark Steward, Director of Enforcement at the UK Financial Conduct Authority (FCA), at a talk the other month. Was he talking about an episode of the latest crime drama? No, he was talking about firms and their approaches to internal investigations.
Internal investigations: Not ‘that important’?
In addition to his comments about ‘the crime scene’, Mr Steward was also quoted as having said that he does not consider internal investigation reports to be ‘that important’.
Contrast Mr Steward’s thoughts with comments made by Jamie Symington, a Director in the FCA’s Enforcement Division, in a speech he gave late last year about the FCA’s expectations for firms’ internal investigations.
We took Mr Symington’s comments about internal investigations in his speech to mean that, if done well, internal investigations can be hugely useful exercises – both for firms and regulators. However, we did acknowledge that what doing an investigation ‘well’ means in practice might vary depending on whether you look at it from a firm’s perspective or a regulator’s perspective. At times it will be difficult to reconcile these two standpoints and firms may need to take tricky decisions, which may not always sit well with the FCA and other regulators or authorities. Where firms come out will, to some extent, depend on the issue or investigation in hand – in some cases it will be more important than in others to maintain close engagement with the FCA during an internal investigation. However, it is clear that firms should always have an eye to their obligations under FCA Principle 11 and PRA Fundamental Rule 7 and self-report issues to the relevant regulator(s) when required to do so.
Against the backdrop of Mr Symington’s comments, what Mr Steward was quoted to have said (which seemed to downplay the usefulness of internal investigations) came somewhat out of the blue. Some have likened Mr Steward’s comments (notably, his comment about ‘trampling over the crime scene’) to similar sentiments that have been expressed by the UK Serious Fraud Office. However, technically-speaking, the vast majority of cases that end up on the radar of the FCA’s enforcement division do not concern potential criminal issues and are therefore not ‘crime scenes’ so the same risks and considerations do not always apply.
The future for internal investigations
Have internal investigations reached the end of the road? No, I do not think so. They are an important tool for firms. At their most basic level, internal investigations act as a means by which firms can figure out what has happened, what consequences might flow from that and also (and very importantly) what needs to be put right – whether that be strengthening systems and controls, remediating customers/clients or something else. Doing some sort of preliminary internal investigation work is often also necessary so that a firm can take a properly-informed decision as to whether there is a need to report something to the FCA, or another regulator or authority.
Firms are going to find themselves under increasing pressure to get to the bottom of issues as a result of the new Senior Managers and Certification Regime, as well as the new whistleblowing rules which are due to come into force for UK firms in September 2016. Firms within the scope of the new regime at the moment are responsible for assessing the fitness and propriety of their Senior Managers and Certified Persons. When things go wrong, some sort of internal investigation will be vital for the firm to ensure that these individuals remain fit and proper to perform their roles. The same applies for when firms are considering whether suspensions or adjustments need to be made to employees’ deferred remuneration in connection with a particular issue.
Mr Steward’s comments about internal investigations reinforce our view that the FCA will continue to look closely at and scrutinise firms’ internal investigations (both their methodologies and outcomes). We have already seen this happening in practice on several occasions. The same can be said about firms’ decisions to self-report issues under FCA Principle 11.
The way forward may not be easy. Senior people at the FCA clearly have the bit between their teeth when it comes to firms’ internal investigations and, as flagged above, the FCA may take a different view to firms as to what doing an internal investigation ‘well’ means in practice. However, provided that firms have in place robust and defensible internal investigation processes and methodologies, follow these in practice and self-report when required, the FCA is likely to find it tough to pick too many holes in firms’ internal investigations – although there could be disputes over certain topics such as attendance notes and privilege along the way.
Blog posts on challenging issues in internal investigations
We are in the process of publishing a series of blog posts on internal investigations. These blog posts seek to draw out and give practical guidance on the more challenging and tricky issues that can often arise in internal investigations.
As well as covering Mr Symington’s speech on internal investigations, to date in our series of blog posts we have covered:
If any readers have suggestions for topics that they would like for us to cover in this series of blog posts, please do not hesitate to get in touch via firstname.lastname@example.org.