28 July 2015 - Post by:
In response to recommendations made by HM Treasury at the end of last year, the FCA has published an updated set of enforcement referral criteria, which it will use to determine which cases should be referred to the FCA’s Enforcement Division for investigation.
But what – if any – difference will the FCA’s new enforcement referral criteria make practice?
Is a referral to enforcement always the ‘right’ regulatory response?
The FCA has confirmed that, prior to launching an enforcement investigation, it will consider what is the most ‘efficient and effective’ way of achieving its statutory objectives (protecting consumers, enhancing market integrity and promoting competition). For example, the FCA may consider using one or more of its supervisory tools (a list of which is available here) to address an issue instead of launching an enforcement investigation.
This is nothing new – the FCA has previously stated publicly that it will take this approach. However, in practice, it often continues to be difficult to predict when the FCA will use its supervisory powers and when it will launch an enforcement investigation into a particular matter. The approach that the FCA takes can sometimes vary depending on factors such as the attitude of a firm’s supervisors, or the number of other live supervisory and/or enforcement issues that a firm has at any one time and the FCA’s own resources.
The overarching question that the FCA will ask itself before launching an enforcement investigation is…
Is an enforcement investigation likely to further the FCA’s aims and statutory objectives?
This question is the focal point for the FCA’s new enforcement referral criteria, but again is nothing new. One of the FCA’s ‘old’ enforcement referral criteria was very similar – ‘Overall, is the use of the enforcement tool likely to further the FCA’s aims and objectives?’.
When determining whether an enforcement investigation is likely to further the FCA’s aims and statutory objectives, the FCA will consider the following three factors:
- the strength of the evidence and the proportionality and impact of opening an investigation;
- what purpose or goal would be served if the FCA were to end up taking enforcement action in the case; and
- ‘relevant factors’ to assess whether the purpose of enforcement action are likely to be met.
The FCA has also published details of the approach that it intends to take when considering these three factors, which we have summarised here.
But the FCA’s enforcement referral criteria are ‘not intended to be exhaustive’
When introducing its new enforcement referral criteria, the FCA was quick to point out that the new criteria ‘are not intended to be exhaustive and all the circumstances of a particular case are taken into account’ and that ‘not all the criteria will be relevant to every case and additional considerations may apply in certain cases’. As a result, the FCA has preserved for itself a considerable amount of flexibility and discretion in terms of how it applies its new enforcement referral criteria or whether it applies these criteria at all in any particular case.
The FCA’s new enforcement referral criteria are more detailed and granular than the referral criteria they have replaced. So we now have greater transparency about the kinds of questions that the FCA will be asking itself when considering whether to launch an enforcement investigation into a firm or an individual. However, we do not have any greater clarity in terms of how the FCA will go about answering these questions. That limits the effectiveness of the new enforcement referral criteria in enabling firms and individuals to try and predict with any accuracy whether a particular issue will be referred to FCA Enforcement. This is unsurprising; the FCA will not want to fetter its discretion to refer matters to its Enforcement Division for investigation.
In order to help us better understand how the FCA’s new enforcement referral criteria apply in practice, it would be helpful if the FCA informs subjects of investigations why they have been referred to FCA Enforcement, by reference to the new referral criteria. This information could also be published in statutory notices for the rest of the industry to see.
Further changes are on the horizon
The publication of the FCA’s new enforcement referral criteria is part of a broader piece of work that the FCA is currently undertaking in order to respond to the recommendations made by HM Treasury at the end of last year. The FCA is due to launch a consultation detailing how it proposes to implement these recommendations later this summer, which will be covered on Investigations Insight once published.