The review was commissioned in February by the FSA Board after aspects of its process were criticised by the Financial Services and Markets Tribunal and because it was evident that many affected by enforcement actions had doubts about the fairness of the process. The review was led by David Strachan, director of retail firms, advised by Michael Brindle QC and David Pritchard, recently retired deputy chairman of Lloyds TSB. The review's recommendations have been accepted by the FSA Board.
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;
* 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.
