Group of people chatting on bridge.

Osborne keeps up the pressure on the FCA and PRA with enforcement review

20 May 2014

A month after bringing the Regulator's Code into force as statutory guidance, George Osborne has announced that the Treasury will undertake a major review of enforcement decision-making at the FCA and the PRA.

As I commented in my blog on the Regulator's Code (also commented on by RPC insurance partner David Webster) it seems that the Treasury is reminding the FCA that its powers originate from the Treasury and the Chancellor's current priority is economic growth.

According to a Treasury statement on 6 May the review will examine the fairness, transparency, speed and efficiency of the institutional arrangements and processes for enforcement decision making at the FCA and PRA and "continues the government's focus on strengthening accountability in the financial services industry." In the wake of the zombie insurance review fiasco, this seems somewhat tongue-in-cheek as recent focus has not been on the accountability of industry but the regulators.

The review will consider the design and governance of the respective institutional arrangements and processes at the regulators, including:

  • the process for referring cases for enforcement investigation;
  • the process for co-ordinating investigations and enforcement action taken by the FCA and PRA;
  • the operation of the early settlement process;
  • the operation of the post-investigation administrative processes for reaching disciplinary
  • decisions;
  • the arrangements for the subjects of enforcement action to make representations to the
  • regulators; and
  • the arrangements for referring cases to the Upper Tribunal.

The review will also include a comparison of these arrangements with international practice.

The document introducing the review is a useful read, summarising the FCA and PRA's approach to enforcement and their enforcement processes. (There have, of course, been no completed PRA enforcement cases so this section of the document is rather less substantial.) Some of its more interesting (and worrying) observations about the FCA enforcement process include the fact that:

  • where the Regulatory Decisions Committee (RDC) has issued a Warning Notice to a firm or individual about proposed FCA action, allowing the firm to make written representations, the RDC has nearly always subsequently issued a Decision Notice, suggesting a certain fruitlessness to representations;
  • some 58% of cases closed between 2010-11 and 2012-13 were concluded by executive settlement, a murky process in which firms are persuaded to settle in exchange for 'discounts' on their fines of up to 30%; and
  • the total value of fines increased from £33.6 million in 2009-10 to £432.2 million in 2012-13.

Reading the document, the two themes that stand out and appear to be at the core of the review are transparency and independence. The review anticipates granting the RDC much greater independence from the FCA. The legacy FSA looked at the role of the RDC during a review in 2005 in which it received extensive feedback criticising the links between FSA enforcement teams and the RDC. The FSA's reforms at the time focused on increasing transparency about these links, including disclosing communications between enforcement teams and the RDC, and granting the RDC a separate legal staff. However, being more transparent about the system's deficiencies seemed inadequate reform.

The FCA's combined inquisitorial and judicial roles seem curiously out of place in a country that takes such pride in its common law heritage and trial by jury. Therefore, while the review is studiously neutral in its approach to the matter, comments by the Conservative chairman of the powerful Treasury Select Committee which overseas the work of the FCA and PRA suggests that this independent review is likely to herald major change:

"This is a step in the right direction....It can pave the way for implementing an important recommendation of the Banking Commission, providing greater autonomy for the FCA's Regulatory Decisions Committee in taking enforcement decisions. Those who conduct an enforcement investigation should be, and be seen to be, independent from those who reach a verdict. It is crucial that regulators strike the right balance between supervisory and disciplinary powers. Enforcement should usually be the last resort, not the first."

The introductory document calls for evidence to be submitted to the treasury by 4 July 2014. The Treasury will also be hosting roundtable discussions during June. Those conducting the review will report to the Chancellor by autumn 2014.