Why FCA fines have fallen and are unlikely to ever be what they were in 2014
Last Wednesday morning in a consultation update entitled “Our approach to enforcement”, the FCA announced an upcoming consultation on how they levy fines after swings from record highs in 2014, to the lowest on record in 2016, nearly four years after it first announced its plans to do so.
My first-hand experience with the FSA/FCA was their pursuit of settlement at the expense of sufficiently thorough investigation and fairness, this may or may not have been the case with other investigations. If it was, it would explain why Companies under investigation by FCA enforcement have tended to settle under a “Final Notice”, understandably to allow themselves to get on with their businesses. Individuals under investigation have and will increasingly, fight potential damage to their reputations. The FCA has been under political pressure to make findings of wrongdoing against relevant individuals, normally senior managers that have held positions of responsibility in firms that have been found guilty of failings. The Senior Managers Regime has resulted.
It then gets more complex because the degree of detail that was covered by an initial “Skilled Person” investigation and report instigated by the FCA that might have been used as the basis for investigation and settlement with a firm may have been relatively superficial compared with that required to prove wrongdoing by a relevant individual because the burden of proof is different. It may need to be much more detailed.
The Skilled Person regime was understandably conceived to alleviate the investigative workload for the FCA. There is an inherent conflict in its structure because a report is produced for the FCA at the subject firm’s expense. It is in the commercial interest of any Skilled Person to be as critical as possible to get more business as part of the same investigation or be seen as a safe pair of hands for other future investigations.
Under FSMA 393 the FCA is required to disclose a potential settlement with a firm to any “identified” employees before publication. Where the FCA have settled with firms without giving these third party rights, some employees, have challenged the FCA stating that they were identified by job description, by job title or FCA controlled function without actually being named. And thus far, no employee has won a case against the FCA but they have probably got much too close for the FCA’s liking. The Macris case went to the Supreme Court having won at the Upper Tribunal but was surprisingly overturned.
The FCA know they are unlikely to get away with some of the flabby, overblown and jargon laden arguments that have been agreed under settlement conditions with firms again. For this reason, they have reluctantly accepted the need for more comprehensive “Maxwellisation”, in other words they have decided to agree that wording under s393 with some individuals who previously they might have ignored as they did with Macris, and hoped for the best. These individuals of course, will and no doubt have strongly disagreed, which in turn, has destabilised and probably prolonged the entire enforcement case against the firm as well as closing off the old settlement route that was so lucrative for the FCA in 2014.
This is why, in my view the FCA did not want to release the RBS skilled person report to the Treasury Select Committee because now that it has, individuals working at RBS have been identified and vilified by the report without being able to defend themselves. The glacial pace adopted by the FCA in these matters is unhelpful and these individuals have not had access to justice as FSMA s393 is designed to give them.
The RBS s166 report, conducted four years ago, by Promontory, an IBM consultancy that opened in the UK in 2006, has 25 employees in London and Sir Callum McCarthy, an ex-chairman of the FSA is the Non-Director Chairman, may contain insufficiently guarded language for the public domain or indeed sharp political focus which it has received and is not designed. During the big settlement era, the FCA over-relied on these skilled person reports and possibly failed to sufficiently investigate in some cases.
Mrs Morgan at the TSC was calling for the law to be changed to accelerate Maxwellisation, but this would be at the expense of possibly innocent individuals working in Financial Services with, in this case, no access to justice.
The simple problem is the FCA had gradually adopted a “normal practice” of the pursuit of settlement against wrongdoing which has, by degree, rendered enforcement less and less well ill-equipped to deal with individuals. So, their push to acquire individual accountability has exposed glaring weaknesses in the entire FCA enforcement system which is reflected in the likely over inflation in 2014 followed by the fall in their fines since then.
The truth is they need to focus on all relevant individuals first and, once complete, reach corporate conclusions. The FCA need to work much more quickly when dealing with individuals which, with limited resources under the current investigation system will be hard. However, in fairness to individuals there should be set time limits.
Stephen Cooper 26/03/18