UK: reviewing the fairness, transparency, speed and efficiency of enforcement decision-making processes at the FCA and the PRA

The Chancellor has launched a review of the fairness, transparency, speed and efficiency of the enforcement decision-making at the financial services regulators, as part of the government’s focus on strengthening accountability in the financial services industry.  A call for evidence to be submitted by 4 July 2014 was issued yesterday, with a view to the production of a report in the autumn of 2014. 

The Government recognises that the objective of enforcement action is to deter wrongdoers and encourage improved compliance - to change the behaviour of market and be effective, wrongdoers must face both a real and tangible risk of being held to account, and the prospect of meaningful and proportionate sanctions.  Enforcement machinery robust enough to deliver those sanctions when wrongdoing occurs is also important for public confidence.

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

• whether the current processes provide credible deterrence across the spectrum of firms and individuals;
• the interface between supervision and enforcement, including the process for referring cases for enforcement investigation;
• the process for and approach to coordinating investigations and enforcement action taken by the FCA and PRA;
• the arrangements for the subjects of enforcement action to understand the case against them;
• the arrangements for the subjects of enforcement action to make representations to the regulators;
• the operation of the early settlement process;
• the operation of the post-investigation administrative processes for reaching disciplinary decisions, including
  • the composition and accountability of the decision-making committees;
  • the degree of separation of the decision-making process from the investigatory process (independence); and
  • the arrangements for referring cases to the Upper Tribunal.

The review will include a comparison of these arrangements with international practice.  It will not consider individual cases or the merits of individual decisions, or the processes of the Upper Tribunal itself.

The review expressly highlights the importance of meaningful and proportionate sanctions.  It therefore seems something of a lacuna that although the review covers penalty discounts for early settlement, none of the consultation questions invite consideration of, or feedback on, the way in which the regulators set penalties - most notably the FCA's statement of policy with respect to the imposition and amount of penalties under the Act as set out in DEPP 6, and the way in which this is applied in practice. 

One area particularly ripe for thoughtful consideration is the FCA's use (in cases where revenue is deemed not to be an appropriate indicator of the harm or potential harm caused by the breach in question) of a range of alternative formulae applied to different indicators which the regulator has deemed appropriate, which have emerged in published Decision and Final Notices, although few of these have been the subject of public consultation.   

Next steps

The review has begun with a call for evidence to be submitted by 4 July 2014.  The Treasury also plans to host a number of roundtable discussions in June.  A report will be made to the Chancellor in the autumn, and laid in Parliament.