FCA's regulatory decision-making proposals – faster and less costly, but at what price?

The Financial Conduct Authority (FCA) has published its Consultation Paper CP21/25 on a new approach to decision making in the issuing of statutory notices, as had previously been foreshadowed in the 2021/2022 Business Plan. In launching the Business Plan, Nikhil Rathi, the FCA's CEO, said the FCA's role is to 'run towards fires of complex, difficult issues – and to try to put them out'.

In line with its aim to continue to become a forward-looking, proactive, tough, assertive, confident, decisive, agile regulator, the FCA now wishes to streamline the decision-making process to enable decisions about issuing statutory notices to be made faster, at less cost and more effectively, to stop and prevent harm.  Emily Shepperd, the Executive Director of Authorisations, is quoted as saying that putting the proposed decisions back to FCA subject matter experts will also lead to greater accountability in those areas.

The RDC will remain the decision maker in cancellation cases where the FCA has opened an investigation, is proposing a disciplinary sanction or seeking to impose a prohibition order.  The distinction between the effect on an individual of a prohibition order and of a refusal or cancellation of regulatory approval can in practice sometimes be rather moot.

However, the FCA proposes that certain decisions currently made by the Regulatory Decisions Committee (RDC) will now be made by senior members of FCA staff close to the matters, including:

• using own-initiative intervention powers to impose a requirement on a firm, or to vary its permissions;
• making a final decision in relation to a firm’s application for authorisation or an individual’s application for approval that is contested;
• "straightforward cancellation cases" involving removal of a firm’s permissions because a firm does not meet regulatory requirements; and
• the decision to commence civil and/or criminal proceedings.

Whilst this may reduce an element of delay or potential duplication, the challenge of a fresh perspective as a counter to potential 'group think' will also be lost.

In describing the regulator's deliberate shift to a culture that embraces risks and tests its legal powers to the limits, the FCA's CEO said he recognised the need to balance the desire to prevent harm with the need to ensure procedural fairness. However the Consultation Paper gives a relatively cursory nod to procedural fairness while proposing to set aside the safeguard of RDC scrutiny which was hard fought for on human rights grounds when the Financial Services & Markets Act 2000 was first being introduced.

The RDC is widely seen as independent and as enhancing confidence in the regulatory process, and no case has been made to suggest slow or poor decision-making by the RDC, or an inability or unwillingness of the RDC to resource matters to ensure expeditious hearings. The Consultation Paper does not acknowledge the well-recognised benefits of having someone wholly independent step back when exercising prosecutorial discretion, referring instead to the regulator's experience and expertise in civil and criminal litigation. Many other jurisdictions maintain strict separation of regulatory decision-making (e.g. the French AMF) or rely on judicial process (e.g. Australia).

Somewhat at odds with the Consultation Paper's stated focus on cases which require swift resolution is the FCA proposal to remove the requirement for urgency in section 8.3 of the Enforcement Guide as a pre-condition for the use of own initiation powers and/or for a variation of permission or requirement, although urgency may still feature as a factor for consideration.

For statutory notice decisions made under Executive Procedures, the FCA will continue to take account of written representations but will only allow oral representations in exceptional circumstances, giving as an example a subject of a statutory notice who is not reasonably able to make written representations due to personal circumstances. This is said to be because scheduling oral representations meetings can be time-consuming and the decisions the subject of the consultation are said to require swift decisions.

What will remain is the very limited protection afforded by section 395 FSMA, which requires the FCA to ensure that the decision which gives rise to the obligation to give a statutory notice is taken by a person not directly involved in establishing the evidence on which that decision is based, or alternatively, to be made by two or more persons who include a person not directly involved in establishing that evidence. However, even here, the proposals will slim down the composition of the FCA's senior staff committee, and will in addition enable FCA staff responsible for taking the statutory notice decision to be advised by legal advisers who have already advised FCA staff recommending the decision.

As is the case with statutory notices currently made under Executive Procedures, the FCA will permit (and not disclose to the subject of the notice) communications between staff recommending that action be taken, and those responsible for decision-making in respect of the broader set of decisions which, under these proposals, would fall to be considered under Executive Procedures. The RDC does not, after giving a warning notice, meet with or discuss the matter while it is still ongoing with the FCA staff responsible for the case without other relevant parties being present or otherwise having the opportunity to respond. Those subject to decisions which will now fall to be made under Executive Procedures will not benefit from this transparency and separation, which had been implemented by the Financial Services Authority after the Enforcement Process Review, following criticisms by the Financial Services and Markets Tribunal in the case of Legal & General in 2005.  This means that the subject of a notice may not have full sight of, and be able to address, all representations made by staff to the decision-makers.

Those subject to statutory notice decisions will still continue to benefit from the right to refer the matters to the Upper Tribunal. However, as the FCA is aware, this right is, at least currently, rarely exercised by firms, which are generally anxious to preserve good relationships with their supervisor, and avoid the delay, additional expense, and publicity involved in a Tribunal hearing.  Individuals whose livelihoods depend on the outcome of such decisions are more willing to refer their case to the Upper Tribunal.

The FCA's consultation closes on 17 September 2021 and the FCA envisages publishing a Policy Statement in or around November 2021, and starting to operate the revised decision making framework immediately thereafter.  'In flight' cases being considered by the RDC would remain with the RDC (including those where a warning notice has been issued before that date which refers to making representations to the RDC).

Those proposing to respond to the consultation will wish to consider carefully how other new FCA proposals - particularly those outlined in DP21/2 on 'Driving meaningful change in Diversity and Inclusion in the Financial Sector' - might play out under the FCA's new approach to decision-making.