FCA publishes referral criteria for enforcement investigations in July 2015

Experience in recent years has led many to comment on the increasingly “grey area” between the regulator’s supervisory and enforcement work.
This, in turn, can cause issues for FI insurers when seeking to determine whether and when investigation costs cover has been triggered.

However, we now have some clarity as, on 10 July 2015, the FCA published its new referral criteria for enforcement investigations. https://www.fca.org.uk/news/fca-publishes-new-referral-criteria-for-enforcement-investigations

This step was taken in response to a report from HM Treasury in December 2014 which recommended a number of improvements to the enforcement process, but focussing particularly on the referral and settlement decision-making stages.

When deciding whether to investigate, the first question the FCA will consider is whether an enforcement investigation is likely to further its aims and statutory objectives (being the protection of consumers, to enhance market integrity and to promote competition in the interest of consumers). To assist in answering this primary question, the FCA will then consider the following:

What is the strength of the evidence and is an enforcement investigation likely to be proportionate?

Under this heading, the FCA will consider:
1. the strength and availability of evidence, whether an enforcement investigation is proportionate in terms of the seriousness of the failings in question, and the amount and availability of resource that will be required to investigate;
2. prioritisation of this case against other cases that could be referred to enforcement;
3. any action already taken, or to be taken, by another authority or agency (in the UK or abroad) in relation to the same firm or individuals; and
4. the impact that opening an investigation might have, particularly where the subject is an individual.

What purpose or goal would be served if the FCA were to take enforcement action in this case?

The FCA takes a strategic and risk-based approach to enforcement and the exercise of discretion is central to this.
Reasons why enforcement action could be taken may include:
1. the deterrence effect in respect of not only the wrongdoer (“specific deterrence”) but also more widely by serving as a reminder to others and publicly reinforcing the regulatory requirements in priority areas (“general deterrence”).
2. Other factors cited include holding those responsible for very serious breaches to account with proportionate penalties and sanctions (“justice”) and removing wrongdoers from the industry or imposing other restrictions where appropriate (“protection”).
3. more detailed factors in relation to each of these four elements are expanded upon in the criteria.

A fifth factor under this heading is securing redress for consumers, which can be a feature of FCA enforcement action.
1. However, if it is possible to secure redress by means other than a formal enforcement investigation and, where redress is the priority, the FCA will consider those other options without referring to enforcement.

efficiency is also a factor;
1. the FCA recognises that the formal enforcement investigations are expensive and resource intensive for both it and the firms and individuals involved.
2. Therefore, if there is a more efficient and effective way for the regulator to achieve its statutory objective (for example by utilising one of its other powers such as closer supervision, a skilled person report, limits or additional requirements on a firm’s regulated activities or requiring a firm to redress customers) this will be considered before enforcement.