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Should HM Government call time on the regulatory enforcement process?

Chris Brennan, White & Case, Partner, London, 23 October 2020


The FCA recently published its Annual Report and Accounts for the year 2019/20, including enforcement data for the same year. The data makes unhappy reading for both firms and the FCA senior management. Despite a massive volume of open cases, outcomes remain low, progress remains painfully slow and costs continue to creep upwards.

As Nikhil Rathi arrives at the FCA, he will no doubt be thinking about the plan for his first 100 days. He arrives at a very troublesome time and will face many competing priorities, not least of which is the job of preparing for a "no-deal Brexit." Although it will not be at the top of the list, there is a clear and pressing need for a review of the FCA’s approach to enforcement.

Enforcement is a vital part of any successful regulatory regime. In the absence of an effective enforcement process, rules become meaningless. Regulators must use enforcement to convey important messages to firms and should use it as a credible deterrent against wrongdoing. A successful enforcement regime is one which is both fair and effective. Unfortunately, the glacial pace at which the FCA approaches each case stops it from being either fair or effective.

Flash to bang!

Some years ago, the FCA embarked on an internal initiative under the name "flash to bang." The objective of this work was to reduce the time between the occurrence of misconduct and the publicly-announced disciplinary action -  in other words, to make the process of enforcement more efficient. This project was a clear recognition that stale enforcement outcomes are much less of a credible deterrence. The issuing of a fine in relation to conduct which occurred five or six years ago drains the whole exercise of much of its effect – it is yesterday’s news. The elongation of the enforcement process also causes unfairness to anyone being investigated. Memories fade at both a personal and corporate level, making it harder to defend conduct which occurred many years ago. It is also extremely stressful for someone to have to wait for years while the FCA decides what to do.

Slower and slower

The deterioration in the rate of progress is obvious from a glance at the FCA’s annual enforcement reports. In 2015, the FCA took an average of 18 months to settle enforcement cases. That same process now takes nearly three years to complete. It is more troubling to note that, despite having 646 open cases, the FCA only imposed 15 financial penalties in the last year (compared with 43 in 2015). The total number of cases that resulted in some other form of enforcement-related result was 41. In other words, 93% of cases referred to the enforcers appear to lead nowhere. One wonders why so many cases are still referred for investigation when there is so little prospect of anything coming of it.

The answer goes back to the Green Report which was published in 2015. This led to a change in the threshold for a case's referral for investigation. This removed the prospects for success from the factors that the FCA had to considered when deciding what to investigate. This, not surprisingly, led to a 300% increase in the number of open investigations. Unfortunately, this was not accompanied by a corresponding increase in the number of enforcement staff at the FCA. As a result, everyone who is referred to the enforcers now has to suffer considerable delay and unnecessary cost.

Expenditure of time

Aside from the very real concerns about delay and the effect that this has on the fairness and cost of the enforcement process, these figures raise serious questions about the FCA's deployment of its own resources. If the number of cases being opened has trebled but the number of results has remained broadly the same (or decreased), this suggests that the FCA is wasting a considerable amount of time and money on cases which it should never have referred to its enforcers in the first place. Either that, or it is simply unable to investigate in a way that results in it building a case for some form of enforcement-related outcome. It seems more likely to be a case of the former rather than the latter, although the sheer volume of cases must make it extremely difficult to get to the right outcome on any single case, let alone on all 600.   

There must come a point at which somebody at the FCA or HM Treasury questions the logic and effectiveness of the current approach. A firm should only face the prospect of a referral to the FCA's investigators if there is some evidence of misconduct.

The ‘investigate everything’ approach is simply not working. The scale of the delay is damaging to the FCA’s reputation and the size of its workload prevents it from performing its regulatory duties effectively. More importantly, the delay and costs associated with such a lengthy enforcement process do untold and unnecessary harm to the people and firms under investigation, especially when an investigation turns out to have been needless.

These latest statistics confirm what many practitioners have known for some time: a review of the enforcement process is long overdue. Perhaps Nikhil can add this to his (no doubt very long) list of tasks.

* Chris Brennan can be reached on +44 20 7532 2702 or at christopher.brennan@whitecase.com

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