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Clifford Chance

Clifford Chance

Regulatory Investigations and Financial Crime Insights

The FCA implements changes to its statutory notices decision-making processes

The Financial Conduct Authority (FCA) has published policy statement PS21/16 announcing reforms to its decision-making process to ensure faster and more effective decisions for consumers, markets, and firms.

Background

On 26 November 2021, the FCA published a policy statement (PS21/16) on issuing statutory notices and a new approach to decision-makers. The policy statement follows a July 2021 consultation (21/25) in which the FCA laid out proposals to transfer decision-making from the Regulatory Decisions Committee (RDC) to senior managers in the FCA's Authorisations, Supervision and Enforcement Divisions under executive procedures.

Despite concerns raised by market participants that the changes could result in an increased risk of a lack of fairness and objectivity in decision-making, the proposals have been implemented as consulted on as executive procedures already "provide a fair process" complying with current statutory requirements that require decisions to be taken by a person not directly involved in establishing the evidence in most cases.

What's changing?

The changes are said to support the FCA's ongoing transformation programme which aims to make faster, effective decisions that prioritise the right outcomes for consumers, markets, and firms. The FCA states the changes will ensure decisions to prevent or stop consumer harm are taken more quickly and will allow the RDC to focus on significant misconduct cases, where the harm has already materialised and the main issue is what, if any, sanctions are appropriate. Furthermore, it will instil a greater degree of responsibility and accountability in FCA staff when making decisions.

Under executive procedures FCA senior managers will now be able to make decisions:

  • relating to a firm’s authorisation or an individual’s approval
  • to use their own-initiative intervention powers to impose a fundamental variation of permission or requirement relating to a firm (DEPP 2.5.8G defines fundamental variation or requirement)
  • to take action in straightforward cancellation cases because a firm does not meet the FCA's regulatory requirements, and that action is contested
  • to commence civil proceedings, such as seeking an injunction, and
  • to commence criminal proceedings, such as a prosecution for insider dealing.

Whilst the executive procedures framework will not change, the definition of a senior staff committee is amended to compromise a minimum of two, rather than three people. In addition, the requirement for urgency before the FCA can make an own-initiative decision under the Enforcement Guide 8.3, is also removed.

The FCA has made changes to its Enforcement Guide (EG) and Decisions Procedure and Penalties Manual (DEPP) under the Changes to Decision Making for Statutory Notice Procedure Instrument 2021 (FCA 2021/46). The changes came into force on 26 November 2021.

The decision-maker in existing cases

Cases being considered by the RDC before 26 November 2021 will remain with the RDC. When considering those cases, the RDC will continue to follow its stated procedures. This includes any cases where a warning notice has been issued before that date which refers to making representations to the RDC.

The decision-maker in cases opened from 26th November 2021 onwards

Action

Decision maker

Process changes

Authorisations

FCA team under executive procedures

The opportunity to make written and/or oral representations to the RDC or for the RDC to issue a decision notice after hearing representations has been removed. These are to be dealt with by the FCA team under executive procedures.

Cancellations

FCA team under executive procedures

All stages/decisions relating to the cancellation process are now to be taken by the FCA team under executive procedures and not the RDC.

Fundamental variation or requirement

FCA team under executive procedures

The initial recommendation to intervene and impose a fundamental variation or requirement will continue to be made by the FCA team.

All other stages/decisions in the process are to be overseen by the FCA team under executive procedures and not the RDC.

Non-fundamental variation or requirement

FCA team under executive procedures

No change. All stages/decisions continue to be taken by the FCA team under executive procedures.

Enforcement

FCA team under executive procedures and RDC Chair, RDC Deputy, Or Enforcement Director (exceptional urgency)

The initial recommendation to impose a penalty, disciplinary prohibition or sanction will continue to be taken by the FCA team under executive procedures.

The decision to accept the FCA teams' initial recommendation will be taken by the RDC chair, RDC deputy or enforcement director in exceptional urgency.

All other stages in the enforcement process previously decided by the RDC will now be decided by the FCA team under executive orders.

Commencing criminal or civil proceedings

 

The recommendation to commence proceedings will continue to be taken by the FCA team under executive orders.

The decision to accept the FCA teams' recommendation will now be taken by the FCA team under executive procedures and not the RDC chair or deputy chair.

 

Implications for regulatory investigations

Market participants and professional advisors have raised concerns about the potential for the changes to weaken procedural safeguards at the risk of fairness. However, in part, the FCA appears to place reliance on the changes meeting minimum statutory requirements as a justification for them.

The changes will undoubtedly alter the way regulatory investigations are approached. Whilst the Executive Procedures framework would largely remain the same, there are a number of differences from the RDC process that could potentially undermine the protections for firms and individuals. A notable example is the removal of the ability to make oral representations, which will now only be permitted in "exceptional circumstances". Likewise, the RDC is to be removed as the decision-maker concerning decisions to commence civil or criminal proceedings, to be replaced by the discretion of an FCA Enforcement Executive Director or acting Executive Director. More generally, the ability to refer to the RDC as an independent panel prior to making a reference to the Upper Tribunal (UT) is an important step in resolving cases economically and at the earliest opportunity. Without this mechanism, it is likely the number of referrals to the UT will increase, both meritorious and unmeritorious. References to the UT take time and would likely mean added delay, expense, and stress particularly for individuals. This could result in fewer decisions being challenged beyond the executive decision-maker stage.

Next steps

The FCA will carry out a six-month post-implementation review to assess the effectiveness of the reforms and will include data on executive decisions and outcomes in its annual report.