When Nikhil Rathi, the Financial Conduct Authority's (FCA) new chief executive, took up his role on October 1, he will have faced an unenviable list of issues to confront. The fallout from the pandemic, the upcoming conclusion of the post-Brexit transition period, increased scrutiny following a number of high-profile scandals will have topped his in-tray. Another challenging issue on the list is the regulator's approach to enforcement and, in particular, the use of its criminal powers.
It has been five years since Mark Steward, the Executive Director of the FCA's Enforcement and Market Oversight Division, took the helm. Under his tenure, the number of investigations carried out has increased dramatically. On March 31, 2015, the Division had 226 open investigations. On March 31, 2020, it had 646 open investigations. Mr. Steward will be quick to point out that many of these investigations relate to the same underlying conduct and, as a result, do not demonstrate a three-fold increase in the division's workload. He acknowledges, however, that his division is investigating more now than it was five years ago.
The increase has been driven, in large part, by the adoption of a new "Approach to Enforcement," which was formally rolled out in April 2019. To overcome criticism that it all-too-often approached investigations with a closed mind—driven by the desire to secure an outcome as quickly as possible—the FCA now purports to use investigations as a diagnostic tool.
Under the policy, the purpose of an investigation is "to get a full understanding of the facts so that [the FCA] can make a decision about whether and, if so, what kind of action may be necessary." In the abstract, it is difficult to argue with such an approach but, as any inquisitive child will tell you, the more stones one picks up, the more creepy crawlies one is likely to find. Once misconduct is identified, it is extremely difficult for the FCA to justify closing an investigation without taking further action. The result is an ever-growing list of cases that the FCA considers itself obliged to pursue.
The resulting backlog means that rather than identifying "the heart of the case" quickly and promptly ending investigations where there is no substance to suspicions or evidence of serious misconduct, many individuals and firms are spending months or even years under investigation before cases are closed without further action being taken. The backlog also means that cases that ought to be being pursued are delayed. As a result of the way the FCA now treats investigations, firms cannot expeditiously reach settlements and achieve closure. Also, the backlog means that victims are waiting for restitution or compensation and wrongdoers are not being prohibited and/or convicted in good time.
The problem is exacerbated by the Division's increased willingness to pursue criminal investigations against firms and individuals. The FCA states that "if we investigate a breach that might be the subject of criminal or civil proceedings, we will not decide straight away whether we are investigating to determine a criminal or civil breach." This change in approach has been exemplified by the much-publicised investigations under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017—commonly referred to as "the MLRs"—but it is a trend in other areas of the FCA's enforcement portfolio too.
Again, the rationale for the change in approach is difficult to argue with as a matter of principle. If Parliament has granted enforcement authorities the power to investigate and prosecute criminal offences, it would be strange for them to never do so. However, despite opening a couple of dozen investigations, the FCA is yet to charge an individual or firm with an offence under the MLRs or the regulations that were in force for the preceding ten years.
Last month, the FCA also revealed it has now closed half of the 14 criminal investigations under the MLRs that were open at the beginning of the year. Of the seven that remain open, six are being pursued on a 'dual-track' basis (i.e. they may still result in a regulatory outcome) and recent outcomes against firms, such as Standard Chartered Bank and Commerzbank, indicate that the FCA is still far more likely to seek regulatory outcomes for AML failings.
That the FCA may be losing its appetite to pursue criminal investigations, particularly against firms, is not a surprise. They tend to take longer to complete and can be very expensive. The process of gathering evidence and reviewing disclosure is often far more time consuming and resource intensive. While firms are often willing to enter into early discussions in an attempt to settle regulatory investigations, those who are subject to 'dual track' investigations are often far less inclined to co-operate for fear of incriminating themselves and facing prosecution.
Unlike the Serious Fraud Office (SFO) and Crown Prosecution Service (CPS), the FCA is unable to offer firms a deferred prosecution agreement (DPA). As a result, there is little scope for settlement in a criminal case. If indicted, a defendant either pleads guilty or stands trial. If convicted, a firm will be fined and may be subject to other ancillary financial orders similar to those that can be imposed in regulatory proceedings. Aside from the conviction itself and any increased publicity, there is therefore little else that the FCA will gain from pursuing a criminal as opposed to a regulatory case. The legal and reputational consequences of a conviction for a firm can, however, be significant and long-lasting.
How then should Mr. Rathi go about addressing these issues?
First, the FCA needs to set out what it considers its criminal remit to be. The stock response is that it should be limited to those offences for which Parliament has afforded it investigation powers, primarily under the Financial Services and Markets Act 2000. Frequently, however, the FCA prosecutes offences beyond those listed, as it is entitled to do providing such actions accord with its statutory objectives. While the investigation and prosecution of certain offences, such as insider dealing, falls clearly within the FCA's domain, other forms of misconduct that it can investigate using its statutory powers are, to all intents and purposes, frauds that could be handled by the SFO, the National Crime Agency or any U.K. police force. The FCA should set out what factors it will take into account in deciding whether to proceed with a case that could be pursued by others.
Second, having established its remit, it must clearly articulate the circumstances in which it will pursue criminal as opposed to regulatory outcomes. If criminal charges are only to be brought in the most egregious cases, as Mr. Steward has suggested, the FCA should set out the factors it will take into account when making such an assessment. It should also give serious thought as to whether it is desirable, or indeed appropriate, to commence criminal investigations against individuals and firms merely because there are "circumstances suggesting" that a criminal offence may have been committed when the public interest is likely to be best served by securing an alternative outcome. Being subject to an investigation at all, let alone a criminal investigation, can have long-lasting consequences even if no further action is taken, particularly for those operating in the regulated sector.
Finally, the FCA must ensure that it has the powers and resources it needs to deal with criminal cases falling within its remit. For example, if the FCA remains serious about pursuing criminal investigations against firms, there is no logical reason why it should not have the power to enter into DPAs, particularly as many of the offences for which a DPA may be sought can be investigated by the FCA. The regulator could refer a suitable case to the CPS, but why would a body which has spent years developing its criminal capabilities want to do so?
Like his predecessor, Andrew Bailey, Mr. Rathi is not an "enforcer" by background but as a former senior Treasury official, he will fully understand the politics that are at play and the need for the FCA to deliver proportionate outcomes in a timely manner. No enforcement authority can do all that is asked of it. It may be time for Mr. Rathi to adopt some ruthless pragmatism in order to re-shape the FCA's enforcement policy.
First published on Thomson Reuters Regulatory Intelligence on October 7, 2020.
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