On 26 November, the FCA published Policy Statement 21/16: "Issuing statutory notices – a new approach to decision makers" and the new rules took effect on the same day. Despite significant concern by stakeholders, no changes were ultimately made to the proposals consulted on during the summer.
We share the concerns by stakeholders that the changes appear to prioritise speed of decision making over fairness, given the reduced separation between the FCA fact-finding team and decision makers, reduced transparency through non-disclosure of communications between the two, and the (extremely) limited circumstances in which parties will be entitled to make oral representations. We consider that early engagement with the FCA and hiring professionals to assist with this process will be even more important in light of the changes.
Following on from Shabaz's initial brief summary of changes, in this article, we set out:
- A more detailed summary;
- Commentary on the FCA's stated aims, and potential impacts on the fairness of the decision making process; and
- Practical advice on what parties should do going forward to get the best results when dealing with the FCA.
Summary of changes
When the FCA exercises it formal powers in relation to a firm or an individual, it is required to issue a "statutory notice". Types of statutory notice include:
Giving the recipient details about the action the FCA proposes to take and the right to make representations.
Made after the warning notice, giving details about the action that the FCA has decided to take - following consideration of representations (if made).
First supervisory notice
Giving the recipient details about action that the FCA proposes to take (although the action in this notice may have immediate effect).
Second supervisory notice
Made after a first supervisory notice, giving the recipient final details about action the FCA has decided to take (which may have already come into effect prior to this notice) - following consideration of representations (if made).
Previously, the majority of the FCA's decisions formally to issue statutory notices against firms or individuals were taken by the Regulatory Decisions Committee ("RDC"). This included in relation to:
- a firm's authorisation and individual's approval - such as whether to authorise/approve an application, vary a permission, impose a supervisory requirement, revoke authorisation/approval, or ban; and
- enforcement matters in relation to historic conduct - which could result in, amongst other things, fines and censures.
The RDC is a Committee of the FCA Board that operates separately from the rest of the FCA, and includes members from business, consumer and financial services backgrounds.
Under the RDC process, communications between FCA staff and the RDC are disclosed to the parties, parties can make both written and oral representations to the RDC, and the RDC is advised by separate legal advisors to those advising the FCA evidence-gathering team. Parties also have the right to refer a decision by the RDC to the Upper Tribunal.
The RDC process is intended to ensure fair decisions are made by a body separate to those investigating / recommending an action against a firm. Whilst they are not entirely independent of the FCA, this process introduced some quasi-independent checks over any decision made. The RDC did not simply rubber stamp each and every decision sought by the FCA.
However, under the old rules certain decisions to issue statutory notices were also made under the FCA's Executive Procedures. This included decisions to issue a warning notice in relation to a firm's authorisation (although the RDC made the ultimate decision to issue a decision notice), and for certain FCA interventions.
Pursuant to the Executive Procedures, decisions are made by either a senior staff committee or individual FCA staff members appointed by the FCA Board to make those decisions.
Under the new rules, the majority of the FCA's formal decisions on whether to issue statutory notices will be taken pursuant to the FCA's Executive Procedures. This includes in relation to:
- firm authorisation or individual approval;
- FCA own-initiative intervention powers; and
- cancellation decisions in "straightforward" cases, including where the action is contested.
Decisions to commence civil or criminal proceedings will also be taken in this manner.
The RDC process will be reserved for decisions relating to pure enforcement cases regarding historic misconduct, where harm has already materialised and the FCA is seeking some form of penalty for a failure – in these cases, the FCA perceives that speed is less important, since the harm has already been inflicted.
Under the Executive Procedures process, communications between FCA staff and the decision makers are not disclosed to the parties, parties can make written representations but only have the right to make oral representations in exceptional cases, and the decision makers are not advised by separate legal advisors to those advising the FCA evidence-gathering team. It is noticeable how many checks and balances that use to require fresh thinking have been removed in this new process (e.g. same legal team, no RDC, senior staff committees (a decision maker) have been reduced to two members instead of three staff etc).
The right to refer a case to the Upper Tribunal is retained in relation to decisions made pursuant to the Executive Procedures and by the RDC but, in our experience, only the rich and determined can afford to take on their regulator in court.
FCA's Aims and Commentary
One of the main aims of the changes is for the FCA to make "faster and more effective decisions to promote the right outcomes for consumers, markets and firms". The FCA has made the changes to assist it in dealing with a shift in the threat landscape for consumers, which has seen "fraudsters and scammers benefitting from new technologies and consumers being drawn to high-risk markets and products".
However, whilst speed of action is required in certain circumstances, respondents to the initial consultation were concerned about the impact that the changes would have on the fairness of the FCA's decision making process. It appears the majority of respondents had concerns, including about a perceived lack of transparency, reduced independence, and heightened risk of group-think and bias in the process.
Despite these concerns, the FCA did not consider that its changes would impact the fairness of its decision making process. It appears the main safeguards provided for in this new process are:
- The decision maker under the Executive Procedures will still be separate from those that gathered the evidence upon which the decision is based, which meets the statutory requirements for appropriate separation of decision makers under the Financial Services and Markets Act 2000;
- More draconian decisions, referred to as a "fundamental variation or requirement" must be taken by a Director or acting Director. Otherwise, decisions can be taken at the level of Associate;
- Decision makers will receive bespoke training to assist them in properly exercising their new powers.
We are critical of the FCA in making these changes in the manner they have. It is notable that, with so many concerns being raised, the FCA felt there was no need to either consult further and/or make any changes. This must, presumably, have been agreed upon by the senior managers at the FCA, and it is likely those individuals that will be required to exercise independent judgement when determining whether to impose fundamental variations or requirements on firms.
We are also not entirely convinced by the FCA saying that, since the statutory provision did not expressly require the FCA to adopt a specific procedure, this means the changes are fair or that the procedure as a whole is fair. There is a significant difference between what statute specifically requires compared with how a public body, such as the FCA, exercises its functions. Administrative law requires, amongst other things, that the public body ensures decisions it takes are carried out in a procedurally fair way. It will be interesting to see if any decisions are challenged on this basis in the future.
The new changes appear to be another step along the FCA's path to becoming a more assertive regulator, following recent criticism in light of failures relating to unauthorised mini-bond schemes and other scandals that have caused consumers considerable harm. It is notable that it appears that it is the FCA's own failure to act appropriately in those cases which is (at least in part) the cause of those harms. It was not, for example, the FCA lacking sufficient power or that the now changed decision making process prevented or slowed the FCA in acting. A good example of this contained in the Gloster Review into the LCF scandal, which found that the FCA had ample powers and that the failings were their own (1).
In relation to the LCF failure, it is concerning that certain senior individuals within the FCA attempted to argue that responsibility should not be apportioned to individuals. However, under the new decision making procedures, individuals within the FCA must now take direct responsibility for their decisions and any failures to act.
It will be interesting to see whether the changes do in fact speed up the FCA's decision making process or impact the fairness of decisions, or whether there will simply be an increase in referrals to the Upper Tribunal from both firms and individuals.
Whilst early engagement with the FCA has always been important, the new changes only emphasise this. The ability to refer a case to the RDC previously felt like a "second bite of the cherry", with parties having the opportunity to form their case, give evidence, and make oral representations.
Although the right to make written representations remains, for the most part parties will not be entitled to make oral representations. Accordingly, opening a dialogue early with the FCA and ensuring a firm's position is clearly articulated becomes even more important.
In our experience, even under the previous process, the relevant FCA teams have been willing to meet with firms to discuss their concerns (often on a number of occasions). Whilst not as formal as making oral representations, this process can allow firms to ensure their views are heard and, importantly for the new decision making process, are recorded. We would recommend firms, provided they have done their homework, look to do this with the FCA as it is often a valuable exercise in ensuring nuanced points are understood, as well as being an opportunity to identify any specific concerns the FCA may have.
Further, at the risk of sounding self-serving, firms, particularly those with less experience in dealing with the FCA's expectations, may want to engage lawyers and compliance consultants at an earlier stage. This will allow firms to identify concerns and changes early and ensure that their position is presented in the best possible light from the outset. Whilst this may increase costs initially, it is a lot more costly to fight the FCA once they have made their mind up. First impressions count; the FCA may not expect perfection but bad first impressions are hard to shake.
Finally, linked to the FCA trying to become a more assertive regulator, we have started to see in recent months the FCA being bolder than it used to be and being more willing to set out its position. We wonder if, with the ultimate decision making authority now remaining 'in house', this will further embolden FCA case teams as they may feel they have a better grasp of what the ultimate decision maker's decision will be compared to that of the RDC.
The FCA has committed to reviewing how these changes work in practice in six months. We hope this remains under review for longer as we question whether that will give sufficient time for Upper Tribunal cases to be heard. However, we will be sure to provide an update in due course to what the FCA has said and what we see in practice.
Should anyone have any questions and / or wants to discuss the above further, please do reach out to either of us.
(1) Summary of conclusions highlight three main issues (see section 2) as 1) the FCA's approach to its regulatory perimeter being unduly lenient; 2) the FCA failed to consider the business holistically; and 3) the FCA staff who have reviewed materials submitted by LCF had not been trained sufficiently. See paragraph 4.6 for conclusion that "the FCA had powers under applicable rules and legislation in force throughout the Relevant Period to take action in appropriate circumstances against authorised firms, such as LCF, which conducted unregulated activity".