Our investigations – the evolving approach

Speaker: Jamie Symington, Director of Investigations
Event: Legal Week Banking Litigation and Regulation Forum, London
Delivered: 15 June 2017
Note: This is the speech as drafted and may differ from delivered version.

Highlights

• Our approach to investigations is evolving in step with our Mission and general response to the challenges of the future.
• We do not use investigations only as a precursor to contemplated enforcement action when something has gone wrong. But rather, investigation is a tool for finding out what has happened.
• Our response to an event which has been investigated will be decided only when we have sufficient information to do so.
• We are developing a greater range of responses following investigation.
• We see culture change as the key aim of our work on individual accountability which is why the Senior Managers Regime for deposit takers and the forthcoming Senior Managers & Certification Regime for all other firms are key work streams in our Business Plan.

Let me ask you to imagine this situation.

It’s an ordinary day in the office. You go out for lunch. You come back to your desk and find that a bottle of water you left on your desk has tipped over and spilt all over the desk. Your correspondence, your computer, your pictures of the family all soaked.

Naturally you want to know what happened. So you ask questions. “What happened?” Now, the answers you might get from colleagues could vary enormously:

“I don’t know, I wasn’t here, I didn’t see”

or

“I saw someone tip the bottle over, but I don’t want to say who it was.”

or

“Oh that was Nadia. It was an accident. She’s really sorry. I’ve called IT about the computer and facilities to clear up the mess.”

So what drives the differences in responses that you might get?

It could be the way you ask the questions. But more typically, it is driven by your relationship with the people of whom you ask the questions. And critically, it is likely to depend on what their expectation is of the purpose for which you are seeking the information. What will be the consequences for them and for others of giving you the information you are asking for. Conversely, what are the consequences of not giving you the information?

For investigators, especially regulator-investigators, this is a really important dynamic to understand. We must set the expectations clearly between ourselves and the persons from whom we are seeking information. What we are doing? And why we are doing it?

What I would like to talk to you about this morning is how the FCA uses its powers of investigation, and how this is evolving to fit with the FCA’s recently published Mission.

• I want to be clear that the FCA does not use investigations only as a precursor to contemplated enforcement action when something has gone wrong. But rather, investigation is a tool for finding out what has happened.
• I want to explain how this approach fits with the FCA’s mission and general response to the challenges of the future.
• And I want to explain how we are developing a greater range of responses following investigation.

What are we trying to improve and why?

Let me start be explaining what it is we are trying to improve with our evolving approach to investigations. In essence it is about being simple and clear about what we are here to do as investigators.

If we stand back and look at how investigations by the FCA and its predecessor the FSA developed over time, there are some aspects that deserve some examination. Some of this relates to how the regulator goes about investigating. Some is about how the firms and their professional representatives respond to investigations.

The perception is sometimes this: Investigation is what the FCA does when a matter is “in Enforcement”. People assume that if a matter is “referred to Enforcement” then the FCA wants to take enforcement action. People fear that the investigation process then becomes simply the gathering of evidence to support FCA action.

I don’t think the FCA or FSA intended it to look like that, but I can understand why that perception has come about. The response of the regulated sector is therefore sometimes that every effort must be made to keep matters “out of Enforcement”.

And where a matter is under investigation, then the relationship can become adversarial and quasi-litigious early on in the process. Disputes can arise unnecessarily over what material can and cannot be provided to the investigators. Delays and distractions can ensue.

The problem with this dynamic is that it helps neither us nor firms to do our jobs properly.

The point of an investigation is to find out what has happened. This job needs to be done by investigators who will act fairly and impartially without fear or favour in getting to the truth. When something has gone wrong, this should be as much a priority for the firm as it is for the regulator.

We will then use the findings of the investigation to inform decisions as to what action needs to be taken to protect consumers and to restore confidence in markets.

That is our job as investigators. It is clear and simple.

Why the need to improve clarity around investigations?

Why do we feel it is necessary to clarify this?

The Financial Crisis of 2008 saw unprecedented turmoil in markets. The regulatory response was far reaching. Confidence in the financial system was further damaged in subsequent years by the uncovering of widespread conduct issues in the Libor and FX markets. Investigation and enforcement response for regulators took us into new territory. We dealt with a vast array of issues across all sectors. Large, cross-jurisdictional investigations were carried out involving multiple parties and multiple agencies. Records for fine levels were broken and broken again. The response needed at the time was one that would restore order, stability and confidence in the markets. And do so quickly.

As things have returned to relative stability, there has been time to reflect on the lessons of this period. This is helping us to adapt to face the challenges of the future. It is not just we at the FCA who have been engaged in this exercise, but other limbs of the overall regulatory framework.

In 2014, a review by HM Treasury recommended that we refresh our approach to how we take decisions about when to begin investigations to achieve more consistency and transparency.

In 2015 an independent report on our response to the HBOS matter was published. In particular there was a section by Andrew Green QC on the Enforcement investigation. The detail of that report is mostly quite fact specific to the case. But there are also some conclusions of more general application. Andrew Green noted:

“the FSA, when considering whether or not to conduct an investigation of an individual, would attempt to assess the likelihood of winning subsequent disciplinary proceedings against that individual i.e. such disciplinary proceedings as would be brought after an investigation had been concluded. The problem with this approach was the difficulty in accurately evaluating the prospects of success in disciplinary proceedings before an investigation had even begun. This approach, therefore, had a tendency to discourage the FSA from starting investigations even though the threshold test for investigating was met and even though the public importance of investigating was high.”

We, as a regulator, have a responsibility to investigate where the statutory threshold for opening an investigation is met and where the public importance of investigation is high.

We welcomed this report. And in implementing its recommendations we have considered how it should inform what we say about the job we are trying to do as investigators.

The key point is this. We, as a regulator, have a responsibility to investigate where the statutory threshold for opening an investigation is met and where the public importance of investigation is high.

What we then do in response to a matter is to be decided only once we have sufficient information to inform that decision.

How will this shape our response to the challenges of the future?

As we move forward from the crisis response towards the longer term strategy for the response to conduct risk, the FCA is transitioning to a new phase of its life. It is under substantially new leadership. And the leadership vision is set out in the recently published Mission. This sets out clearly that the FCA sees its purpose as serving the public interest through its statutory objectives. We need to state clearly what we expect of firms. We need to improve how markets operate. We must work to prevent harm occurring. And we must help to put things right when they go wrong.

To support this approach, the FCA has developed a decision-making framework. In this framework, there is a cycle of regulation. First, we must identify where harm is occurring or potentially occurring. Then we use diagnostic tools to establish the nature and the cause of the harm. We have a range of powers to remedy the harm. And finally we need to evaluate the success of the response.

The use of investigations should be seen as one of the options available to the FCA in the diagnostic phase of regulation. Our investigation powers provide us with the ability to uncover the facts and issues.

An investigation function in keeping with our mission

It clearly does not follow, however, that we will investigate every case that technically crosses the threshold which would give us powers to investigate.

The powers and resources that we have to investigate need to be deployed most efficiently and effectively in delivering on our objectives in the public interest. As set out in our Mission, the decision making framework begins with us defining the issue involved and how it may harm users of the relevant financial service. That analysis of the harm or potential harm to market users is critical to the process of deciding whether it is appropriate to open an investigation.

This analysis applies across all aspects of our regulatory remit. For example, in the retail sector there may be a concern that a financial promotion is misleading. The analysis might look at:

• the harm or potential harm from the perspective of the degree to which consumers may be misled
• the types of consumer the product is aimed at; their degree of sophistication
• the numbers of consumers
• the consequences for those consumers etc.

Similarly in the wholesale markets sector , for example, there may be concern that an issuer of securities may not have promptly disclosed to the market information that may have an impact on the share price. Then the analysis may include consideration of the materiality of the information, what the impact on investors may have been, how many investors, for how long etc.

Where the suspected misconduct is considered to be serious, and harm or potential harm is sufficiently significant to warrant investigation, then we would expect to open an investigation. The decision on whether to do so is taken jointly by senior staff from both our Enforcement and Supervision Divisions, sometimes with input from Intelligence, Policy or other specialists within the FCA.

It is important to recognise that these decisions are judgment calls to be made on a case-by-case basis. There are no numerical thresholds or metrics that can be used and applied universally. We do not believe that that approach would lead to good decision making in the public interest. The judgments that we need to exercise in taking these decisions require a sophistication that goes beyond the application of a numerical framework or matrix. Evaluating the degree of harm is - we have learnt from experience – sometimes more an art than a science. The “unknown unknowns” that lurk within the increasingly complex markets that we regulate may mean that the harm is not always apparent without sophisticated analysis.

For example, we have recently drawn attention to the fact that our capital markets are susceptible to money laundering. Complex trade structures obscure the flows of funds through, for instance, mirror or matched trades. If these trades are carried out off exchange and at market, we may not pick them up as harmful in terms of market abuse. But with the input that we have from our Intelligence function and our policy position regarding money laundering controls that firms should have in place, the potential harm of this conduct can be evaluated in a different light.

The role of senior management

As set out in our recent business plan, our foremost cross-sector priority is to improve culture and governance in firms.
We see culture change as the key aim of our work on individual accountability which is why the Senior Managers Regime for deposit takers and the forthcoming Senior Managers & Certification Regime for all other firms are key work streams in our Business Plan.

These changes have been put in place to ensure that individual responsibility is at the heart of how these firms conduct themselves. One year on, the FCA has seen senior leaders within firms taking their responsibilities more seriously. But we recognise culture change takes time and there is still more to do. So we will continue to keep a watchful eye on the progress that firms are making.

We need an approach to investigation that will meet the challenges of supporting the embedding of the culture [of senior management accountability]. This means that generally where there are grounds for investigating a matter, there will be a need to investigate the role of senior management in the conduct issues that arise.

But we need an approach to investigation that will meet the challenges of supporting the embedding of this culture. This means that generally where there are grounds for investigating a matter, there will be a need to investigate the role of senior management in the conduct issues that arise.

Following the Green Report recommendations, the FCA has built on the process around decisions to open investigations. We document decisions regarding all potential subjects, and a summary of the circumstances and reasons why a firm or individual is not being referred for investigation. The FCA ensures that the appropriate seniority of decision-making is maintained in the oversight of these decisions. Decisions on the scope of the investigation and which persons should be included or remain under investigation are continually reviewed.

What are the implications of opening more investigations?

It is inevitable that the implementation of this approach will lead to more investigations being opened. There are two important consequences of this.

First, is that there must be rigour in ensuring that our resources are deployed most efficiently and effectively in progressing investigations to the point where we can decide what the regulatory response should be. To this end, we have refreshed our approach to case management to put the emphasis on establishing key facts that will enable us to decide what to do at an early stage. This initially may take the emphasis off evidence gathering in preparation for legal action. We have put in place enhanced governance structures that will oversee the strategy and progress of investigations.

Furthermore, following consultation we have implemented a number of changes to our decision-making process, including the introduction of partly contested cases before the Regulatory Decisions Committee. These changes bring more flexibility and will help narrow issues in dispute, preserving important incentives to encourage sensible resolutions at the earliest point in time.

Secondly, there needs to be a recognition that it is likely that proportionately fewer of our investigations will progress to disciplinary enforcement action. There are multiple responses that might be appropriate other than imposing sanctions on or prosecuting people. It could be that the consequences of an investigation are that we do nothing further. It could be that Supervision takes the matter forward with a firm through a programme of measures that they oversee. It could be that there is a policy response whereby we issue revised guidance to the industry to clarify our expectations. Or it could be that some other remedial action is taken forward.

One way or another, the response should be one that is proportionate to and appropriately addresses the harm that we gauge has resulted from the matter investigated.

A recent example of where we have demonstrated our willingness to use the full range of our powers is the case of Tesco plc and Tesco Stores Limited (Tesco). In this case the companies agreed that they committed market abuse in relation to a trading update published in August 2014, which gave a false or misleading impression about the value of publicly traded Tesco shares and bonds. In that case Tesco agreed to pay compensation to investors who purchased Tesco shares and bonds on or after the flawed trading update and who still held those securities when the statement was corrected a month later. This was the right thing for the company to do and the right outcome for investors.

What does this mean for investigations in future?

So what are the consequences for the regulated community of this refreshment of how we go about investigating?
I hope from what I have explained to you this morning that you will get a sense that we have taken the opportunity - with a little distance now from the heat of the financial and conduct crises in recent years - to look at what is the best and most appropriate use of our investigation powers.

But I also hope that you will take away that we are aiming to set out clearly what to expect when the FCA is investigating a matter.

The key point is that a matter is not passed to Enforcement only so that Enforcement can do its best to bring an enforcement case. An investigation is opened because we want to understand what happened.

With that concept clearly in everyone’s minds, persons who are within the scope of an investigation can make better judgments as to how to respond and engage with the process.

I am not saying there is a one-size-fits-all response. Undoubtedly we will still often need to investigate matters of deliberate, serious and sometimes criminal conduct. No doubt some subjects of those sorts of investigations will stand on their right to silence etc. They are entitled to do so, and we respect that. We have a good track record of gathering the evidence by other means to convict such individuals. We can and we will continue to pursue such cases. We did so when we prosecuted an insider dealing ring in our Tabernula case resulting in multiple convictions and prison sentences last year.

But not all investigations will end with that sort of response and nor do we expect them to.

What we do expect, is it to get to the heart of the matter and the truth of what happened as quickly as possible. We will investigate with objectivity and rigour. Our response will be fair and proportionate in all circumstances.

So we expect firms to appreciate that is it often also in their best interests that we do get to the heart of the matter quickly and support us in doing so.