Top Tips for a FSA Investigation

November 14, 2011

This article was written for and first featured in Compliance Monitor

Sun Tzu didn’t have the FSA in mind when he wrote his seminal treatise ‘The Art of War’, but some of his strategic and diplomatic ideas are a sensible alternative to locking horns aggressively with the regulator. Peter Wright and Deepak Arora provide their top tips for engaging with an investigation in such a way as to achieve optimal outcomes.

The FSA continues to flex its regulatory muscle. In pursuit of its ‘credible deterrence’ strategy the regulator releases final notices against firms and individuals on an almost daily basis.

An investigation by the FSA’s enforcement division can be a nerve-racking, uncertain, complex and often disruptive process. However, by planning ahead and adopting a few practical tips, the experience need not be as Machiavellian as others would have you believe.  The key is in understanding and preparing for the process, and knowing what is expected of you.

Tip 1 – Conduct

Be open, co-operative and helpful (always)

The FSA does not target firms and individuals indiscriminately. Its enforcers will only come knocking should they have reason to do so. This could be for a number of reasons, such as the outcome of a thematic review where weaknesses in a firm have been revealed or a report of a one-off breach in an egregious failing.  The way that your firm or an individual deals with FSA contact, right from the outset, especially where your firm may not have extensive contact with the regulator, is critical as first impressions are vital and can set the tone of all subsequent dealings. Firms should remember that:

• The active involvement of a firm’s senior management at an early stage will help build a ‘regulatory rapport’ with the FSA and help create
confidence in your firm. If a firm engages early and takes prompt and effective action, the FSA may decide to refer less serious matters to be dealt with privately at a supervisory level, instead of by formal enforcement. To avoid an enforcement-led investigation should be the ultimate objective of any approach taken.

• All authorised firms and approved persons should remember their regulatory obligations to be open and co-operative with the regulator at all times. This obligation continues during an investigation when relations with the regulator can be challenged. The worst thing you can do is be defensive, disruptive, unhelpful and unco-operative. The FSA will look favourably on individuals and firms if assistance is provided over and above the norm. By responding appropriately, an individual or firm could gain valuable credit at an early stage in the eyes of the
investigation team.

Tip 2 – Scoping discussion

Have a role and reduce impact on business

The scoping discussion maps out and sets the tone for the investigation. The FSA will usually initiate such discussions to explain who is under investigation,  the reasons why, broadly indicate the key areas to be investigated and indicate what documentary evidence it will require. However, this is also an invaluable opportunity for a firm or individual to have an active involvement in and management of the investigation and ensure the investigation team understands the firm or individual in question.

• The scoping discussion should be used as an opportunity to prove that the investigation is being taken seriously. It is intended to be a two-way process – use it to gain a better understanding of the issues that you or your firm are facing and to ensure the FSA understands your firm or business. You only get one chance, so don’t be afraid to ask questions to clarify your own perception of the process and what
is expected of your firm or yourself. It should also be used by the firm to deal with practical issues and to explore with the FSA how any disruption to the firm can be mitigated and how information requests can be most effectively handled.

• Invariably an FSA investigation will occupy considerable amounts of time for the subjects. An investigation can be profoundly disruptive, impact adversely on a firm or an individual’s business and create reputational risk. How a regulatory issue is managed can have a sustained impact on a firm’s long term operations. The scoping discussion will allow firms and individuals the opportunity to liaise with the FSA in an open dialogue with a view to reducing the adverse impact. For such dialogue to be constructive it is also helpful to understand the FSA’s policy approach to enforcement and to be familiar with the Enforcement Guide to understand the decisions and approach the  nvestigators will have to take.

Tip 3 – Interviews

Fail to prepare, prepare to fail

Enforcement interviews represent a key stage in any FSA investigation. They are often the first time the FSA enforcement team will meet with key individuals for the information gathering process to start in earnest.  The investigation team will, in addition to gathering information, be forming views as to the interviewees’ demeanour and how they are co-operating with the investigation process. Their opinions will help form the investigators’ views, which will impact upon decisions made further along the investigation process. How you or your firm’s individuals come across in interview is crucial. Again, preparation is the key to a successful set of interviews. If you are to be interviewed, as a subject of an investigation or as a witness, it is important to be aware that:

• Interviews can be conducted on a voluntary, compelled or under caution basis. Whichever type of interview is undertaken, prospective interviewees must diligently prepare. Individuals should review all necessary information that is relevant to the investigation and/or has been provided to the FSA, and familiarise themselves with the facts and what they have direct knowledge of.

• The exact topics and supposed breaches under investigation should be understood, so that interviewees are able to understand what is being asked of them and able to provide focussed answers.  If necessary, work with professional advisers to assist you. If individuals are able to answer questions confidently and with precision, the FSA is more likely to form the opinion that you are knowledgeable of your sector and understand the regulations that govern it, and that you or your firm’s conduct at the time of the supposed breaches was in fact correct and proper.

An interview is formal and tape-recorded, and can take place over several hours or several days in large investigations. It is important to review the post-interview transcript thoroughly to ensure it reflects accurately what was asked and answered during the interview.  Any undetected inconsistencies that transpire at a later date could be held against the firm or individual during further stages.

Tip 4 – Conduct

Be active: engage and challenge appropriately

It is all too easy to adopt a defensive approach to any FSA investigation. However, while you have a regulatory obligation to be open and co-operative, that does not mean that you should simply ‘roll over’ in an unquestioning manner. You can challenge and engage with the FSA without being obstructive. Should you or your firm believe that the regulator is unreasonable in its requests for documents, for example, do not feel that by asking constructive questions or ‘pushing back’ you or your firm will not be satisfying your positive obligations
under APER or PRIN. An investigation is intended to be a two way process and thus relies on firms and individuals to stand on their own two feet.

• Through a combination of proper assistance and challenge you could help alleviate any detrimental outcomes to your business. If you have the grounds to challenge the FSA’s views then you should not shy away from being confident in your position. As a public authority the FSA ought only to bring cases and make allegations that can be evidentially justified.  If you can show the regulator’s assessment is not well founded then you can reduce the case being presented against you.

• Active engagement in the enforcement process can also bring about certainty of outcome. In reality very few enforcement cases proceed all the way through the statutory disciplinary process. The FSA provides strong incentives to settle cases, with a formal process by which firms can obtain a discount off financial penalties of up to 30% should the case reach an early settlement. The discount is based upon the stage that the enforcement proceedings have reached. It is possible to obtain additional ‘credit for co-operation’ if you have been proactive, helpful and co-operative in your dealings with the regulator (and any parties who may have been affected by breaches).

Tip 5 – After the event

Reflect and learn

As with any challenging experience, an FSA investigation can be an opportunity for a firm or individual to learn and improve for the future. For some firms, even if it does not result in any formal disciplinary action, it can be an invaluable lesson. Use it as an experience to understand how the FSA operates, what it expects of you or your firm and how you or your firm should operate and respond to the regulator differently in the future. In particular it is worth remembering:

• Do not be scarred by the process – use it to develop your business, for example by perfecting the systems and controls that may have attracted the attention of the FSA.

• Should you or your firm properly manage the investigation process and demonstrate this to the FSA, you will have created the foundation for a solid relationship with the regulator that may pay dividends in the future.

Influence outcomes

An individual or firm under investigation will never be the driving force of an FSA investigation. That said, it is possible to influence its outcome and achieve a desirable result. The key to maximum impact is to be open, honest and properly engage with the FSA.

It is also important to remember that many firms have gone through the enforcement process – it does not have to be fatal to your business. With proper preparation you can influence the eventual public messages released and sanctions imposed. Enforcement cases that are widely publicised often involve the most serious of breaches and are intended to demonstrate the consequences of not meeting regulatory standards.  What the public do not read about are the majority of cases that are not pursued by the FSA or which reach settlement at an early stage. This can be you or your firm, as long as you play your cards right.

As soon as a regulatory problem arises, firms or individuals should seek legal and expert advice from those with the knowledge and expertise for such investigations, to formulate a clear strategy and provide guidance through the regulatory framework.


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