On November 6, the UK Financial Conduct Authority (FCA) published a speech by Jamie Symington, director in enforcement (wholesale, unauthorized business and intelligence), on FCA-regulated firms’ internal investigations of their own affairs when problems arise, either at their own initiative or through an agreement with the FCA. Often such investigations and reports are prepared by firms when there is no likelihood of enforcement action, i.e. they are prepared for internal purposes and/or are uncontroversial and may be shared with FCA supervisors. However, problems may arise if firms conduct internal investigations of matters while there also is enforcement action by the FCA. Firms should take great care not to prejudice any such action, such as when the FCA carries out criminal investigations of insider-dealing or fraud.
Mr. Symington noted that FCA-regulated firms often achieve good standards of conduct in industry and markets and that in-place systems and controls prevent problems from arising. However, if problems do arise, then firms bear the primary responsibility for correcting them. Firms must establish the nature and extent of the problem, its root causes and where accountability lies for their own purposes and should proactively investigate when there are issues or concerns. Firms do not need to report minor issues to the FCA, but if there are substantive issues, firms need to ask whether or not they should self-report and engage with the FCA and if so, how early.
Early engagement with the FCA: Mr. Symington emphasized that self-reporting is the bare minimum required of firms and reminded them that the FCA has fined firms more than £10 million for breaching Principle 11 by failing to self-report. Principle 11 states that a “firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice.” Mr. Symington reminded firms that the FCA will give credit to those firms that assist the FCA in unravelling potential misconduct and help the FCA to conduct enquiries quickly and efficiently. This is often when the firm’s own investigation can be particularly helpful.
Ground rules: In his speech, Mr. Symington listed typical questions that the FCA would ask a firm that is conducting an internal investigation:
- To what extent will the FCA be able to rely on the report in any subsequent enforcement proceedings?
- To what extent will the FCA have access to the underlying evidence or information that was relied upon in producing the report?
- To what extent, and on what basis, is the firm willing to disclose material over which they claim legal privilege, and how can the FCA use it?
- How will evidence be recorded and retained?
- Have any conflicts of interest been identified?
- What are the proposals to manage conflicts of interest appropriately?
- Will the report describe the roles and responsibilities of identified individuals?
- Will the investigation be limited to ascertaining facts, or will it also include advice or opinions about breaches of FCA rules or requirements?
- How does the firm intend to inform the FCA of progress and communicate the results of the investigation?
- What is the expected timescale for completion?
Transparency: Mr. Symington stressed that transparency is a core value. He noted that the FCA fully understands and respects the needs of firms to claim and protect their rights to legal privilege when appropriate, but firms should not let legal privilege become an unnecessary barrier when sharing the output of internal investigations with the FCA. He advocated striking the right balance and emphasized that when firms carry out or commission an internal investigation they should share the core product of their investigation, i.e. the evidence, with the FCA. Consequently, the FCA will negotiate in early discussions what materials the firm will provide to it.
Confidentiality: Mr. Symington reminded firms that information provided to the FCA does not lose all protections from onward disclosure and it is possible that the FCA may use and disclose information in furtherance of its own functions or to assist other regulators. However, the FCA is subject to strict statutory restrictions on the onward disclosure of confidential information and reports, and underlying materials provided voluntarily to the FCA by a firm, whether covered by legal privilege or not, are confidential for these purposes and benefit from the statutory protections. He emphasized that the FCA carefully considers whether it’s appropriate to disclose material provided voluntarily by a firm and that the FCA knows that firms are more likely to volunteer information when they know that the FCA is mindful of the impact of potential disclosure. If the FCA is considering disclosing materials voluntarily provided by a firm, that firm will normally be notified and given an opportunity to make representations to the FCA.
The text of Mr. Symington’s speech is available here.