Our referral criteria set out a range of factors we may consider when deciding whether to appoint enforcement investigators.
When we take these criteria into account
We use the referral criteria when we consider that the potential outcome of an investigation might be to:
- take disciplinary action to fine, publicly censure, suspend and/or restrict firms/individuals who have breached our requirements
- make a prohibition order
Cases involving civil litigation (e.g. applying to the Courts for injunctions and restitution orders for unauthorised business) and bringing criminal prosecutions to tackle financial crime (such as insider dealing or unauthorised business) are not assessed using these criteria. In addition, supervisory activity leading to OIVOPs and VREQs, and enforcement investigations in relation to threshold conditions, unauthorised business, the Competition Act 1998, the Listing Rules and market abuse cases are not assessed using these criteria.
When we investigate
Before deciding whether to appoint investigators, we carefully consider what is the most efficient and effective way of achieving our statutory objectives (protecting consumers, enhancing market integrity and promoting competition). Enforcement action is an expensive and resource-intensive option for the subject of the investigation as well as for the FCA, so we need to exercise our discretion to ensure that in all the circumstances it is the appropriate course of action to take and the best use of our resources. When deciding whether to appoint enforcement investigators we therefore consider what other tools are available. For example, we may consider whether we should (instead of or as well as appointing enforcement investigators):
- agree with firms what action we want them to take through regular supervisory correspondence
- appoint a skilled person to obtain an independent view of aspects of a firm's activities that cause us concern or where we require further analysis
- prevent firms from conducting particular activities
- impose requirements on how firms conduct their activities
- make firms pay redress to customers where they have caused loss/harm
- ban or restrict particular products and/or misleading financial promotions
However, it is critical that meaningful and proportionate sanctions continue to be applied in appropriate cases. Effective, proportionate, robust and public enforcement action is a key part of changing behaviour by acting as both a specific and general deterrent. It delivers credible deterrence, so that wrongdoers operating in the financial services industry believe they will be held to account and that meaningful sanctions will follow.
Our powers to investigate
The FCA has wide-ranging powers to investigate potential breaches. These include requiring firms and individuals to provide documents/information to us, and/or to attend interviews with us and answer our questions.
To be able to exercise these powers, we have to meet the statutory test for opening an investigation, as set out in the Financial Services and Markets Act 2000. The precise test depends on the nature of the investigation we propose to open. For example, we can investigate whether a firm or individual has breached one or more of our rules if it appears to us that there are circumstances suggesting that there may have been a breach.
When we open an investigation, we have not decided that there have been breaches, nor what type of enforcement action, if any, should be taken if it turns out that there have been. Rather, we investigate the evidence and then form a view about whether there has been misconduct and the appropriate regulatory response.
The referral criteria
The referral criteria are not intended to be exhaustive and all the circumstances of a particular case are taken into account. Not all the criteria will be relevant to every case and additional considerations may apply in certain cases. Any one of the factors may be sufficient to warrant an enforcement investigation and sometimes, including in cases where breaches are self-reported, misconduct might be so serious that we conclude that there is no credible alternative to enforcement action.
We consider these criteria when deciding whether to appoint enforcement investigators. We also keep under review whether enforcement action is likely to be the right regulatory tool for any breaches. The referral criteria are not only relevant at the outset of an investigation, but also at subsequent stages, e.g. if the investigation reveals different failings from those suspected at the outset of the investigation.
The overarching question we ask ourselves is:
Overall, is an enforcement investigation likely to further the FCA’s aims and statutory objectives?
To assist in answering this question we consider the following:
- the strength of the evidence and the proportionality and impact of opening an investigation
- what purpose or goal would be served if the FCA were to end up taking enforcement action in the case
- relevant factors to assess whether the purposes of enforcement action are likely to be met
We explain our approach in relation to each of these further below.
The strength of the evidence and the proportionality and impact of opening an investigation
As overarching questions we consider:
- the strength of the evidence and what other evidence is or may be available
- whether an enforcement investigation is proportionate, both as regards the seriousness of the failings in question, and the amount and availability of resource that will be required to investigate the matter fully and deliver an appropriate outcome
- prioritisation of this case against other cases that could be referred to enforcement
- any action already taken, or to be taken, by another authority or agency (in the UK or abroad) in relation to the same firm or individuals
- the impact that opening an investigation might have, especially where the subject is an individual
What purpose or goal would be served if the FCA were to end up taking enforcement action in this case
We take a strategic and risk-based approach to enforcement, and the exercise of discretion is essential. In exercising that discretion it is important that we consider what purpose would be served if we ended up taking enforcement action.
The reasons why we might take enforcement action include the following:
- Deterring wrongdoers from repeating their behaviour (specific deterrence).
- The wider deterrence value of taking action to serve as a strong reminder to a range of different firms and individuals of what will happen if they break the rules and to change behaviour and raise standards in the broader financial services industry. Enforcement action has a strategic purpose in publicly reinforcing the regulatory requirements in priority areas (general deterrence).
- Holding those responsible for very serious breaches to account with proportionate penalties and sanctions (justice).
- Removing wrongdoers from the industry or imposing other restrictions where appropriate (protection).
We set out below a range of factors that we take into account to help us decide in any given case if one or more of these purposes of taking enforcement action is likely to be achieved. The questions raised under each heading may be relevant to more than one purpose of enforcement action.
Factors used to assess whether the purposes of enforcement action are likely to be met
Deterring wrongdoers from repeating behaviours (specific deterrence)
- What was the reaction of the specific firm/individual to the breach?
- What is the most efficient, effective and economic way to achieve our objectives for this firm?
- What would the impact of an enforcement investigation and enforcement action be on other steps the FCA and/or the firm itself is taking to improve its compliance with our requirements?
Changing behaviour and raising standards in the industry (general deterrence)
- Is the issue to be referred relevant to an FCA strategic priority, e.g. a specific area of focus as set out in the FCA’s Business Plan?
- Do we know or suspect that the issues in this case may be widespread in the market?
- To what extent has the message to the market already been delivered in other ways?
- Does the suspected misconduct suggest poor culture and governance, such as:
- misconduct by senior individuals?
- repeat offending by firms, or firms who do the minimum to fix specific problems but do not address the root causes?
- failing to cooperate with the FCA/other regulators, or firms not doing what they tell us they will do?
- If a number of firms could be subject to an enforcement investigation for similar failings, which cases are the most serious, have the most potential impact, and/or would send the strongest deterrent message across a range of different firms operating in the relevant market?
- For cases against senior individuals, would enforcement action deliver a strong message to senior individuals in the broader industry about the personal consequences of misconduct?
- Does the suspected misconduct involve an overseas jurisdiction? If so, would enforcement action materially further investor protection or market confidence in that jurisdiction?
Holding those responsible for very serious breaches to account with proportionate penalties and sanctions (justice)
- Are there actions or potential breaches that could undermine public confidence in the orderliness of financial markets?
- Has there been widespread harm or potential harm to consumers, market integrity or competition?
- How serious was the suspected misconduct, taking into account all relevant factors, including if appropriate:
- Are there issues that indicate a widespread problem or weakness at the firm?
- Is there evidence that the firm/individual has profited from the action or potential breaches?
- Has the firm/individual failed to bring the actions or potential breaches to the attention of the FCA?
Removing wrongdoers from the industry or imposing restrictions where appropriate (protection)
- Are there circumstances that suggest an individual is not ‘fit and proper’?
- Is or was the individual an approved person?
- Is the individual in the UK or were they in the UK?
- Is the individual still in the industry and, if so, at what level of seniority?
- A prohibition has protective and punitive purposes and holds individuals to account publicly. Would enforcement action be appropriate to achieve one of these aims?
- ^ Securing redress for consumers could be considered to be a fifth category in its own right, and it is often a feature of our enforcement outcomes. However, securing redress can be achieved outside the context of a formal enforcement investigation – and if that is the priority then it can often be done much quicker without referring to enforcement. Therefore we focus below on the other four main reasons why we take enforcement action.