Practical implications of US law on EU practice

Speech by Mark Steward, Director of Enforcement and Market Oversight at the FCA, delivered at the Practising Law Institute’s annual seminar on securities regulation in Europe.

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Speaker: Mark Steward, Director of Enforcement and Market Oversight
Location: 1 Bishops Square, London
Delivered on: 19 January 2017


  • Senior Manager’s Regime has introduced a new and challenging dynamic. 
  • We expect actions against senior managers will be harder to resolve by agreement.
  • The challenge of responsibility and suppressing the instinct to evade responsibility is a cultural one.
  • There is a significant public interest in resolving cases as early as possible and we will continue to do so following thorough and fair investigations.
  • While early resolution is important, we want to make early detection of misconduct our primary virtue. 
  • We are proposing a change to the dispute process for those who agree the facts but wish to dispute the proposed sanction.

Note: this is the speech as drafted and may differ from delivered version.

I want to speak to you about three things. First, I want to make a few observations about financial penalties; secondly the senior manager’s regime and what I think is the different dynamic it creates and thirdly, in light of that, the new ways we are proposing firms and individuals will be able to resolve cases without protracted litigation.

Financial penalties

The FCA (and its predecessor) has imposed more than £3 billion in financial penalties over the last 5 years:  most were imposed before 1 April 2016.

As several news stories recently pointed out, since that date, the aggregate level of fines appears to have reduced markedly or, at least compared to the halcyon years prior to that date. What does this mean? Has light touch returned?

The remarkable thing about these fines – and the experience in the US is very similar – is that they have been imposed by agreement as part of what is here called ‘early settlement’. These fines were paid after negotiation in return for closure of the underlying investigations. In most of these cases, the firm took the full weight of responsibility and culpability without any action being taken against any member of the senior management of the firm. 

The leverage that regulators have been able to apply to firms and the preparedness of firms to resolve cases in this way though agreements has been unprecedented and remarkable.

I want return to the challenge of how large cases can be resolved without expensive litigation in a moment. It is an important topic and there is a very clear public interest in having effective means to resolve complex cases through agreement, where possible. 

But let me answer the questions I have posed. Has light touch returned? Have we gone soft? For many of you today, the answer may be disappointing because it is a very clear ‘no’. We have not gone soft nor do we intend nor will we. Light touch has not returned.

At the same time, I think there has been a change that is worth discussing. I think this is creating a different dynamic.

The change or inflexion is the commencement of the senior manager’s regime which imposes what is called a duty of responsibility on senior managers and which commenced in March 2016. 

The senior managers regime

Let me make a few observations first about the senior manager’s regime.

The senior manager’s regime doesn’t prescribe or define any particular misconduct, importing, instead a notion that senior managers have obligations to act reasonably to prevent misconduct by the firm from occurring.

The duty is, in effect, an obligation to act by taking reasonable steps. Importantly, liability may arise not only for unreasonable steps but also from a failure to take sufficiently reasonable steps or no steps at all – misfeasance and nonfeasance or, in other words, acts and omissions.

The regime embraces a very simple proposition – a senior manager ought to be responsible for what happens on his or her watch.

The regime embraces a very simple proposition – a senior manager ought to be responsible for what happens on his or her watch. This is what shareholders, consumers as well as the FCA really want.

The challenge of responsibility – and suppressing the instinct to evade responsibility – is a cultural one.

Responsible senior managers are thoughtful; they apprehend consequences; they have a sense of duty; they possess insight into what should be or needs to be done and they have a compulsion to set about doing it.

There are plenty of different examples. One of my favourite cases concerns the poor Cardiff Savings Bank. It failed following a fraud perpetrated by the directors. An attempt was made to apportion responsibility to the Chairman of the bank. He was appointed chairman in 1848, at the age of 6 months - by his father - an appointment I suspect the FCA today would not approve. He took no part in the Bank’s affairs or the fraud, yet what occurred happened on his watch, no doubt aided by his inattention. He is said to have attended one board meeting when he was 21, perhaps for his birthday. Yet the action against him failed.

Incidentally, this case and others like it (following the financial crisis of the late 1880s and early 1890s) led to the first attempt in this country to impose a statutory duty on senior managers. The Davey Committee Report of 1895, chaired by Lord Davey, a judge and politician, proposed a statutory obligation of care and prudence. Yet proposal was never taken up.

The outcome today, I think, would be very different. The senior manager’s regime would bite in the Cardiff Bank case, as it should on senior managers who neglect their responsibilities so cavalierly. 

The different dynamic

Now let me return to what I think is the different dynamic created by the senior manager’s regime.

First, we don’t expect senior managers to agree so readily to pay high fines to resolve cases. We expect there will be more contest and more litigation.

Secondly, firms may well be reluctant to spend such high sums to resolve investigations where those resolutions do not also resolve cases against senior managers who may also be in our cross-hairs.

And thirdly, there lurk latent tensions in the way in which firms may self-report misconduct or cooperate with the FCA where senior managers in the firm may also be or become subjects of investigation for the same matters.  

Firms are often eager to provide us with their own investigation reports, either to persuade the FCA not to investigate or to influence the scope of the investigation.  These reports are often helpful starting points, but as I have said to a number of colleagues who work in this area, I see these reports as having limited determinative value.  

Leaving aside the concerns about the forensic rigour of internal investigation reports, there is an inherent conflict of interest as the reports have been commissioned by and prepared for senior management who may well be part of the problem.

I am yet to see an internal investigation report that has filleted the involvement of existing senior management in suspected misconduct. In these circumstances, the public interest requires a full and thorough investigation by the regulator.

All of this means investigations need to be more thorough with stronger disciplines and, where evidence of misconduct is sufficient, there is more likely to be a dispute.

Following recommendations coming out of the HMT review on decision-making, which we largely accepted, we consulted the market on some new options to resolve enforcement cases which were not canvassed in the December 2014 HMT review on decision-making.  I suspect, given the different dynamic, the timing is about right.

Agreed resolutions

At the moment, the FCA offers those under investigation an opportunity to resolve a case before proceedings are commenced and initiated before the Regulatory Decisions Committee (RDC).  

The RDC is a body of decision-makers, whose role is to provide statutory decision-making for the FCA that is separate and independent from both the Executive and Board and the investigation teams. The requirement for separation is a statutory one and is observed most strictly.

The offer to resolve a case before it goes to the RDC is the way in which ‘early settlement’ is achieved and a resolution under this mechanism provides the person under investigation with an automatic reduction in penalty of 30%.  Given the scale of penalties involved, it is a very valuable incentive.

However, if the firm decides not to resolve the case at this stage because it doesn’t accept or agree that all of the alleged facts and circumstances are necessarily correct or that the proposed penalty is too high, the opportunity for ‘early settlement’ disappears, the investigation will continue but the subject is no longer entitled to a reduction of 30% of the penalty. The opportunity has been lost. This will occur even if the firm’s dispute with the FCA’s case only goes to part of the case.  

In effect, the resolution process has not provided parties with a way of narrowing the dispute without losing the most valuable incentive for agreement or any formal process for giving credit for cooperation once a case is before the RDC. The process of negotiation was more or less ‘take it or leave it’ which undoubtedly led to some very robust outcomes.

Some may say, ‘well that’s the way it goes’. Others, that it creates problematic disincentives for firms to engage the RDC, whose role and function, under the legislation, is to provide an independent check and balance on the process by which financial penalties and sanctions are imposed by the FCA.

We have now proposed what I think is a more transparent approach to the resolution of cases and we consulted the market about it last year.

In essence, we will continue to offer those under investigation an opportunity to resolve cases by agreement, once we have completed our investigation and we have a firm view that we think there is a case to answer. There will continue to be an automatic reduction of 30% where this opportunity is taken up and there is agreement about the salient facts and circumstances and the proposed sanction. But if defendants, for one reason or another, for example, agree the facts and that those facts amount to a breach of our rules but wish to dispute the proposed sanction, they will be offered an opportunity to argue their case before the RDC, the independent decision-makers, without loss of the 30% incentive. 

What is proposed is, in effect, akin to what happens in criminal proceedings where a defendant decides to plead guilty at the first opportunity. In criminal proceedings, the defendant doesn’t lose the credit that courts typically give to defendants who plead guilty at the first court appearance, simply because they may have denied liability when interviewed by the police.

This process recognizes more incentives need to be provided to firms and now individuals, as a result of the senior manager’s regime, to resolve cases in ways that increase the degree of perceived fairness and provide sufficient incentives without losing the rigour of a formal disciplinary process.

We are also proposing a number of variants of this suggestion as well as providing a mechanism for those under investigation to proceed more directly and quickly to the Upper Tribunal, a court, providing external adjudication that is wholly separate to the FCA. The Upper Tribunal of course hears appeals from FCA decisions but reviews FCA cases on a de novo or as ‘of new’ basis, so effectively as a court of first instance.

The aim of every proceeding will be to ensure fairness and, where the person is found to be liable for misconduct, to ensure the sanction properly reflects the gravity and impact of the misconduct on our markets and the consumers.

We have received several supportive submissions from the public in relation to these proposals which are ‘of their time and moment’ and we will be announcing our final decision on them very soon.

Fines and effective enforcement

I don’t believe the size of fines demonstrates anything significant about the FCA’s enforcement effort, provided of course the fine is the result of a thorough investigation and a legally rational and fair process reflecting all relevant factors, including the gravity or seriousness of the misconduct in question, the need for general deterrence and all relevant mitigation. In other words, it fits the crime.

What is more fundamental and important is how quick we are at detecting serious misconduct and then investigating, thoroughly and fairly, so that where serious misconduct can be established, we are able to tackle both its causes, through sanctions, and its consequences, via remedies, reparation and redress.

What is important, in this context, is not the size of the outcome but the perception that detection and responsive action are both inevitable and speedy.

What is important, in this context, is not the size of the outcome but the perception that detection and responsive action are both inevitable and speedy. 

And while there is an undoubted public interest in cases resolving themselves through agreement, I would like to make early detection rather than early settlement our primary virtue.

This is not the soft option, by any means.

In practical terms better detection means investing in better systems, better intelligence, better coordination, not only within the FCA but also with other agencies.  The Joint Financial Analysis Centre, a cross-agency initiative involving the NCA, HMRC, the SFO and the FCA created last year, initially as a result of the Panama Papers, is an example of what I think is a very good initiative that is focused on increasing the number of joined dots and driving collaboration.

International collaboration

I am conscious that I haven’t spoken yet about cross-border enforcement work and I need to do so briefly. 

In my experience, especially over the last 12 months, is that all agencies are enormously conscious of the need for collaboration, if only to reduce the amount of individual work each agency needs to do, to reduce duplication or sometimes triplication.

We continue to be assisted by and to work with great effectiveness with our colleagues at the SEC and CFTC as well the US Department of Justice and, increasingly, the New York Department of Financial Services.

There remain legal hurdles with some gateways. Coordination and collaboration is also a logistical challenge.

But I know how much can be achieved with the undoubted goodwill that exists between the FCA and all the US agencies we are engaged with. There is an undoubted common ambition to collaborate more effectively and to help one another in our related missions.

We continue to be assisted by and to work with great effectiveness with our colleagues at the SEC and CFTC as well the US Department of Justice and, increasingly, the New York Department of Financial Services. Today’s event gives me an opportunity to publicly thank all of them and I do so.