Financial Services: Investigation & Enforcement (2nd ed.)

Citation

Pyne, V. (2006), "Financial Services: Investigation & Enforcement (2nd ed.)", Journal of Financial Regulation and Compliance, Vol. 14 No. 4, pp. 424-426. https://doi.org/10.1108/13581980610711207

Coming hard on the heels of the Strachan Review, Freshfields' second edition of this book aims to accommodate the considerable changes which have occurred over the four years since its original publication. The introduction of FSA regulation in the general insurance and mortgage markets, the enforcement of both the market abuse and listing regimes, and the increasing impact of the FSA's “treating customers fairly” (TCF) principle are among the familiar, but frequently troublesome, challenges that now face compliance professionals. This book is of particular value where such challenges have attracted the FSA's scrutiny and potential opprobrium.

In Chapter 3 on “Information Gathering”, Freshfields observe of the FSA that “there is little that it cannot ask of a firm”. The unsettling vagueness that surrounds many of the FSA's powers is taken to task in this wide‐ranging review of the practicalities of the regulatory “stick”. Two questions for the compliance professional arise when faced with books such as this: firstly, does this book help keep me out of enforcement? Secondly, does this book assist me in managing the investigations and enforcement process once I am there?

The book sets out with thoroughness and clarity the key stages to be encountered when firms and individuals re placed under an often unforgiving regulatory spotlight. The book can usefully be divided into two parts:

1. 1.

   the core regulatory, supervisory and enforcement activities, such as the conduct of investigations and disciplinary proceedings; and

2. 2.

   areas of specific activity, such as criminal prosecutions, the role of the Ombudsman and market misconduct. This section also features an in‐depth analysis of mis‐selling and how the FSA might be challenged.

In arranging the material in this way, the book draws upon the core processes in (1) and applies them to each of the areas of specific activity in (2). This highlights the underlying approaches to which firms should be alive, such as keeping FSA's Principles for Businesses 11 at the forefront of the corporate mind and ensuring document management practices centre on retention rather than creation. As part of this approach, the book maintains a healthy vigilance over the European Court of Human Rights, regulator interaction (domestically and globally) and potential exposures to third parties.

In presenting these issues, each chapter takes on a confident tone and structure, much as one might expect from a magic circle firm. In general this takes the form of an introduction, an overview, a presentation of the points to be considered, and the associated practical implications of pursuing the options available. This is supported by impressive, exhaustive case references and other evidential detail arranged in an easily referenced format following the section in hand. On occasion, these may extend over a complete page.

The book's real strength lies in the assisting of the compliance professional to act as a “fencing advocate” and stay the right side of the line which divides cooperation from provocation. There are numerous dark corners where the FSA's powers and absence of guidance provides pitfalls for the unwary. So, where case law and precedent are thin, the book identifies the problem and provides practical answers. For example, protecting confidentiality while in the throes of an internal examination and taking action on an individual while protecting the firm from attacks on the integrity of its systems and controls, are typical of the challenges that the book tackles with effect.

This style of counsel is founded on step‐by‐step advice for a preferred course of action supplemented by tips aimed at retaining the initiative while supporting continued dialogue with the FSA. While any number of chapters could be chosen to demonstrate this approach, two chapters – Chapter 5. “The Tribunal and Appeals” and Chapter 6. “Disciplinary Sanctions and Other Regulatory Action” – are prime examples of this dexterity.

In Chapter 5, while acknowledging that precedents are still in the growth phase, Strachan Review notwithstanding, the chapter describes an excellent incremental approach to process, including the timings to be observed in cases and notices, the bounds on the scope of the information submitted, and the managed disclosure of the documentation, bearing in mind, for instance, that confidentiality is not a ground for withholding disclosure. There is comfort to be had in the depth of consideration of options to be pursued at these various stages.

Likewise in Chapter 6, the implications for Approved persons are highlighted, particularly in the beneficial light of “proactive cooperation”. Such proactivity may work both ways. For example, where there is an implication that an informal warning may stay on the FSA's database indefinitely, there is, however, no overt reference in the FSA's Handbook. This leaves the Approved person open to seek agreement for a time limit to be set. The Handbook is similarly reticent on guidance on concerns of an even more serious nature, such as the contents of a public censure and the calculation of restitution. Again, here discussions with the FSA are advised to reach “consistency and a fair result” particularly in the interests of finality.

In Chapter 14, on “Listed Companies”, the book supplies a checklist which summarises the typical broad scope of the material covered, such as:

• •

  the process of internal investigation and the steps to ensure that the breach does not recur;

• •

  what steps can be taken against employees;

• •

  whether reports should be made to insurers, compensation should be made to those suffering loss and whether the matter gives rise to criminal proceedings and/or civil claims; and

• •

  what steps should be made to safeguard documents and ensure further documents are not created.

The book is also supported by a useful set of introductory reference sections, with a glossary and tables cross referencing FSMA, statutory instruments, cases and Handbook references (DEC and ENF) to paragraphs in the text. There are also helpful tables detailing regulatory actions against firms, individuals and criminal offences attached to appropriate sections.

The book is, therefore, particularly good at explaining how firms might stay on the right side of the law during the enforcement process. It should not, however, be a substitute for being conversant with either the relevant sections of the Handbook, or for engaging external counsel should your firm find itself under investigation.

There are, however, three areas which would benefit from expansion in subsequent editions to improve the practical management of the enforcement process:

1. 1.

   the new settlement regime;

2. 2.

   risk management of the investigation and enforcement process; and

3. 3.

   forthcoming themes in regulation.

With the new graduated tariff of discounts available to firms, there is now even greater incentive (and therefore, pressure) for firms to arrive at a suitable conclusion. While the regime is appropriately referenced and its importance emphasised in the book, there is not the same depth of approach to benchmarking of what would be advisable courses of action matched to levels of discount. Here advice on quantifying the costs and benefits of particular approaches to target settlement discounts would be of value. For example, case studies based on historic injunction and restitution orders may highlight appropriate courses of action.

Although quite possibly the subject of a book in itself, cross references to risk management procedures relating to the classification, quantification and monitoring of the risks and issues of a case would provide an invaluable enhancement to the book's practicality. A half‐step in this direction is taken by the book with the inclusion of three process diagrams which, while extremely useful, are too few. Often the process in question is relatively linear, but the surrounding implications are not. More use of diagrams that, where possible, progressively build in complexities would be of great assistance to compliance, risk and governance management alike, to say nothing of easing communication with senior management.

Lastly, some forward thinking on the impacts of emerging themes in regulation would aim firms' preparations. While the book makes plan there is still much to be clarified from precedent to understand the FSA's regime's real costs and issues, what guidance is (nonetheless) available to guide the compliance professional in the management of themed reviews, implementation of MiFID, MAR, and TCF and the impact of Basel II and Solvency II implementation on management behaviour? What impact, for instance, might these areas have on the hitherto little‐used approved persons Statements of Principle 5‐7? Without some educated speculation in relation to these areas the book is at risk of appearing out of touch.

These questions aside, the book's breadth of technical content and informative style creates a valuable backdrop for action for the compliance professional both faced with and in the midst of regulatory proceedings. Is it worth the money? Given the rarity of any competition as well as the book's breadth and depth, my advice is “probably”. However, if your firm has recently engaged Freshfields on any matter, be sure to ask for a complimentary copy.