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14 Sep 2017

FCA enforcement powers and practical tips for dealing with information requests

The Financial Conduct Authority (FCA) has a range of enforcement powers available in its toolkit. Sections 165 – 172 of the Financial Services and Markets Act 2000 (FSMA) provide the FCA with wide-ranging powers to gather information and appoint investigators. Failure to comply with the requirements imposed by the exercise of these powers without reasonable excuse can give rise to serious consequences including punishment by imprisonment or fine in some cases. Approved firms are also subject to the FCA’s Principles for Businesses, which require that they must deal with the Regulator in an open and co-operative way, and must disclose to the FCA anything relating to the firm that the FCA would reasonably expect notice of (principle 11). In short, the FCA will expect full co-operation from any firm from which it seeks information.

Requests for Information

The FCA Handbook stresses that the FCA prefers to discharge its functions by working in an open and co-operative way with firms. It will therefore firstly look to obtain information through more informal channels by requesting information without issuing a formal information request. This process is often called voluntary production. There is no statutory obligation on a firm to provide the requested information but the overriding principles of co-operation that govern an Approved Firms status will be sharply in focus. Despite a lack of formality in any request that is made, it is still imperative that firms consider the request carefully and respond with care and diligence. It will also be necessary to consider whether to ask for a formal production request to be made. This is often done to avoid any suggestion that by providing the information voluntarily the firm is breaching its duty of confidentiality or other obligations, such as under the Data Protection Act.

If the FCA considers that it is not possible to work in an informal manner, it will use its statutory powers to progress its investigation. FSMA provides a number of statutory powers to the FCA, including:

  • The power to require the provision of information by authorised persons (section 165)
  • The power to require reports from skilled persons (section 166)
  • The power to appoint investigators (section 167 – 168)
  • The power to request information under s165 and/or appoint investigators at the request of an overseas regulator (section 169)
  • The power to require information from a person under investigation (section 171)
  • The power to require information from persons not under investigation and not connected to an investigation (section 172)

Sections 165 & 166

Section 165 of FSMA provides the FCA with the power to require information from Authorised Persons within a specified time. Any request must be made in writing and will set out the nature of the information or specific documents that must be produced. The powers conferred by section 165 are narrow in nature. In reality, section 165 powers are used to gain information from Authorised Persons or Exchanges before any decision is taken to open a formal investigation. Once an investigation is opened, the FCA will utilise its broader powers under s171 – 172 to obtain information.

Section 166 is a different kind of power. It enables the FCA to require a firm to provide a report by a skilled person, or itself to appoint a skilled person to produce such a report, on any matter that the FCA requires.  The FCA may use its section 166 power to require reports by skilled persons to support both its supervision and enforcement functions. An example would be where the FCA requires an accountant to produce a report on a particular area of business for which the FCA holds a concern.

The FCA’s statistics confirm their ongoing commitment to using s166 with the number of Skilled Person reviews being commissioned increasing in 2016/17. Skilled Person reviews can prove to be very expensive for firms, as they are required to pay for whoever it is that the FCA chooses to appoint. The FCA’s Enforcement Guide (EG) sets out the factors that it will consider when determining whether to use its s166 power. Amongst these factors are a consideration of what the FCA’s objectives are for making such enquiries, and whether their wider information gathering and investigation powers might be more appropriate. That is not to say, however, that information received as part of a s166 Skilled Persons report will not be used by the FCA as part of its wider enforcement objectives. Firms should always keep this in mind if they find themselves in receipt of such a request.

Appointment of Investigators

Once the FCA takes the decision to proceed with a case to Enforcement, it will seek to appoint investigators under either s167 or s168. Section 167 provides a power to appoint investigators for general investigations, such as into the nature, conduct or state of a business. Section 168 relates to investigations for particular breaches. It is important to check which power is being used if in receipt of a notice confirming that an investigation has been commenced.

Sections 171 & 172

Following the opening of a formal investigation, the FCA can use powers granted by s171 and s172 of FSMA to request information and/or request the attendance of an individual at an interview. Section 171 provides these powers to an investigator appointed under s167 (see above) and enables the FCA to enforce such powers against individuals that are the subject of the investigation or any person connected with the person under investigation. Section 172 is slightly different in that it provides an investigator appointed under s168 additional powers to require individuals who are not the subject of the investigation and not connected with the person under investigation to provide information or attend to be interviewed.

Practical tips for firms facing information requests

There are a number of practical steps that firms should take when faced with any type of information request from the FCA:

  • Identify the power: Ensure it is clear what power the FCA are relying on and that they are utilising their statutory powers correctly;
  • Voluntary production: Consider whether it is necessary to ask for a formal production request if concerns about confidentiality or other obligations exist;
  • Scope of request: Whether a request is for hard copy or electronic material, it is vital to establish the precise scope of what it being requested. Ensure that compliance with the request is achieved, but do not give the FCA more than they have asked for;
  • Timing: Be realistic about the time it will take to respond to the request and communicate this to the FCA. Extensions of time can be agreed if the task is simply too onerous to complete within the allotted time, however the FCA will expect this to be identified early on;
  • Electronic data requests: Requests for data held electronically will inevitably be time consuming and often complex if the organisation has large IT systems. Establishing the scope of what is being requested is key to ensuring that searches are manageable. The FCA will require that electronic data be provided in a specific format. However, it is possible to discuss this with them if the format raises difficulties for the firm;
  • Legal Professional Privilege (LPP): Ensure that any items covered by LPP are identified and removed prior to the provision of any information. Seek legal advice on what constitutes LPP if required;
  • Effective internal communication: Ensure that steps are taken to keep documentation preserved and secure whilst the process of responding to an information request is ongoing. This will involve identifying which employees are in possession of relevant documentation and communicating effectively about the need to preserve such information.

The FCA has high expectations of full co-operation from firms that it requests information from. This makes the prospect of being able to oppose such requests very unlikely. It is therefore imperative that firms ensure they have effective systems in place to respond to such requests, so that they can be confident that full compliance is achieved.

This article was originally published in Thomson Reuters Accelus and in Mondaq, which can be accessed here

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