Written by: Freshfields Bruckhaus Deringer
Freshfields’ “Review of Financial Services: Investigations & Enforcement” is an excellent and impressive book. It is comprehensive, practical, and as up-to-date as can reasonably be expected, given publishing deadlines. Who should read it? The preface states that the book is written with the lay user in mind. Certainly, no prior knowledge is assumed, but it would be a devoted lay reader who could plough through the 800 odd pages in this book, many of which contain some dense legal material.
This, of course, is no fault of the authors, who are merely reflecting the complex legislation and accompanying body of rules and guidance that constitute the Financial Services Authority’s regulatory regime. The FSA is likely to work on pruning its Handbook, mindful of the burden of regulation. This book is likely to appeal most to, and actually be read by, practitioners and legal and compliance professionals. It would not surprise me if a few copies also appeared on the desks of regulators in Canary Wharf.
Relying on the earlier edition (published four years ago) will not be good enough. There have been a large number of significant developments since then, including: some major enforcement cases (Shell, Citigroup, Legal & General to name a few); new regulatory responsibilities for the FSA (principally in insurance and mortgage regulation); several reviews of enforcement processes and procedures (the end to end review in 2004 and the enforcement process review in 2005); and a changing cast list of enforcement senior managers at the FSA. As a further incentive to prospective readers, the authors have also added a new, topical chapter on mis-selling.
So what does the book tell us? As one would expect, there are chapters describing in some detail the FSA’s investigation powers, the various disciplinary sanctions available to the regulator, and the Regulatory Decisions Committee and tribunal processes and procedures. There are also specialised chapters on topics such as market misconduct and listed companies, civil liability to third parties and the ombudsman scheme. It is helpful to have all this material assembled in one place.
A practical approach
Where the book will be of greatest value, however, is in the sections that deal with the practical application of the various provisions and provide practical advice on FSA investigations. From this perspective, chapter two, which addresses the steps to take when regulatory problems arise, is extremely important. The various issues raised in the chapter (for example, reporting problems to the FSA, dealing with customers, dealing with employees involved in the contravention, document destruction and creation) could act as a checklist of key points that need to be considered when facing an FSA investigation.
How a firm responds to a regulatory issue, when identified, can sometimes be just as important as the underlying issue itself. As the FSA has repeatedly stated, a firm that takes prompt action to resolve a problem, ensures that its senior managers grip the problem and cooperates fully with the FSA can expect to receive credit.
Sometimes this may just reduce the overall level of financial penalty, but sometimes it can obviate the need for enforcement action at all. On the other hand, a firm that delegates the resolution of a problem to its compliance staff or lawyers, or that fails to recognise the extent of a problem, is unlikely to give confidence to its supervisors. The book sensibly recognises that there are some difficult areas which require careful judgement. For example, at what point should a firm notify the FSA that there is a problem? The answer, as the authors advise, is that generally the FSA will prefer to be made aware promptly when a problem exists, than discover subsequently that a problem existed that may present a threat to its regulatory objectives. Firms are, however, sometimes understandably cautious about setting regulatory hares running, fearing a prompt referral to enforcement.
Interview techniques
Chapter three, another good practical section, discusses the preparation for interviews by FSA investigators and how subjects should conduct themselves during those meetings. Although much of this ought to be common sense — e.g., subjects should only answer questions that they are asked, should not speculate in their answers, should ask for time to consider the answer where needed etc., — it is surprising how often subjects deviate from these basic rules.
The book contains a number of useful reminders in this area. The book is sufficiently up-to-date: it includes the recommendations arising from the recent enforcement process review. The authors do not give great prominence to the earlier end-to-end review (presumably because it is more of historical interest), but the effect of that review should not be underestimated: investigation time (before the cases reached the RDC) was speeded up significantly (around 40 per cent); innovations such as scoping visits (an early preliminary meeting between the firm and the FSA investigators) were also introduced.
As the authors state, however, the end-to-end review was principally concerned with improving the enforcement division’s operational efficiency, but did not address perceived or actual unfairness in the enforcement process. That was one of the purposes of the enforcement process review, which is generally regarded — at least within the regulated community — as a sensible response to the concerns raised. Since the book was published, more detailed implementation of the review has taken place and the picture has become clearer. For example, to meet the recommendation that there should be a legal review of the case before it proceeds to the RDC, the FSA has established a litigation and legal review unit within the enforcement division.
Another example: those subject to regulatory enforcement action will (after the conclusion of that action) be given the opportunity to provide feedback to the FSA on their experience and “how it was for them”. This is intended to provide an opportunity to comment on procedures and process rather than to complain about the size of the fine. It is early days, but Margaret Cole, the director of enforcement, and her team have responded promptly and pragmatically to the implementation of the review.
Chapter 15 explains how to challenge — and complaining about — the FSA. It contains a good summary of the many and diverse ways of tweaking the regulatory tail. Some of these tools (for example, the complaints procedure) are occasionally used as litigation tactics in an attempt to distract or divert the FSA staff from the routine work on a case. They can have a high annoyance factor, and should not be underestimated.
The book also includes some coverage of dealing with investigations by overseas regulators. As the authors recognise, this is an increasingly important area. The number, diversity and intensity of these requests to FSA are all increasing. The drivers for this development include the continued importance of the London markets as an international financial centre, the accession of new EU states and an increased level of international co-operation between regulators, encouraged by international bodies such as the International Organisation of Securities Commissions and the Committee of European Securities Regulators.
Previously an overseas regulator might request the FSA merely to provide some transaction information. Now, the requests might sometimes require a programme of interviews to be arranged. Another trend is for regulators not merely to exchange information on areas of common interest, but to run joint enquiries and investigations, such as that seen in the Shell case.
Details
Are there any areas in which the book could be improved? Very few. The introductory chapter that explains the regulatory framework could possibly be expanded to cover how the FSA is organised. The role of the enforcement division within the FSA could be examined in more detail; for example, the fact that the director of enforcement has a direct reporting line to the chief executive is an important factor. It would also be helpful to describe how the FSA identifies its priorities for enforcement cases, against a background of limited resources. The organisation of the enforcement division could also be explained, and how this influences the staffing of cases in terms of project teams.
There is an inaccuracy on p231 where it is stated that: “The role of project sponsor used to be performed by one of the heads of department in the enforcement division, however since this resulted in project sponsors being responsible for 60–70 investigations, the role is now performed by senior managers.” In fact, heads of department continue to sponsor the larger, higher profile cases, with managers sponsoring the smaller cases. This means that heads of department will generally be devoting more time to the higher priority cases.
Despite these minor comments, I would highly recommend this work. It will surely continue to be one of the leading practitioner works in the field. Although the book costs £120, it is a well-produced hardback. Given the nature of the work, most purchasers will be corporate rather than individuals (probably not one for the airport lounge). Given the rapidly evolving world of FSA enforcement, the only certainty is that a third edition will be required in another four years time (if not sooner), so the authors had better enjoy their break from writing now.
The second edition of “Freshfields Bruckhaus Deringer on Financial Services: Investigations and Enforcement” has been published. The book offers a comprehensive step by step guide to the practical and legal issues that need to be considered when potential regulatory problems arise, presented in a user-friendly way. The second edition incorporates four years of practical experience of dealing with the FSMA regime.
Reviewer: Ian Mason
Complinet.com January 2006
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