Early intervention on the rise


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Summary: The FCA is increasingly using its early intervention powers rather than waiting to launch formal enforcement proceedings; what does this mean for firms?

What is an early intervention?

Whilst early intervention is not a term that has been formally defined by the FCA, it has certain key characteristics focused on the FCA engaging earlier than usual and agreeing an appropriate response before damage is caused (or, at least to minimise the damage caused).

An early intervention can result in a wide range of actions, including use by the FCA of its powers under FSMA. The possible steps include: requiring firms to provide information ‘here and now’; varying a firm’s permission to remove certain permissions (either voluntarily through a ‘VVOP’ or by FCA’s own initiative ‘OIVOP’ power); putting requirements on a firm’s permissions (either voluntarily through a ‘VREQ’ or by FCA’s own initiative ‘OIREQ’ power); commissioning skilled person reports; obtaining attestations from senior managers at the firm; banning financial promotions; placing a firm into administration or winding up proceedings; and/or obtaining a freezing/restraining injunction through the High Court where the firm is likely to contravene a requirement under FSMA.

Additional early intervention powers will be added as a result of the new Senior Managers Regime for banks, including the power to immediately suspend the approval of a Senior Manager. While early intervention may involve formal action, in many cases it is more likely to involve a ‘voluntary agreement’ with the firm – frequently secured through a threat of formal action. It should also be noted that the use of its early intervention powers will not preclude the FCA from taking further enforcement action. When a significant issue is identified at a firm that gives rise to a risk of consumer detriment or damage to market integrity, the FCA is increasingly engaging with firms at an earlier stage than it (and indeed the FSA before it) had done previously. This new approach to regulation, which often involves both FCA supervisors and enforcement, is known as early intervention.

The FCA’s annual report for 2013/2014 stated that the FCA used its early intervention powers 21 times over the course of the year. We anticipate that this figure will rise sharply in the year to come as the FCA seeks to establish a reputation for itself as a pro-active rather than a reactive regulator.

Recent example

A recent example of the early intervention strategy at work was the voluntary requirement (VREQ) entered into by the high-profile ‘payday lender’ Wonga in October 2014.

Wonga agreed to a requirement to change its lending criteria to improve customer outcomes, appoint a skilled person to monitor its new lending platform and write off approximately £220m of customer debts. This came as a result of information received by the FCA that suggested Wonga was not taking adequate steps to assess customers’ ability to make repayments in a sustainable manner.

Considerations and advice for firms

There are a series of issues that firms will need to consider in practice.

An early intervention may commence with an unannounced visit (or ‘dawn raid’). Firms should ensure that staff are prepared for such an eventuality and have a suitable policy in place that sets out what actions should be taken in the event that the regulator turns up at the door.

The wording of voluntary requirements and the terms of redress packages are negotiable and firms should be wary of signing up to requirements that are unduly, onerous or otherwise unfair. However, it is frequently the case that, given the threat of formal action by the FCA, the firm’s room for negotiation may be limited.

Principle 11 of the FCA’s Principles for Businesses requires that firms are open and co-operative with the regulator. I believe firms should keep this in mind when engaging with the FCA and co-operate so far as it is reasonable to do so. Building a positive relationship with the FCA is likely to assist the firm in the long run.

All in all, in my opinion, co-operating with the FCA and voluntarily agreeing to a requirement, for example to pay redress, can often enable a firm to communicate a positive message to customers, as well as better control and limit any adverse media attention and reputational damage that might otherwise have been caused. This needs to be weighed against the reasonableness and appropriateness of the measures that the FCA is asking the firm to agree.

More generally, the stage at which the FCA is considering the exercise of its early intervention powers can be a critical one for the firm and its on-going existence. As a result, it is critical to understand the regulator’s priorities and what it is seeking to achieve, and engage appropriately and sensitively to identify an outcome that is acceptable to the firm and which achieves the FCA’s desired outcome.

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