Regulatory control over internal investigations

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Firms are increasingly being asked to undertake detailed internal investigations by the FCA; we consider the implications

In recent years, I’ve seen a clear trend towards the FCA asking firms to undertake more detailed, lengthier internal investigations and to identify for themselves whether there have been any breaches of regulatory rules. If the matter proceeds to enforcement, the FCA will, of course, need to carry out its own investigative work and properly scrutinise the firm’s findings. However, much of the heavy lifting will already have been done by the firm and inevitably that work product will shape the enforcement investigation to a large extent.

The corollary of this ‘outsourcing’ of investigative work is that the FCA is seeking to exert greater control over firms’ internal investigations. The FCA is not alone in this regard; many regulators in different jurisdictions will expect to have their say as to how a firm should investigate and report issues arising in its business. This regulatory scrutiny can be challenging for firms.

I believe that the relationship between firms and their supervisory regulators is of paramount importance

To some extent, I think this trend was inevitable and borne out of expediency. The resources available to regulators have not kept pace with the massive scale of investigations we are now seeing, particularly in the wholesale sector.

Huge, liquid markets such as interest rates and FX generate large volumes of data, and regulators need significant help from firms both to review and understand the material. The FCA already had an unenviable workload independent of these investigations, including a variety of market studies in the retail sector, wholesale sector reviews, its new consumer credit remit and preparing for concurrent competition powers in April 2015.

Another reason for the change might be political pressures to speed up the enforcement process. For non-settled cases, it takes on average over three years from the referral to enforcement until the decision notice by the FCA’s Regulatory Decisions Committee, and significantly longer for the larger, more complex cases. This was noted in the recent Treasury Consultation reviewing enforcement decision making at the FCA and the PRA. There may be scope for the FCA to make the enforcement process quicker and more efficient if it has enlisted the firm’s help to identify and isolate the nature and scope of any issues prior to referral. Read the full article >

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