EG 3.11 1FCA approach to firms conducting their own investigations in anticipation of enforcement action

1The FCA recognises that there are good reasons for firms wishing to carry out their own investigations. This might be for, for example, disciplinary purposes, general good management, or operational and risk control. The firm needs to know the extent of any problem, and it may want advice as to what immediate or short-term measures it needs to take to mitigate or correct any problems identified. The FCA encourages this proactive approach and does not wish to interfere with a firm’s legitimate procedures and controls.

1A firm’s report – produced internally or by an external third party – can clearly assist the firm, but may also be useful to the FCA where there is an issue of regulatory concern. Sharing the outcome of an investigation can potentially save time and resources for both parties, particularly where there is a possibility of the FCA taking enforcement action in relation to a firm’s perceived misconduct or failing. This does not mean that firms are under any obligation to share the content of legally privileged reports they are given or advice they receive. It is for the firm to decide whether to provide such material to the FCA. But a firm’s willingness to volunteer the results of its own investigation, whether protected by legal privilege or otherwise, is welcomed by the FCA and is something the FCA may take into account when deciding what action to take, if any. (The FCA's approach to deciding whether to take action is described in more detail in DEPP 6.2 and paragraph 2.1.4 of this Guide.)

1Work done or commissioned by the firm does not fetter the FCA's ability to use its statutory powers, for example to require a skilled person’s report under section 166 of the Act or to carry out a formal enforcement investigation; nor can a report commissioned by the firm be a substitute for formal regulatory action where this is needed or appropriate. But even if formal action is needed, it may be that a report could be used to help the FCA decide on the appropriate action to take and may narrow the issues or obviate the need for certain work.

1The FCA invites firms to consider, in particular, whether to discuss the commissioning and scope of a report with FCA staff where:

1. (1)

   firms have informed the FCA of an issue of potential regulatory concern, as required by SUP 15; or

2. (2)

   the FCA has indicated that an issue or concern has or may result in a referral to Enforcement.

1The FCA's approach in commenting on the proposed scope and purpose of the report will vary according to the circumstances in which the report is commissioned; it does not follow that the FCA will want to be involved in discussing the scope of a report in every situation. But if the firm anticipates that it will proactively disclose a report to the FCA in the context of an ongoing or prospective enforcement investigation, then the potential use and benefit to be derived from the report will be greater if the FCA has had the chance to comment on its proposed scope and purpose.

1Some themes or issues are common to any discussion about the potential use or value of a report to the FCA. These include:

1. (1)

   to what extent the FCA will be able to rely on the report in any subsequent enforcement proceedings;

2. (2)

   to what extent the FCA will have access to the underlying evidence or information that was relied upon in producing the report;

3. (3)

   where legal privilege or other professional confidentiality is claimed over any material gathered or generated in the investigation process, to what extent such material may nevertheless be disclosed to the FCA, on what basis and for what purposes the FCA may use that material;

4. (4)

   what approach will be adopted to establishing the relevant facts and how evidence will be recorded and retained;

5. (5)

   whether any conflicts of interest have been identified and whether there are proposals to manage them appropriately;

6. (6)

   whether the report will describe the role and responsibilities of identified individuals;

7. (7)

   whether the investigation will be limited to ascertaining facts or will also include advice or opinions about breaches of FCA rules or requirements;

8. (8)

   how the firm intends to inform the FCA of progress and communicate the results of the investigation; and

9. (9)

   timing.

1In certain circumstances the FCA may prefer that a firm does not commission its own investigation (whether an internal audit report or a report by external advisers) because action by the firm could itself be damaging to an FCA investigation. This is true in particular of criminal investigations, where alerting the suspects could have adverse consequences. For example, where the FCA suspects that individuals are abusing positions of trust within financial institutions and that an insider dealing ring is operating, it might notify the relevant firm but would not want the firm to embark on its own investigation: to do so would alert those under investigation and prejudice on-going monitoring of the suspects and other action. Firms are therefore encouraged to be alive to the possibility that their own investigations could prejudice or hinder a subsequent FCA investigation, and, if in doubt, to discuss this with the FCA. The FCA recognises that firms may be under time and other pressures to establish the relevant facts and implications of possible misconduct, and will have regard to this in discussions with the firm.

1Nothing in paragraphs 3.11.1 to 3.11.7 extends or increases the scope of the existing duty to report facts or issues to the FCA in accordance with SUP 15 or Principle 11.

1Where a firm does conduct or commission an investigation, it is very helpful if the firm maintains a proper record of the enquiries made and interviews conducted. This will inform the FCA's judgment about whether any further work is needed and, if so, where the FCA's efforts should be focused.

1How the results of an investigation are presented to the FCA may differ from case to case; the FCA acknowledges that different circumstances may call for different approaches. In this sense, one size does not fit all. The FCA will take a pragmatic and flexible approach when deciding how to receive the results of an investigation. However, if the FCA is to rely on a report as the basis for taking action, or not taking action, then it is important that the firm should be prepared to give the FCA underlying material on which the report is based as well as the report itself. This includes, for example, notes of interviews conducted by the lawyers, accountants or other professional experts carrying out the investigation.

1The FCA is not able to require the production of “protected items”, as defined in the Act, but it is not uncommon for there to be disagreement with firms about the scope of this protection. Arguments about whether certain documents attract privilege tend to be time- consuming and delay the progress of an investigation. If a firm decides to give a report to the FCA, then the FCA considers that the greatest mutual benefit is most likely to flow from disclosure of the report itself and any supporting papers. A reluctance to disclose these source materials will, in the FCA's opinion, devalue the usefulness of the report and may require the FCA to undertake additional enquiries.

1For reasons that the FCA can understand, firms may seek to restrict the use to which a report can be put, or assert that any legal privilege is waived only on a limited basis and that the firm retains its right to assert legal privilege as the basis for non-disclosure in civil proceedings against a private litigant.

1The FCA understands that the concept of a limited waiver of legal privilege is not one which is recognised in all jurisdictions; the FCA considers that English law does permit such “limited waiver” and that legal privilege could still be asserted against third parties notwithstanding disclosure of a report to the FCA. However, the FCA cannot accept any condition or stipulation which would purport to restrict its ability to use the information in the exercise of the FCA's statutory functions. In this sense, the FCA cannot ‘close its eyes’ to information received or accept that information should, say, be used only for the purposes of supervision but not for enforcement.

1This does not mean that information provided to the FCA is unprotected. The FCA is subject to strict statutory restrictions on the disclosure of confidential information (as defined in section 348 of the Act), breach of which is a criminal offence (under section 352 of the Act). Reports and underlying materials provided voluntarily to the FCA by a firm, whether covered by legal privilege or not, are confidential for these purposes and benefit from the statutory protections.

1Even in circumstances where disclosure of information would be permitted under the “gateways” set out in the Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations, the FCA will consider carefully whether it would be appropriate to disclose a report provided voluntarily by a firm. The FCA appreciates that firms feel strongly about the importance of maintaining confidentiality, and that firms are more likely to volunteer information to the regulator when they know that the regulator is mindful of this sensitivity and the impact of potential disclosure. Accordingly, if the FCA contemplates disclosing a report voluntarily provided by a firm, the firm will normally be notified and given the opportunity to make representations about the proposed disclosure. The exceptions to this include circumstances where disclosure is urgently needed, where notification might prejudice an investigation or defeat the purpose for which the information had been requested, or where notification would be inconsistent with the FCA's international obligations.