07 March 2017 by Francis Kean
There are tensions around self-reporting misconduct, says Francis Kean
FCA fines total more than £3 billion in the five years up to April 2016 – with only a miniscule proportion levied on individuals. But the accountability imbalance is set to change. Mark Steward, Director of Enforcement and Market Oversight at the FCA recently described how the spring 2016 introduction of the Senior Managers Regime in the UK marked ‘an inflection point’ in the regulator’s approach.
As he put it: ‘The regime embraces a very simple proposition – a senior manager ought to be responsible for what happens on his or her watch.’ He identifies three associated enforcement challenges.
First, senior managers cannot be expected readily to agree to pay large fines to resolve cases; rather, increased litigation is likely. Second, firms may be reluctant to invest in dealing with investigations when resolutions reached do not also resolve any associated cases against senior managers. Third, Steward describes the ‘latent tensions’ that lurk in terms of firms self-reporting misconduct to the FCA under which their senior managers may also be, or become, subject to investigation on the same issues.
“For swift justice, based on early detection, the regulator must be involved at an earlier stage in the process than firms might wish”
Part of the solution from the FCA’s perspective lies in earlier interventions: ‘It is not the size of the outcome but the perception that detection and responsive action are both inevitable and speedy’ which matters, says Steward. For swift justice, based on early detection, the regulator must be involved at an earlier stage in the process than firms might wish. The third challenge outlined above could, therefore, pose the greatest concern for individuals.
Take this example. The anti-money laundering (AML) officer of Bank A has concerns over potentially suspicious activity in one of the bank’s overseas branches. Arguably, he is already under a duty to report his concerns directly to the FCA. Senior Management Rule 4 requires senior managers to ‘disclose appropriately any information of which the regulators would reasonably expect notice’.
The problem here is that it is ultimately the regulators who are arbiters of what, often with the benefit of hindsight, they would have expected to have been told. The FCA’s July 2016 thematic reviews covered the failure to report suspicious activity relating to bribery and corruption, so it might very well regard it as ‘reasonable’ to be told of the AML officer’s concerns at an early stage. In practice, however, the officer is likely to want first to establish whether his concerns are well-founded.
So let’s say the AML officer raises his concerns with the bank’s general counsel, prompting an internal investigation. The findings suggest there may be systems and controls shortcomings relating to ‘Know Your Client’ checks which should have been carried out in-branch.
Three months have elapsed between the concerns initially coming to the manager’s attention and the FCA receiving the report. The internal investigation report is now disclosed to the FCA on the grounds that failure to do so would itself constitute a breach of the duty to self-report misconduct – both by the firm and the senior manager.
“It is difficult to know what the AML officer could have done to avert an unwelcome (personal) outcome”
‘Too little, too late,’ the FCA might say. Steward’s view on internal investigation reports are sceptical to say the least: ‘Leaving aside the concerns about the forensic rigour of internal investigation reports, there is an inherent conflict of interest as the reports have been commissioned by and prepared for senior management who may well be part of the problem. I am yet to see an internal investigation report that has filleted the involvement of existing senior management in suspected misconduct.’
For the regulated firm and senior manager, the actions taken here, including the timing of the regulatory reporting, appear reasonable. And in the ‘pre-inflection point’ world, this scenario may lead to ‘early settlement’ – that is, payment of a fine with the firm taking full responsibility and culpability, but without action against a senior manager. That outcome is much less likely today.
It is difficult to know what the AML officer could have done to avert an unwelcome (personal) outcome. Much will depend on who knew exactly what and when.
It may be that the manager’s predecessor will also face uncomfortable questions. If the predecessor has left the bank, that may create additional challenges for him or her – including as to payment for the cost of his legal representation.
Senior managers can and should prepare for the new regulatory focus on their conduct. A good starting point would be to take individual responsibility for informing themselves as to the best personal liability protection available to them both through insurance and the employer’s indemnity. There are, for example, some insurance products specifically geared to the costs of legal representation in the context of regulatory investigations.