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Supervision and Enforcement Support

The UK has one of the world’s most tightly regulated financial services sectors. Following a run of mis-selling scandals and perceived failings by its predecessor body over the global financial crisis, the Financial Conduct Authority is understandably zealous about wielding its extensive investigatory and enforcement powers. The prospect of a knock on the door from the FCA is something no firm can afford to take lightly.

The FCA can limit or withdraw firms’ or individuals’ ability to operate in the financial services sector. It can also freeze assets, seek restitution, and bring criminal prosecutions.

Even an FCA investigation that doesn’t result in disciplinary or enforcement action will still make significant demands on management time and resources, particularly for smaller firms. These investigations can also cause significant reputational damage and take a heavy personal toll on the individuals affected.

FCA Information Request

Rather than issuing a formal request, the FCA will typically first seek information through more informal channels. This is the process known as voluntary production.

There’s no statutory obligation to provide the information requested, but failing to do so runs directly counter to the principles of cooperation that underpin authorised firms’ status. The apparent informality of a voluntary production request should not disguise the importance of considering it and responding to it with care and diligence.

You’ll also need to consider whether you should ask the regulator to make a formal production request. Doing this helps avoid any suggestion that your firm is breaching its duty of confidentiality or the Data Protection Act by providing the information voluntarily.

If the FCA does not feel an informal approach is appropriate, it will use its statutory powers under the Financial Services and Markets Act 2000 (FSMA) to:

    • Require the provision of information by authorised persons (section 165)
    • Require reports from skilled persons (Section 166)
    • Appoint investigators (Section 167–168)
    • Request information under Section 165 and/or appoint investigators at the request of an overseas regulator (Section 169)
    • Require information from a person under investigation (Section 171)
    • Require information from persons not under investigation and not connected to an investigation (Section 172).

What is a Section 165 request?

Section 165 of FSMA gives the FCA the general power to require firms to produce documents and information. This includes any information of interest in relation to firms’ regulated activities. Firms may be given very tight deadlines within which to answer questions and produce detailed information.

What do firms need to do?

Firms need to answer all questions and provide the FCA with all information requested before the specified deadline. This may include highly detailed operational, financial and marketing information on business models, sources of revenue, and approvals for financial promotions.

Questions will apply, not only to the firm itself but also to any subsidiaries, affiliates and appointed representatives. The questions generally seek a concise written answer explaining the firm’s practices. A spreadsheet supplied along with the questions asks for more specific data on each of the investment deals the firm has been involved in.

What are the consequences?

If your firm fails to respond or provides an inadequate response to a Section 165 request, it can lead to a wide range of FCA enforcement actions, including:

    • The requirement for a skilled persons report (a Section 166 report)
    • Cancellation of permissions
    • Withdrawal of authorisation
    • A winding-up order
    • Fines or seizure of assets
    • Entering your premises with a warrant
    • Civil proceedings.

Section 166

So you’ve been served with a Section 166 notice. What do you do now?

Firstly, don’t panic. The FCA issues around fifty Section 166 notices a year. So, you’re certainly not alone. In an era of ever more stringent and complex regulation, it’s all too easy to engage in non-compliant behaviour inadvertently.

Secondly, our specialist Section 166 support service is here to help.

Your first priority should be to understand what happens next – and what this means for your business.

What is Section 166?

Section 166 of the Financial Services and Markets Act 2000 (FSMA) empowers the FCA to require a skilled person to go into a firm and prepare an independent report on any matter about which it has concerns. Although the FCA has discretion over the selection of the skilled person, it will be your firm that foots the bill.

Typically, the skilled person’s report will be split into four sections:

    • Identifying, assessing, and measuring risks
    • Reporting and monitoring identified risks
    • Suggesting preventative action
    • Proposing remedial action, including any customer redress.

What does the FCA do with the report?

The regulator will use the report in four main ways:

    • Diagnostic: finding out more about a concern (perhaps something highlighted in a thematic visit, risk assessment or notification) and determining whether further regulatory action is required
    • Monitoring: monitoring your firm’s systems and controls
    • Preventative: gathering and analysing information on an identified risk (e.g. concerns about your firm’s financial crime risk management) and developing recommendations for a resolution
    • Remedial: helping to develop, oversee, and report on the implementation of a remedial action plan, or assisting with the design of a customer redress programme.

What does it mean for you?

It’s vital you respond to any Section 166 notice appropriately. The way you liaise with the FCA throughout the process will significantly influence what view the regulator ends up forming of your organisation.

If the skilled person’s report confirms that the FCA was right to be concerned, the regulator will investigate your firm. But if their report shows your firm has always been fully compliant, the matter can probably be resolved without further action.

In our experience, it’s best to be as transparent as possible with the skilled person. If anything, you should share too much, rather than too little, information. This can save a lot of to-ing and fro-ing after the report is submitted. Any suggestion of having withheld information will reflect badly on you.

Enforcement support

Our enforcement support team has extensive experience of helping firms who are facing the risk, the threat, or the reality of FCA enforcement action. We understand the processes inside out and can help you avoid, minimise or mitigate the impact of enforcement action and the additional sanctions it could entail.

The FCA has wide-ranging enforcement powers to use against firms it believes are implicated in financial crime, market abuse, significant breaches of FCA rules or principles, acting unethically, or disregarding consumer interests. These include withdrawing a firm’s authorisation, entirely or partly, imposing fines, applying for court injunctions, and bringing criminal prosecutions against individuals or firms.

Whether you’ve already been served with a Section 166 notice or you simply want to ensure your marketing strategy doesn’t expose you to the risk of future enforcement action, our enforcement support team can help.

The FCA’s enforcement powers include:

    • The power to ban investment products, subject to a consultation process
    • The power to ban investment products that pose a risk to consumers, for a period of up to 12 months, without any consultation, where immediate action is required
    • The power to remove misleading financial promotions immediately from the market without the use of any formal enforcement process
    • The ability to announce publicly that disciplinary action is being taken against a firm or individual, prior to a decision notice being issued
    • The ability to contract directly with skilled persons such as legal or accounting firms where a Section 166 report is required.

Application of powers

Circumstances under which the FCA might use these powers include:

    • Concern about the effectiveness of a firm’s internal audit department
    • A firm’s inability to quantify its current financial position
    • Concern about the quality of a firm’s systems and controls
    • An indication that financial crime or money laundering is taking place
    • A firm’s failure to provide information to the FCA
    • The need to develop a remedial action plan.

Enforcement support

If the FCA intends to use its enforcement powers against your firm, we can offer effective enforcement support in all of the following contexts:

    • Interviews under caution
    • Compulsory FCA interviews
    • Voluntary FCA interviews
    • Compulsory requests for documents and information
    • Responses to information requests
    • Searches of your home and/or office
    • Restraint orders and the freezing of company or personal assets
    • Seizure of computers and other electronic devices
    • Hearings before the FCA Regulatory Decisions Committee
    • Hearings before the Upper Tribunal
    • The Senior Managers Regime and SM&CR
    • Senior Manager applications and the fit and proper test
    • Self-reporting.

How can we help you?

Our specialist team has extensive experience providing effective Section 166 support, helping firms navigate the process and resolve any issues efficiently.

The impression you make through the Section 166 process also has an important bearing on how the FCA responds to any future concerns, bearing in mind that it’s likely to be keeping an eye on your activities for some time to come.

Our team can help you prepare for FCA enforcement or a Section 166 visit. For example, we can conduct mock interviews to test the readiness of your senior team and then coach them as appropriate. We can assess the robustness, effectiveness, and adequacy of your policies and procedures, and develop these where necessary, helping you create a robust governance framework.

For more information about our supervision and enforcement support services, call 0207 436 0630 to speak to a member of our expert team or email info@thistleinitiatives.co.uk.


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