At the start of the year, Nadhim Zahawi was allowed to remain chairman of the Conservative Party and minister without portfolio until an internal investigation into his disclosure of his tax affairs was completed and reported to the prime minister. This internal investigation was remarkable in its rapidity – just six days – and the lack of reply afforded to its individual subject, Mr Zahawi.
For individual bankers regulated by the Financial Conduct Authority (FCA) and/or certified by their banks, times could be a-changing too. Mark Steward, the long-standing FCA director of enforcement, is standing down next month, coinciding with a review of the FCA’s Senior Managers and Certification Regime (SM&CR).
Mr Steward’s tenure, at least at its outset, was marked by the large number of FCA Enforcement investigations that were opened relative to the far smaller number seen through to any conclusion.
Commentators have remarked on the FCA Enforcement model having been ‘broken’ due to the sheer number of unresolved investigations and the regulator’s ability to operate through and beyond the pandemic with remote working, low staff morale and high staff turnover compromising its operational resilience.
This ongoing pressure on FCA Enforcement resources is despite the introduction of the SM&CR for banks and insurers from March 2016 and the remainder of FCA-regulated firms from December 2019. Through SM&CR’s requirement on FCA-regulated firms to certify the majority of formerly FCA-approved persons as fit and proper, SM&CR has in effect permitted the FCA to outsource the oversight and policing of those certified staff to their regulated firms.
This has in turn increased the stakes of internal investigations involving those certified staff as it gives them limited rights of appeal and/or actions in relation to any adverse outcomes. Other FCA-regulated firms are reluctant to second-guess the quality and integrity of other firms’ internal investigations and to give those firms’ former employees a second chance if those individuals have been found not to be fit and proper.
This upping of the stakes has also caused these internal investigations to take longer and any related disciplinary process to become more protracted too.
What needs to change?
Given these Gordian knots strangling the future prospects and careers of so many individuals working within FCA-regulated firms, how could the changing of the guard at the FCA and the ongoing review of SM&CR be used to speed up regulatory investigations and re-introduce an element of fairness and proportionality into the equation?
FCA Enforcement should also be subject to the same 28-day response deadlines as individuals
First, the new FCA Enforcement senior management should voluntarily accept a notional time limit on any FCA Enforcement investigation of, say, 18 months from the time an individual is informed they are the subject of such an FCA Enforcement investigation. Within that 18-month period, FCA Enforcement should decide whether to institute proceedings against those individual subject(s) or not.
Further, FCA Enforcement should also be subject to the same 28-day response deadlines as the individual subjects are for each procedural step in those FCA Enforcement proceedings.
Second, in any FCA-regulated firm’s internal investigation and related disciplinary process, there should be equivalent but shorter deadlines within which an internal investigation should conclude its findings. This is especially pertinent where an individual subject may be under a period of suspension and/or unpaid.
Where an internal investigation and related disciplinary process concludes an individual employee is not fit and proper, resulting in the effective recommendation that the individual should not be employed by any other firm in that sector, the employee should be given the right to refer that finding and decision to either the FCA and/or the Upper Tribunal for an objective review.
Alternatively, should the firm conclude that such a harsh censure is required, it should accept that it is not in a position to do so unilaterally, and instead turn the matter over to the FCA for consideration. If the FCA declines to do so within a set period, it should be concluded that the individual can present themselves for re-employment by another FCA-regulated firm on the basis they can be considered to be fit and proper.
Given the resources the FCA has at its command, these are modest proposals in the interests of expediency and fairness for individuals who may find themselves caught up in such regulatory investigations. Now is the time to restrike the balance.
Harvey Knight is a partner in the London office of international law firm Withers LLP.
