FCA goes ahead with new approach to decision making

In July 2021, the FCA published a Consultation Paper entitled CP21/25 ‘Issuing statutory notices – a new approach to decision makers’. In the paper, the FCA proposed a number of controversial changes to its decision-making procedures which would have a significant impact on the ways in which many important regulatory actions are taken and decisions made. Notably, this included stripping the independent Regulatory Decisions Committee of the FCA (‘RDC’) of some of its powers.

The FCA has now responded to the comments made in its consultation exercise and issued a Policy Statement PS21/16. In summary, the statement noted that the FCA intended to go ahead with all the changes it suggested. The changes came into force with immediate effect on 26 November 2021.

In this article, financial services and banking specialist Tony Watts provides an overview of what the changes will mean and suggests why they are considered controversial.

A recap of the changes

Many supervisory actions and decisions which were formerly taken by the RDC will now be made under Supervisory Procedures.

The RDC is part of the FCA but functions with a degree of independence from supervisory and enforcement teams which are involved in day-to-day activities. Under Supervisory Procedures, however, actions and decisions may be taken by senior members of the FCA supervisory team that is proposing the action and building the case (though to some extent different individuals may be involved).

The actions and decisions involved will be the issuing of statutory notices (commencing proceedings) and the taking of decisions relating to:

• a firm’s authorisation or an individual’s approval;
• the use of the FCA’s own-initiative intervention powers to impose a fundamental variation of permission or requirement in relation to a firm;
• action in ‘straightforward’ cancellation cases because a firm does not meet
  the FCA’s regulatory requirements, where that action is contested;
• commencing civil proceedings, such as seeking an injunction;
• commencing criminal proceedings, such as a prosecution for insider dealing.

There will also be changes in how Executive Procedures operate. Decisions may be made by a Senior Staff Committee consisting of two (rather than three as at the moment) members. Unlike the RDC, those making decisions under Executive Procedures will not have their own source of legal advice but may rely on legal advice of those who have been involved in the gathering of evidence. Again, unlike the RDC, the person potentially affected by a decision will not be entitled to see communications between the relevant supervisory team and the decision makers. There will generally be no right to make oral representations to the decision makers; this will be reserved for ‘exceptional’ cases. The examples given by the FCA of ‘exceptional’ cases are quite limited, including where the respondent cannot make written representations or any delay in making written representations may increase the risk of harm occurring.

Enforcement proceedings (i.e. those relating to misconduct after the event) will still be under the jurisdiction of the RDC.

Impact of decision making change

It is clear that the FCA met with significant opposition to many of these proposals (it concedes that on one point – the making of oral representations – opposition was ‘overwhelming’). It is nevertheless keen to proceed with them in the interests of greater speed and efficiency in decision making. It remains confident that its decision-making processes after the changes will be fair.

The FCA expressed the view that its changes may not have been fully understood, especially in relation to the RDC being part of the FCA (and not wholly separate from it). Most respondents to the consultation who deal regularly with the FCA will, however, have fully understood this point.

The involvement of the RDC has still up to now provided some reassurance that there has been a fair and objective hearing. The basis of the distinction between supervisory and disciplinary actions is not, in any event, always practically significant. Firms and individuals subject to supervisory actions may still suffer loss of livelihood and damage to reputation – leading to collapse of a business or to the effective end of an individual’s career.

There are also still real ambiguities. For example, the FCA stresses that its powers in relation to cancellation will only be with regard to ‘straightforward’ cases. It will not always be clear what will be a ‘straightforward’ case. The FCA gives examples of failure to pay fees (which will clearly be straightforward) and failure to comply with the Threshold Conditions (which may not be straightforward in many cases).

One of the effects of these changes may be to greatly increase the number of appeals to the Upper Tribunal. The Upper Tribunal has power to suspend an FCA decision taking effect, subject to various criteria including that doing so will not prejudice the interests of consumers or investors. It will be interesting to see how often the Upper Tribunal exercises these powers.

If the effect of these changes is to cause a logjam elsewhere in the process (i.e. at Upper Tribunal level), then the FCA may still not achieve its objectives of faster and more efficient decision making. The Upper Tribunal has also been critical of the FCA and its approach in some cases, even where the RDC was involved. This may also increase following the changes.