Remedial action may prompt FSA to suspend enforcement

Jul 04 2007 Alex Davidson

The Financial Services Authority may suspend enforcement action against companies that have taken appropriate remedial action and explained their response during a scoping visit, according to Will Amos, head of retail, enforcement, at the regulator. Alternatively, such remedial action could prompt the FSA to reduce its penalties, he said.

Amos spoke before the presentation of a dramatised case study focused on payment protection insurance mis-selling, where he addressed specialised issues. The workshop, entitled "Internal Investigations and Notifying the FSA", was hosted by Kroll Ontrack and law firm Addleshaw Goddard.

Before starting any investigation, the FSA conducts an on-site scoping visit, which gives the firm an opportunity to explain any remedial action that it has taken, Amos said. "We go in and [outline] our concerns, and hear from firms how the sales process works, how practices work at a high level, and we learn about the key people who decide things in the organisation."

The more the firm tells the FSA, the better, he said. "It may lead to changes in the scope of investigation. Or we may hold off until we see what is being done."

The enforcement division does not choose its cases but they come from supervisors, Amos noted. "They're our clients, and they pick up things at routine visits, or from third parties such as whistleblowers."

If a case is passed to the enforcement division, it considers its seriousness, including the risk of loss on a consumer basis or, if a fraud occurred, the market impact, Amos said. "We look across the industry and, if it's a widespread problem, we are more likely to do something."

If a firm isolated a problem and notified the regulator immediately, it would count in its favour, Amos said. "If we find it, it's more serious."

In either case, the firm needs to work out what to do, such as to put customers back in the position where they should have been if the event had not happened, Amos said.

"I am not saying that if you take remedial action, the issue won't come to enforcement, but your action will have a [positive] impact on the penalty."

Dropping a line

If firms go down the route of demonstrating what is happening during scoping visits, it is less onerous and more efficient than producing documents and taped interviews with senior management, which the FSA cannot comprehend in many cases, Amos said.

"We're not industry professionals and we don't understand the business. Firms may say that what we think is a clear request for documents is a fishing trip," Amos said.

Instead of obtaining "17 files and a load of documents", it would be better for the FSA to ring firms, or for firms to ring the FSA, to determine the best documents and how to provide them, on paper or electronically, he added.

"We are fixed in some ways but we encourage dialogue, and don't see it as uncooperative to discuss this," Amos said. "We'll want to look at e-mails, backup tapes, laptops and imaged services, meaning digital information. We will get a FSA specialist to talk to an IT guy in your firm."

If the FSA wants to do research on an individual, the discussion could focus on how to reduce the number of e-mails to be viewed, Amos said. "This is where liaison goes smoothly or, sometimes, not."

If the FSA thinks that it is not getting information or that material is being destroyed, it can go to a magistrate's court, get a search warrant, and go in with the police, Amos said. "We've done this."

When a firm has electronic information, the issue of privilege emerges, Amos said. This must be addressed on a case-by-case basis.

To conclude, firms should be open with the FSA, and proactive, because it can reduce the length of an investigation, Amos said.

"Anything you can do internally to help our investigation will reduce management time spent on it and affect the remedy, he said. "It may even end in no action by us. It's happened."

The views and the opinions expressed in 'hot topics' are that of the individual authors and not necessarily those of the Securities & Investment Institute.