Internal Investigations: The FCA makes its position clear

Posted on 27 January 2016

Internal Investigations: The FCA makes its position clear

It is increasingly common for authorised Firms to conduct internal investigations into possible failings or misconduct. On 5 November 2015, Jamie Symington[1] gave a hard hitting speech about his expectations of Firms' engagement with the FCA in those circumstances.

Symington's view was that the issue was relatively straightforward where there was not a likelihood of enforcement action. However, he viewed matters as somewhat more problematic where enforcement action was likely. He set out a number of issues as of concern and explained what his expectations of Firms were in those circumstances.  The following were of most interest:

  • Self-reporting: there was a continuum between those matters at one extreme that did not need to be reported at all and those at the other that needed to be reported urgently. Firms that had decided to investigate conduct concerns needed to consider at the earliest opportunity whether it was appropriate to notify the FCA.
  • Benefits: An appropriate internal investigation could help a Firm to achieve a more efficient and speedy regulatory outcome. In the right case, the FCA would consider a Firm's internal report as part of its enforcement work.
  • Independence: An important factor to the FCA was the independence of the investigation and this would often be brought about by the relevant Firm instructing a third party to conduct the investigation.  Such investigations are often of course carried out by law firms.
  • Transparency: Symington stressed that the FCA would never blindly accept factual conclusions reached by an internal investigation without testing them to its own satisfaction.  The core value that the FCA therefore wanted to see in a Firm's own investigation was transparency. He said its starting point was that it expected access to evidence as the "core product" of the investigation. 
  • Scoping with the FCA: Symington urged Firms considering a voluntary internal investigation to scope out its remit with the FCA before it was commenced, to ensure that the end-product was something that the FCA would actually rely upon as part of its decision making process.  He explained that the scoping exercise would be detailed and include discussions around the extent to which the FCA could obtain independent access to the underlying evidence, the extent to which the report would describe the roles and responsibilities of named individuals and the Firm's approach to privileged material generated by the internal investigations.  If this was not done, a Firm could find that the internal investigation was of little use to the FCA, and find that the FCA had to investigate deeper themselves than might have been the case otherwise.
  • Prejudice: Symington also stressed that it was crucial that a relevant internal investigation be structured so as not to prejudice any subsequent or concurrent FCA investigation and that this was particularly important where allegations of criminal conduct might result.  

It is Symington's comments on privilege that may cause the most concern to Firms and their lawyers. For example, Symington said that some Firms' interviews of their employees as part of their internal investigation process were documented only through lawyers' notes, over which privilege was then claimed.  This, he said, looked like "gaming" the process and was unwelcome and unhelpful, devaluing the report that resulted.  Whilst he understood that Firms had an entitlement to assert privilege, he said it was important to strike a balance to ensure that privilege did not become an "unnecessary barrier" to sharing the output of an investigation with the FCA. 

Privilege of course is an entitlement that is often fiercely contested. The recent attempts by the UK authorities to gain access to privileged materials is viewed in some quarters with great concern. It is interesting to note in passing that Symington's speech was given on the very day that the judgment of Mr Justice Snowden upheld the various claims to legal advice privilege asserted by RBS for the work its lawyers had been doing in relation to external regulatory investigations concerning LIBOR (see elsewhere in this issue 5 November 2015: Court rulings stir up the privilege debate).

Symington was keen in his speech to make it clear that the FCA did not naively accept Firms' reports and conclusions. Indeed, correcting this perception about how it carries out its enforcement responsibilities may well have been one of the reasons why the FCA saw in the first place the need to make such a hard hitting speech about its stance on internal investigations. Whatever the reason, Firms and their legal advisers would do well to study the speech and to consider how they should factor into their conduct of future internal investigations the thinking displayed in it.  Looking "On the Horizon", we will be interested to see if there is criticism in future Notices of the conduct by Firms of internal investigations.

What Firms must ensure of course that they do not lose sight of in all of this is that where things have gone wrong, they will usually need to investigate. They will need to understand properly what has gone wrong, what has caused it and what actions they should take as a result. How to deal with the FCA is part of the bigger issue.

You can read a copy of the speech here.