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Markets Regulation
UK Treasury to shake up regulatory fines
From the Financial Times of Thu, 18 Dec 2014 20:26:28 GMT
The headquarters of the Financial Conduct Authority (FCA) in the Canary Wharf business district in London©Bloomberg

Regulators should be more “constructive” in their dialogue with companies during investigations and involve more senior officials in decisions about fines and penalties, the government said on Thursday.

Its new proposals also call for a quicker system for challenging regulators’ decisions, as part of a wider overhaul of the enforcement process, designed to make it speedier, fairer, and more transparent.

Details of the planned changes follow a series of City scandals — most recently foreign exchange rigging — and an escalating series of regulatory fines. Over the past year, the Financial Conduct Authority has come under fire from some companies over the tough way it polices the City and, in May, the Treasury ordered a review of the enforcement system to ensure it is fair.

On Thursday, the Treasury published its report, and made 39 recommendations for change.

It said regulators should consider how best to promote “early, constructive engagement between investigators and subjects”, as well as instituting further training for investigators and boosting the involvement of senior staff.

Both the FCA and the Bank of England’s Prudential Regulation Authority should publish more information about their criteria for starting investigations, the report added, as well as their approaches to referring cases from supervision to enforcement.

A new “signposted, expedited” procedure to appeal an enforcement decision has also been recommended. However, the new system will push companies to co-operate more quickly with regulators, as well.

When the FCA decides to take enforcement action, it should no longer offer a graduated system of discounted fines to companies that settle cases at different stages, the report said. Instead, the regulator should offer only a one-off 30 per cent discount on a fine, in return for early settlement. Existing 20 per cent and 10 per cent discounts, currently offered later in the process, should be scrapped.

George Osborne, chancellor, said the changes would help ensure that the Financial Conduct Authority and the Bank of England’s Prudential Regulation Authority handled their responsibilities “swiftly, fairly and robustly”.

Thursday’s recommendations also cover the PRA, which undertakes enforcement investigations less frequently than the FCA. Last month, the PRA imposed a £14m fine on Royal Bank of Scotland in connection with a critical failure of its IT systems.

Among the PRA measures, the report recommends the creation of a new independent decision-making committee, with a dedicated and independent chair.

However, the recommendations met with a cautious response from some regulatory lawyers.

Sara George, a partner at Stephenson Harwood, said: “The public need to have confidence in the regulator, so greater transparency about the process and about why an investigation has been started should help this. It is open to question how much practical difference these recommendations will make however.”

A response from the FCA to the Treasury report is expected early in the new year. On Thursday, an FCA spokesperson said: “We welcome this comprehensive review and recommendations which will serve further to strengthen our approach.”

A Bank of England spokeswoman said: “The Review rightly recognises that the PRA’s focus is on pre-emptive intervention to address emerging risks in the firms that it regulates. Nonetheless, the PRA is likely to take a small number of enforcement cases over time. The PRA welcomes the Review.”

Simon Orton, a partner at Freshfields, a City law firm, said the Treasury review should have done more to strengthen accountability in the regulator’s system for settling enforcement investigations.

He said: “The dice have felt like they were rather loaded towards the FCA. In the long run, settlements obtained that way risk being corrosive to the system, because they don’t give the market enough clarity on what the regulatory system requires.”



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