Any actor who provides financial services is subject to the scrutiny of the Financial Conduct Authority (FCA), and actively encouraged to conduct investigations of their own affairs when things go wrong. However, there are a few things you need to know about internal compliance investigations. In fact, some organisations choose to outsource legal services for this very task.
During a regulatory conference in 2015, Director of Enforcement Jamie Symington outlined the benefits and challenges associated with actors conducting internal compliance reviews.
Internal investigations: The benefits and the risks
The conducting of internal reviews is a long established practice. Symington pointed out that investigations and reports are often prepared by firms where there is no likelihood of enforcement action, in preparation for internal purposes or sharing with FCA supervisors.
Efficiency and speed are identified as the biggest benefits of an internal investigation. The view taken by the FCA is that a firm will generally have readier access to and a deeper understanding of the necessary evidence. A firm knows its employees, their roles and responsibilities, and how those might interact with the issues under investigation. It also has direct access to systems containing all manner of relevant data and communications.
Where things become more problematic, says Symington, is when actors want to conduct internal investigations in response to an investigation by the FCA. This could lead to a biased public perception and the impression that the FCA did not conduct thorough investigations. For this reason, actors are actively encouraged to inform the FCA as quickly as possible when they decide to investigate internally, and promptly deliver the investigation findings.
Another important consideration for the FCA is whether the investigation is conducted with a satisfactory degree of independence. Symington suggests that this can be achieved by engaging a third party to carry out the internal investigation, though it still depends entirely on the actor’s willingness to share the output openly, fully and promptly with the FCA.
Mostly importantly, the actor must discuss the scope of its investigation with the FCA as early as possible. Generally speaking, the FCA can only properly maximise the utility of an internal report if it has had the chance to comment on its proposed scope and purpose.
Transparency is key
What caused some alarm bells to ring in the financial world was the FCA’s view on legal privilege. The benefit of an internal investigation to the FCA hinges on transparency.
The position, as outlined by Symington, is that the creation of documentation during the course of an investigation, and the tendency of firms to withhold that information on the basis of legal privilege, poses an obstacle for the FCA. Firms under investigation should therefore be as transparent as possible.
Symington concludes that when firms become aware of conduct issues, they should:
- Firstly, engage with the FCA at an early stage. This way, any ground rules and an agreed upon approach can be established.
- Secondly, consider whether the FCA can gain proper access to the records of your investigation. If not, it can render the internal investigation useless. The FCA may have to reinvestigate the matter, drawing out the process and preventing the firm under investigation from claiming credit for it.
Informing your internal investigation
Symington outlined a number of helpful considerations that should be considered by actors in advance of conducting an internal review:
- To what extent will the FCA be able to rely on the final report of that investigation in any subsequent enforcement proceedings?
- To what extent will the FCA have access to the core evidence that was used to produce the report?
- To what extent, and on what basis, is the actor willing to disclose material over which they claim legal privilege, and how can the FCA use it?
- How will evidence be recorded and retained?
- Have any conflicts of interest been identified? What are the proposals to manage them appropriately?
- Will the report describe the roles and responsibilities of identified individuals?
- Will the investigation be limited to ascertaining facts, or will it also include advice or opinions about breaches of FCA rules or requirements?
- How does the firm intend to inform the FCA of progress and communicate the results of the investigation?
- What is the expected timescale for completion?
Outsource legal services to make internal compliance investigations easy
The FCA acknowledges the benefits of firms conducting their own regulatory reviews, but the effectiveness of the process can be called into question if those investigations are not conducted in the appropriate manner, and in collaboration with the FCA.
A number of UK-based financial services companies have chosen to outsource legal services to Johnson Hana International (JHI). We’re helping our clients to investigate financial conduct matters in a way which is independent, transparent and satisfactory to the FCA’s requirements.