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6 NOVEMBER 2003
Andrew Procter
Director of Enforcement, FSA
KEYNOTE ADDRESS

This conference takes place at a time when, from the vantage point of the FSA, things are becoming clearer. In many areas of the enforcement of the Financial Services and Markets Act we now have a considerable body of experience.

Some areas of our work have even begun to take on something of a routine.

But in other important respects there is, nearly two years on, little or no practical experience.

I also appreciate that even areas that appear to us at the FSA to be clear and a matter of routine, may remain a matter of obscurity and uncertainty for many practitioners who have less day to day exposure to the process!

Against that background, our objectives in organising this conference, include:

• A real desire to share some of our experience of the legislation and FSA Policy in operation – to reduce the scope of practitioner uncertainty; And
• A wish to identify and discuss some of the topics upon which we have more limited experience and which remain matters for debate. And indeed, to have some of that debate in public, today.

The Role of the Lawyer

Why do we care about an improved understanding of the FSMA regime? Because, despite what some commentators would suggest, the success of the FSA as a regulatory enforcement agency is not simply to be measured in aggregate fines or numbers of convictions.

If we are to be judged a successful regulator, the process of investigation and enforcement must also be understood and respected.

We see you as a key audience if we are to secure that understanding and respect. Conversely, we do not see you as "the other side" or in any sense, "the opposition".

Over the last two years we have invested heavily in practitioner understanding of what we do, why we do it and how we do it. This conference is a further investment in that understanding.

I am quite sure that there has never been a more experienced group of lawyers gathered together to consider the FSA's enforcement role.

From time to time, I have been accused of lawyer bashing. Of suggesting that those who are the subject of FSA investigations would be better off without lawyers to advise them. Outraged emails fly about some City law firms to that effect. From time to time accountants seek to persuade me to that view!

Let me assure you: I have never said that. Nor do I believe it.

The great majority of lawyers that we deal with on investigations positively contribute to the effective resolution of the investigation. They handle themselves well in what can be a difficult area. An area in which there will and there should be hard cases. Investigations in which there are real disputes as to the facts and real arguments as to the law. Where there are individual rights at stake and where I would expect a hard fought defence of those rights. An area in which we at the FSA cannot pretend to have all the answers and in which, sometimes, we too will make mistakes.

But I have observed that some litigation lawyers seem to find it difficult to make the transition to work on FSA investigations. Here I am focussing particularly on our regulatory investigations.

Those lawyers behave in their correspondence, and so far as I can judge, in their advice to clients as though they were engaged to advise in commercial litigation.

It is an approach which generally has the effect of prolonging their client’s experience with the FSA's Enforcement Division, but it rarely affects the substantive outcome of an investigation, except perhaps to ensure that there is no credit given for co-operation when we come to fix a financial penalty. The kind of lawyer who confuses an FSA investigation with litigation also finds it difficult to adjust to a decision making process that is administrative rather than judicial. That kind of lawyer loses sight of the fact that an FSA investigation is not necessarily and inevitably an inexorable and slow process from information gathering through procedural fairness to a decision. That kind of lawyer loses sight of the fact that it is possible to resolve many FSA regulatory enforcement cases very quickly and to the benefit of their client.

It is my common experience that in many, if not most of our regulatory investigations, the facts are relatively straightforward and the proper debating ground is the content of remedial action and the appropriate penalty.

I should make it absolutely clear that I am not suggesting that the proper response to an FSA investigation is to unquestioningly submit to whatever punishment we wish to hand out.

I am not asking for a free run at your client. It is absolutely right that a party affected by an FSA investigation should take legal advice and clearly understand their rights and responsibilities. That also helps the FSA! It is often right that the legal advisor should remain closely involved throughout – particularly in criminal and markets investigations.

But I also observe a minority of lawyers getting in the way of an outcome that is in their client's interests.

It is in that context that I have encouraged CEOs to remain closely involved and in control of cases affecting their Firm. They are the people who have the vision and the authority to deal quickly with the substantive issues and to see beyond debate on a forest of minor details.

I recognise that it will appear presumptuous but I hope that one product of this conference will be a better awareness of how a lawyer can best serve the client affected by an FSA investigation.

Faster Investigation

I said at the outset that there are some aspects of our enforcement work that are becoming routine. That does not, however, mean that we are satisfied with all aspects of our current way of working.

Indeed, we are not satisfied that we are as quick and efficient as we could be. As many of you will know, we have announced an "end to end" review of the enforcement process.

Why? Simply because it takes too long to complete some of our cases.

Our end to end review will result in changes that will be largely invisible to the outside world – except to the extent that we complete cases more quickly. We will be making better use of technology. We will be better at planning and conducting our investigations.

In other respects, there will be visible change. Some of that change will already be apparent to some of you.

• We will waste less time debating arcane and peripheral issues;
• You will see a difference in the way we sequence our investigation work.
• Our preparedness to give credit for co-operation;
• Our insistence on meeting, at the start of a case, with senior executives of firms under investigation to ensure they understand the potential benefits of co-operation;
• Our willingness to enter into mediation and negotiation.

Our review of the way we investigate is under way and we intend to complete it in the first quarter of 2004.

The FSA Decision Making Process

The end to end review of the enforcement process will also include a review of the decision making process. The decision making process is a long one.

FSMA contains the bare bones of the decision making process: a separation of investigator and decision maker, a need for a Warning Notice to precede a Decision Notice and a right to make representations. Those statutory requirements do not take us much beyond good lawful practice in administrative decision making. But the full and ornate process by which decisions are made is, largely, of the FSA’s own making and design.

Even without delay or requests for an extension of time, under the process we have designed it takes five months or more to move from the end of an investigation to a Decision Notice. We must ask if that is too long.

We begin from the position that the fairness of the process is of primary importance. Any change to the process cannot be at the cost of a person's right to put their arguments to the decision maker on the fair and just disposition of the case.

As I have said already, the process must also be a respected one. Respect for the process will require, at the very least, that:

• Those under investigation must understand how the process works. And
• The general public, if properly informed, must regard it as a process which delivers justice in a timely way

There are some very valuable components in the current decision making process:

• The separation of investigator from decision maker is important.
• The scrutiny of the RDC is valuable and does improve the quality of our decision making.
• The right of an affected party to make representations is a necessity.

But, is it a process that delivers timely results?

As a matter of policy, the FSA generally gives an affected person at least three chances to make representations.

• First, in response to a preliminary findings letter.
• Then twice in respect of a Warning Notice, once in writing and once in oral representations.

In addition, many seek to reach a negotiated settlement including through access to our mediation scheme. Is all of that really necessary? It is, after all an administrative decision making process. It is not, as some would wish it to be and as some do their best to make it, a private judicial process.

Arguments do not get any better for being repeated but there is the potential for a lot of repetition in the current process. The need for this extended decision making process must be considered in a context in which there is also a specialist judicial Tribunal before which a complete hearing of a matter may take place.

We have therefore commenced a review of the decision making process and, in particular, those parts of it established as matters of FSA policy.

We want to determine whether the decision making process can be shortened without a loss of fairness to affected parties or a loss of respect for the process itself.

The New FSA Structure

Earlier this week, The FSA announced a change to its internal structure. The internal structure of the FSA is not, I can assure you, a very interesting subject but there are two aspects affecting the Enforcement Division that I think are worth sharing with you.

You may know that in future there will be three main FSA business units covering:

• Wholesale and institutional markets.
• Retail markets.
• Regulatory Services.

The Enforcement Division has been moved outside that structure and we will report directly to the CEO. Why?

There are three main reasons:

• First, to send a clear external message about the importance of enforcement – a message to people like you.
• Secondly, to preserve the creative tension between enforcement and supervision – something that might be lost if we were subsumed into a business unit, primarily focused on supervision. The fact is sometimes supervision is not enough and you have to use enforcement powers to protect, prevent or punish.
• Thirdly, to facilitate the “end to end” review of the enforcement process and of which I have spoken. The other thing I would observe about the restructure is that it builds on the FSA’s risk based approach to regulation. The Enforcement Division also takes a risk based approach.

Two years ago, we promised that we would take on enforcement cases that mattered: that we would not allow our enforcement resources to be diverted on to matters that were better dealt with by supervisors.

I think we have kept to that promise, albeit that we have not yet been able to publicly demonstrate that in all areas of our work. I expect that you will see a substantial number of reported cases in the next few weeks and months that will demonstrate that we are serious about focusing on things that matter. We shall continue to take that approach.

I cannot recall ever seeing a press report about any financial markets regulator in any country that suggested the regulator had got its enforcement policy right. Regulators are, in the popular conception either overbearing and exercising "Draconian powers" or they are sleepy "toothless watchdogs".

They just never seem to get it right. I think in our choice of cases we have, in our first two years, got it right.

We do not expect to win every case – that would at the very least indicate that we were avoiding hard cases. But we do hope that lawyers like you, who understand the industry we regulate, will look at our cases and observe that they were indeed the right kind of case to take on.

The challenge of the next 18 months will be to demonstrate that through more public outcomes, delivered more quickly without loss of the integrity of the process and the protections that come with it.