Keynote address - Enforcement Law Conference
Speech by
John Tiner, Chief Executive, FSA
Enforcement Law Conference,
16 June 2006
I. Introduction
Thank you very much for that introduction, Margaret, and good morning ladies and gentlemen. May I add my own warm welcome to you all here today. I am delighted to be here to give the keynote address at the opening of this conference.
II. Extending thanks to the Contributors.
During the conference today, you will hear from FSA people and from external speakers about a range of issues including: Principles-based regulation, settlement and mediation, cross-border co-operation, Enforcement action against small firms, senior management responsibilities, the Regulatory Decisions Committee and the Tribunal. May I just thank all of our speakers particularly our external speakers, for giving up their time and putting in the effort to participate in this conference today.
III. Issues to be Covered
I intend to talk about four issues which I am sure will crop up on a number of occasions during the day: firstly, the role of Enforcement within the FSA, secondly, the bedding down of our Enforcement Process Review [which I will refer to as the EPR], thirdly, the increasing trend towards executive settlements, and, finally our shift towards a more Principles-based approach to regulation.
I hope that you will use today as an opportunity to discuss and raise questions about the key issues of concern to you. We are here to try to answer those questions in as straight forward and open a manner as possible.
IV. The Role of Enforcement within the FSA
Enforcement is an important regulatory tool and that importance is reflected in the Enforcement Division reporting directly to me and Margaret having a seat on my Executive and Regulatory Policy Committees. But I have also been keen to have Enforcement clearly separated from senior managers responsible for supervision, so the necessary checks and balances are built into our system. And we are emphatically not an enforcement-led regulator.
The great majority of firms we regulate do, in our opinion, run their businesses in a proper way. For those that do stray from the track, intervention by supervisors is usually sufficient to deal with any issues that have arisen. However, it is clear that some firms, from time to time, do not operate in a way that ensures that markets are efficient, orderly and clean or that retail consumers get a fair deal. It is also true that sometimes firms do not respond positively to the promptings or requests of their line supervisors. Enforcement action is an essential component of our regulatory toolkit.
Enforcement is only one of a number of regulatory tools available to the FSA to deal with non-compliant behaviour and it is not by any means the most widely used. Only 8% of the FSA's employees work in Enforcement and take up a corresponding amount of the overall budget. Enforcement is actually a very small part of the regulatory relationship.
The Enforcement Division exists to conduct timely, fair investigations and, where appropriate, take disciplinary or other action. Viewed strategically the Enforcement tool exists to support the FSA's objectives and is used as part of our overall risk-based supervisory strategy.
The potential impact of Enforcement action is significant. Enforcement activity generates more publicity (whether positive or negative) about the FSA than any other single issue. Enforcement outcomes can, therefore, play a very significant role in communicating issues of concern and the FSA’s approach to them. It is explicitly recognised that one of the principal purposes of Enforcement action is deterrence (both specific and general).
Enforcement is, by its nature, largely a service provider to the rest of the FSA. Enforcement’s work is driven by the requirements and priorities of the rest of the FSA and is aligned to what is going on elsewhere in the Organisation. Enforcement's priorities are therefore necessarily, a subset of the FSA's overall priorities. I will ensure that the Enforcement Division operates at the heart of the FSA as a fully integrated regulatory tool focused on the delivery of the FSA's aims and objectives. To reinforce this, in the 2006/07 Business Plan, I have not listed a separate set of Enforcement priorities.
I am committed to the effective use of Enforcement in areas which pose the greatest risk to our statutory objectives. The Enforcement Division is aligning closely with our Wholesale and Retail Business Units to achieve this. Business Unit priorities include - in the wholesale area: market abuse and market misconduct - particularly in the areas of systematic and organised insider dealing. And in the retail area, the Treating Customers Fairly agenda, payment protection insurance, equity release and mortgage endowment complaints handling. This doesn't mean Enforcement action will only happen in the FSA's priority strategic areas. Enforcement action will also be necessary in particularly egregious cases; ad hoc cases where consumer protection is a key issue, or where a case is necessary in the interests of achieving effective deterrence.
We have already restructured the Enforcement Division to align with our Wholesale/Retail Business Unit Model. This enables us to focus our efforts, skills and resources so that we can better deliver our strategic aims of promoting efficient, orderly and fair markets, helping retail customers achieve a fair deal and improving our business capability and effectiveness.
We are committed to the effective use of the Enforcement tool to assist us in achieving our strategic aims and objectives, not just in 2006 but as we move forward. I believe that a bold and resolute approach to our Enforcement activity is an essential part of that commitment.
V. Enforcement Process Review
As you know, over the last year we have devoted a considerable effort to overhauling our Enforcement and decision-making processes to make them more efficient and transparent.
Key issues that used to trouble the regulated community have now been dealt with. The foremost of these were transparency and separation - the separation required by the Act between those who investigate and prepare the case (i.e. the Enforcement Division) and those who make the decisions in contested cases (i.e. the Regulatory Decisions Committee, which I will refer to as the RDC). There is no longer any special access to the RDC by the Enforcement team – an issue which we know used to cause concern in the community. Any significant contacts between the Enforcement team and the RDC are minuted. Both Enforcement and the party in discipline now arrive at and leave oral representations meetings at the same time.
We have put in place systems designed to make it easier for those affected by our decisions, whether enforcement or supervisory decisions, to comment on how those decisions have been made and implemented. The feedback concentrates on the handling of the practical and procedural aspects of the case by the FSA staff and decision makers. The opportunity to give feedback has been available in all disciplinary cases that have closed since 10 October 2005, including those which settle or are discontinued. We have found the feedback meetings that have taken place so far very useful. We are certainly seeing, through the feedback meetings and our informal contacts with advisors and firms, a positive reaction to the new RDC processes and settlement processes introduced by the review. I hope that those we regulate will not be inhibited from making intelligent use of these systems and providing constructive criticism through them.
As you may know, a key recommendation of the EPR was that each matter should be scrutinised by a lawyer without previous involvement in the case before the preliminary investigation report is sent out and before the matter comes to the RDC. It was with this in mind that we have set up the new Litigation and Legal Review Team. Although this did happen previously in a number of our cases, formally implementing this recommendation enables us to create a consistent framework for stress testing our cases. It will enable a dispassionate review of the way a case is put and whether it is supported by sufficient evidence. It should also counter concerns that we have heard expressed before that we have a prosecution mind set. Concerns have been expressed about delays to the process caused if we have both an independent legal review within the Enforcement Division, and the advisory role of RDC's legal advisers. We recognise some delay is inevitable but will work to ensure that timescales are minimised.
It is essential for the FSA to be able to assess how well the new process is operating. Accordingly, we have put in place internal arrangements for regular reviews of how we are using the Enforcement tool to support the FSA priorities both by our Executive Committee and the FSA Board. It is in our interests as much as the interests of those we regulate that all our processes are, and are seen to be, fair and efficient.
VI. Executive Settlements
A few words about settlements. We have repeatedly made it clear in speeches over the past year or so, and again in the context of our EPR, that we are prepared to discuss settlement with those affected by an FSA investigation. Many cases are, in my view, capable of being resolved without the need for a full investigation, let alone contested RDC proceedings, even where the outcome includes a substantial financial penalty. It is open to firms to try and resolve the issue with the FSA by way of settlement at any point in the process.
We are prepared to talk, and to talk early, about the possible settlement of enforcement cases, but it is important to reiterate that whilst we are committed to settlement in appropriate cases, we are not interested in settlement at any cost. We are only interested in getting the right settlements - ones which are justified on the basis of the law, Principles and the facts. We will not compromise the integrity of our decisions and outcomes by rushing to tie-up settlements on bases which are inappropriate. We are prepared, where necessary, to fight cases. There is, of course, in any litigated case, a risk of an adverse outcome or indeed of adverse publicity arising from the process. We are, however, committed to taking on difficult cases, ensuring that we have the resources and support necessary to enable us to pursue them and, where we are unsuccessful, learning from that and moving on.
Settlement discussions are now made entirely separately from the RDC and are dealt with by Enforcement case teams with two FSA directors (one of whom would normally be Margaret Cole) setting the parameters and approving any settlement. This is already proving an efficient and effective way of concluding settlements promptly. It has the advantage of involving FSA senior management in the decision making process and facilitates close interaction between the Enforcement Division and the Wholesale and Retail Markets Business Units. For those who are concerned about how we will achieve consistency in our approach to penalties between RDC decisions in contested cases and Executive Settlement Decisions, let me offer some reassurance. Although the RDC and the Enforcement Division are separate, we have regular policy liaison to ensure consistency of approach and to make sure that the RDC is fully briefed on the factors the FSA considers are important for penalty setting. We will also, of course, be able to discuss the detail of the rationale for penalties in concluded and published cases.
Finally, a point of clarification on our settlement philosophy. It is important to us to achieve early settlements. They help us to achieve certain outcomes in a more timely fashion using the minimum possible resource. Early settlements enable us to communicate messages more quickly and ensure that resources are not tied up unnecessarily on existing cases preventing new cases being taken on. They facilitate prompt redress in consumer related cases.
The majority of our cases which result in disciplinary action, or other sanctions, are settled rather than fought out through the RDC process or indeed through the Tribunal. We have already concluded fifteen Executive Settlements since the process came into effect in late October, and there are several more in the pipeline. We envisage that, with the continuing use of executive settlement, the proportion of cases settling will rise further.
You can, however, expect to see us becoming more time sensitive in settlement situations. We have found that settlement negotiations can sometimes drift on for extended periods. If you want to negotiate settlements, you need to be prompt and co-operative in moving the matter towards resolution. In the interests of efficiency and effectiveness, we are intending to become much more rigorous about settlement negotiations. We will be thinking more carefully about when negotiations take place – and will not be afraid to say we need a period e.g. 3 months to look at the facts before we can speak meaningfully about settlement. We will be setting windows for settlement discussions. We will be encouraging the use of structured settlement processes such as mediation in appropriate cases. Of course, there is no one size fits all approach to settlement any more than there is to investigations but we will be considering these issues in each and every case.
VII. More Principles-based approach to regulation
Finally, I would like to say a few words about our shift to a more Principles-based approach to regulation.
The 11 Principles for Business are the key elements of the regulatory architecture to which we and others refer when talking about a more Principles-based approach.
Principles are generally more 'future-proof', i.e. better at accommodating and encouraging innovation in the market place. We believe a more Principles-based approach will also facilitate the development of market-based and industry-generated solutions to regulatory issues. It also aligns with our risk-based approach to supervision, as embodied in the ARROW II framework, which requires supervisors to focus on the outcome they wish to achieve through a firm-facing risk mitigation programme or a thematic project.
From a legal perspective, our Principles have the status of rules and we can take enforcement action on the basis of a breach of them. Indeed, we have already done so successfully on a number of occasions, including the recent Deutsche Bank case concerning breaches of Principles 5 and 2. I want to emphasise today that we can and do take Enforcement action on the basis of Principles alone and it is our intention to go down this route. The FSA set out in an often-quoted letter to the London Investment Banking Association in 1999 the circumstances in which it might take Principle-based enforcement action where there are a number of cumulative rule breaches which call into question compliance with a Principle or where there are no detailed rules concerning the conduct but where it clearly contravenes a Principle. We stated that we would expect the number of cases for a breach of a Principle alone to be small. This is not the position of the current FSA leadership or Board. The Principles are rules and we intend increasingly to take enforcement action on the basis of those Principles alone, where this is appropriate.
We also recognise that there is a legitimate concern that in order for consequences legitimately to be attached to the breach of a Principle it must be possible to predict, at the time of the action concerned, whether or not it would be in breach of a Principle. But as long as the action or actions in respect of which discipline is being brought could reasonably be predicted to be in breach of the Principle, we do not consider that there is anything unfair about taking Enforcement action for the breach of Principles. In other words, where the requirement of predictability is met it is legitimate for consequences to follow even though the Principle is expressed in general terms. This does not mean you must have known at the time of the conduct you were in breach but rather that had you applied your mind to the question you would have realised the risks you faced.
We also recognise that we need to work with the RDC to consider the implications of a more Principles-based approach for their work, and the Enforcement Division has this in hand.
We see very significant positive implications in this approach for our stakeholders: for example, firms will face less prescription from our regime, will have greater flexibility and will need to make more decisions themselves about how to meet their regulatory responsibilities, using their understanding of our high-level Principles and desired outcomes. We also believe that consumers will get better treatment through firms' own initiatives and actions than through regulatory detail. In our view, this approach will provide better quality regulation than would be achieved simply by imposing a mass of detailed rules. There are, we understand, significant challenges - for both the FSA and the industry, which Andrew Whittaker will cover in detail a bit later this morning. I just want to re-emphasise that we can and do take Enforcement action on the basis of Principles alone and it is our intention to continue to go down this route.
VIII. Conclusion
I do hope that in these few minutes I have been able to give you a flavour of some of the issues that are going to be on the table during the course of today’s discussions. We very much welcome the input that all of you will be able to give us during the course of today. I will now pass you back to Margaret. Thank you.