Watch FCA investigations – the new world on CISI TV One of the most viewed videos on CISI TV in 2018 features an exciting interactive event on the new world of FCA investigations. This was developed with lawyers from Willis Towers Watson and two law firms, Brown Rudnick LLP and Mishcon de Reya, who have particular expertise in regulatory investigations. A rerun at the university of Edinburgh Business School in October drew out yet more concerns for members in this sensitive and increasingly difficult area.
Here, Francis Kean, a lawyer and an executive director in Willis Towers Watson’s FINEX Global, outlines some of the key issues. And Richard Burger, a partner in law firm DWF and co-chair of the CISI’s Disciplinary Committee, considers some of the cultural issues.
Francis Kean 
Executive director, FINEX Global, Willis Towers WatsonThe seminar looked at the challenges arising from the FCA’s new enforcement policy and its focus on individual accountability. Adam Epstein and Guy Wilkes of Mishcon de Reya described what we aimed to achieve thus: "The underlying law and rules are laid out in black and white. By contrast, what we were particularly keen to get across in the discussion were the critical strategic and tactical issues that people may not have thought through or, in many cases, not even have been aware of. Those caught up in potential difficulties need to take the right decisions at the outset.”
The seminar was based on a realistic set of circumstances invented by our panel and staged on the podium by five actors.
Setting the sceneThe story concerned Financial Engineering Solutions (FES), a relatively successful, middle-ranking and privately-owned asset manager with a predominantly retail client base. Its new CEO wanted to outsource as many functions as possible to free up resources in order to expand the client base by offering ‘new and exciting’ investment opportunities. He suggested to his COO that she should take this project forward and consider using an outsource company he had heard good things about. She then assembled an executive team comprising the head of compliance, the general counsel and the IT and operations manager, to run the outsourcing project, which resulted in the appointment of the CEO’s choice as outsource company.
Several months later, after the new arrangements had been up and running for some time, the FES risk committee (comprising the same executive team) became aware of an IT-related glitch and of some customer complaints which appeared to relate to delays in administration. These were perhaps linked to the IT problems, but there was also the suggestion of some more serious issues relating to the investment products themselves. Recriminations between the executive team began to break out.
The audience opinionAt the February 2018 event, over 200 delegates drawn from financial services organisations were given the opportunity to express their opinions through instant voting technology on a range of subjects related to this scenario as the panel debated the issues in more detail. There were some evident differences in opinion/emphasis between the audience and the panel, of which the following were particularly interesting:
- 70% of the audience felt the CEO should be more concerned than any other employee as to the possible consequences of what had gone wrong at FES.
- The panel, while not discounting the dangers for the CEO, were able to identify areas of concern for the whole of the team engaged in the project.
- 62% of the audience thought that FES should be notifying the possibility of regulatory breaches to the FCA straight away.
- The panel felt that it would be wiser to scope the problem first and go to the regulator with a plan of action.
- 66% of the audience thought that directors and other employees had the right to receive legal advice or representation at the company’s expense.
- The panel highlighted there was no such right.
Key issues
Other topics the panel grappled with, under the chairmanship of George Littlejohn MCSI, were:
- Whether legal advice and/or the product of any internal investigation conducted by FES was protected from disclosure by privilege.
- What some of the strategic and tactical considerations of dealing with the regulators and the potential customer complaints might be.
- Some of the practical steps that should be taken and errors which should be avoided by FES in dealing with the issues.
- The potential conflicts of interest between FES and its employees.
- Who should pay and whether and to what extent a Directors & Officers liability policy could be relied on.
Compliance, conduct and culture: Non-financial conduct in financial services
Richard Burger
Partner, DWF LLP, joint chair of the CISI Disciplinary PanelRecent commentary from the FCA on non-financial conduct and culture in firms highlights the regulatory expectation on firms to: “foster healthy cultures which support the spirit of regulation in preventing harm to consumers and markets.”
With a specific focus on sexual harassment, the FCA “views sexual harassment as misconduct which falls within the scope of [its] regulatory framework.” It says: “A culture where sexual harassment is tolerated is not one which would encourage people to speak up and be heard, or to challenge decisions. Tolerance of this sort of misconduct would be a clear example of a driver of poor culture.”
Firms should not be surprised if the regulator now takes an interest in how senior management responds to and investigates allegations of sexual misconduct and poor personal misconduct. In such non-financial conduct reviews, typically at the request of the regulator, a senior figure such as an independent non-executive director (iNED) will be tasked, with some external support, to review the conduct and culture of a firm. Examples include reviewing a firm’s approach to compliance following a complaint received by the regulator that a senior director, at a firm’s Christmas party, had shown “little regard” for the firm’s compliance function and for the regulator. In another case, where the regulator had real concerns that senior management were overstretched and “stressed out”, there was a “less than warm welcome” for the regulator at a routine supervisory meeting, involving the phrase “not you lot again”.
By the time the Senior Managers and Certification Regime rolls out across all financial services, all senior individuals, and those wishing to achieve senior manager status, should be aware of their regulatory responsibilities and individual accountability, including a positive obligation to appropriately and proportionately notify the regulator of conduct rule breaches. Firms should provide sufficient whistleblowing and internal complaints handling procedures so staff can report concerns and feel they have a voice within firms.
This article first appears in the Q4 2018 print edition of The Review. All members, excluding student members, are eligible to receive the quarterly print edition of the magazine. Members can opt in to receive the print edition by logging in to MyCISI, clicking on My account, then clicking the Communications tab and selecting ‘Yes’.
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