The Financial Services Authority (FSA) is continuing to focus its attention on individuals who work in the London markets. The recent expansion of the FSA’s requirement to record telephone conversations and electronic communications made from traders’ mobile devices highlights this focus. Its aim is to heighten oversight of and help deter and detect acts of market abuse and/or insider dealing. As recent action shows, the FSA is increasing the number of criminal and regulatory insider dealing and market abuse investigations and individuals are now increasingly likely to find themselves on the receiving end of the FSA’s disciplinary powers.
Individuals often fear an investigation by the FSA’s enforcement division. It can be a nerve-racking, uncertain, complex and often both a professionally and personally disruptive experience. However, by planning ahead and adopting a few practical tips, the experience need not be quite so traumatic. The key is in understanding and preparing for the process and knowing what is expected.
TIP 1 – CONDUCT: BE READY & BE HELPFUL
The FSA will only come knocking should it suspect some out of the ordinary activity. If a large number of shares in a company are purchased just before a public takeover announcement, the FSA’s market monitoring team may start asking questions of those involved or who have dealt recently in the shares. The way that a person deals with the investigators will set the tone of the investigation from the start. You may be unknown to the FSA, and as in any situation, first impressions are vital. Some important points to remember are:
TIP 2 – UNDERSTAND THE INVESTIGATION
To fully prepare for, engage in and respond to an investigation, it is vital to identify and understand the possibilities and potential consequences of the investigation. The FSA could be planning a criminal insider dealing investigation, a civil market abuse case or a failure to meet market standards.
In a regulatory case, a scoping discussion ordinarily maps out and sets the tone for the investigation – who is under investigation, why, key issues to be investigated and what documentary evidence the FSA will require. It is an invaluable opportunity to have an active involvement in and management of the investigation and ensure the investigation team really gets to know the target, his role and his abilities. It follows the issuance of a Notice of Appointment of Investigators to an individual, and will usually be the first physical meeting with the FSA.
An individual must use the scoping discussion to clarify any holes in his understanding of the process or the exact subjects under investigation. It is intended to be a two-way process that can be used to gain a better understanding of the issues involved and to ensure the FSA does not overstep the bounds of its own investigation. The target should not be afraid to ask questions to clarify what the FSA expects or requires.
In FSA investigations where scoping discussions are not conducted, which often happens in matters with a criminal dimension, the process will be different. If there is the potential for a criminal investigation, then early engagement with skilled advisors is critical to ensure that the subject of an investigation responds appropriately.
TIP 3 – INTERVIEWS: FAIL TO PREPARE, PREPARE TO FAIL
Interviews represent an important stage in any FSA investigation. They are the first time the FSA enforcement team will meet with key individuals and gather information. The team will assess interviewees’ demeanour, and their opinions will form the basis of decisions made further along the investigation process. Therefore, preparation is key to a successful set of interviews.
TIP 4 – CHALLENGING THE REGULATOR: REASONABLE AND SENSIBLE CHALLENGES
It is all too easy to adopt an overly litigious approach to any FSA investigation. This often creates a poor impression with the FSA and can have a detrimental impact on any eventual decisions taken. However, while the target must be open and co-operative, that does not mean that he should “roll over,” and he may challenge and engage with the FSA without being obstructive. If the FSA’s questions or document requests are unreasonable or unfair, the target should not hesitate to ask constructive questions or respectfully “push back” for fear of not satisfying his positive obligations under APER. Should the FSA take a view of standard market behaviour that is incorrect or unreasonable, explain this to the FSA and present them with supporting evidence.
TIP 5 – REFLECT, LEARN AND EDUCATE
If a person becomes involved in a regulatory investigation, then as with any experience, the process and outcomes can provide valuable lessons.
An unusual example of such reflection has been shown by Mr Alexander. Following the disciplinary sanction imposed on him he has expressed a desire to train would-be traders about his shortcomings, how to avoid the loopholes in many firms and how to avoid making the same mistakes he did. He has proclaimed a need for greater clarity and guidance to assist self-employed traders to work out what is and what is not permitted by law.
Whilst this is an unusual approach for someone who has been banned from the industry, there are lessons that can be learnt by all parties to an FSA investigation. For example, if you or your client became involved in an FSA investigation you should consider whether you adopted best practice and whether you could have addressed regulatory concerns at an earlier stage or in an alternate manner to mitigate the adverse impact of an investigation.
An individual under investigation will never be the driving force of an FSA investigation. That said, it is possible to influence its outcome and achieve a desirable result. The key to maximum impact is to be open, honest and properly engaged with the FSA.
Eventual fines imposed or public messages released can be controlled by how the investigation goes. Enforcement cases that are widely publicised often involve the most serious of breaches and are intended to demonstrate the consequences of not meeting regulatory standards. What the public do not read about are the majority of cases which are not pursued by the FSA or which reach settlement at an early stage. This can happen if a person plays his cards correctly.
As soon as a regulatory problem arises, detected by the FSA or otherwise, individuals should seek legal and expert advice from those with the knowledge and expertise of such investigations, to formulate a clear strategy and provide guidance through the regulatory framework.
Peter Wright is a litigation partner specialising in financial services regulatory issues and is a leading member of Fox William’s financial services group. He graduated with an honours degree in law from the University of Bristol in 1997 and then trained with London firm Russell Jones & Walker, where he qualified and specialised in commercial litigation. While at the FSA’s enforcement division’s legal group, he was quickly appointed to the position of senior lawyer advising on high-profile cases arising out of the financial crisis. Telephone: +44 (0) 207 614 2680; E-mail: email@example.com.
Deepak Arora graduated from University College London in 2006 with an LLB Hons degree and gained a commendation rating for the Legal Practice Course at The College of Law, Moorgate in 2007. Deepak commenced his training contract with Clifford Chance LLP in 2008, spending six months on secondment at the firm’s Paris office as well six months in the firm’s litigation, arbitration and regulatory group. Deepak qualified as a solicitor in February 2010 and subsequently joined Fox Williams’ dispute resolution team. Deepak’s contentious experience to date includes a spectrum of commercial, financial and regulatory-based litigation. Telephone: +44 (0) 207 614 2648; E-mail: firstname.lastname@example.org.
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