Power shifts within the FCA - quick-fire executive decision-making is coming into style

The FCA is consulting on significant proposed changes to its decision-making procedure to facilitate rapid regulatory action.  The changes shift certain decisions away from the RDC and towards various FCA Divisions, and they weaken some procedural safeguards.    

The FCA wishes to increase the frequency and speed with which it is able to impose requirements on firms, withdraw authorisations, manage exemptions from the general prohibition, begin criminal prosecutions and seek injunctions and orders for redress.  These decisions are all currently made by the RDC, a process the regulator believes slows down its ability to act. 

In making these proposals, the FCA likely is concerned to address potential consumer harm arising from fast-moving developments in UK financial services including fraud, scams and business model innovations.  As FCA Chief Executive Nikhil Rathi has foreshadowed, the FCA now wishes to mitigate issues by acting more often and more nimbly as a preventative "gatekeeper" in an effort to reduce the extent to which it must deter firms (and arrange redress) through formal enforcement action after harm has crystallised.

The FCA isn't merely shifting decision-making on formal regulatory action from the RDC to FCA Enforcement.  It's looking to "cut out the middle-person" entirely, by giving decision-making directly to FCA executives within its various Divisions; this will result in FCA Supervision directly taking a greater proportion of the FCA's regulatory actions against firms and individuals.

This is a potentially significant - and front-footed - change in stance.  Contentious regulatory teams should prepare themselves to respond, with external counsel's assistance where necessary. This will include up-skilling on how to conduct themselves in high-stakes and contested supervisory matters and embedding risk assessments and mitigations relating to formal regulatory action early in product design and change management processes.

Hold on - doesn't FSMA have something to say about this?

Maybe not.  FSMA doesn't require the FCA to establish a functionally separate decision-making body like the RDC.  FSMA s.395(2) requires that decisions to issue supervisory, warning or decision notices must be taken with the involvement of a person who is not directly involved in establishing that evidence.  The FCA considers that its proposals fall within this subsection.  

Section 395(3) does allow for such decisions to be taken by persons directly involved in establishing the evidence if that is necessary to advance one of its operational objectives - but the FCA does not rely on that subsection to support its proposals.

Clear roles for the RDC vs FCA executives

The proposals carve out a clear but circumscribed niche for the RDC: it should deal primarily with contested enforcement matters.

Other decisions would be left to FCA executives.  The decisions that would be transferred from the RDC to FCA executives are in summary:

• Decisions to use the FCA's own-initiative intervention powers to impose a fundamental variation of permission or requirement in relation to a firm.
• Contested decisions in relation to a firm's authorisation or an individual's approval.
• Action taken in straightforward cancellation cases.

We expect the decision-making centre of gravity to shift in the months after the proposals are implemented, with more regulatory action taken directly by Supervision teams and less by Enforcement.

But FCA Enforcement has carved out its own niche too, effectively taking responsibility for anything that might touch the civil or criminal courts - the following decisions will be transferred from the RDC to the FCA Executive Director of Enforcement:

• Decisions to apply to the civil courts for restitution orders.
• Decisions to commence criminal proceedings.
• Decisions to apply to the civil courts for insolvency orders.
• Decisions to apply to the civil courts for collective investment scheme related orders.

What procedural safeguards are weakened?

In RDC proceedings, communications between the RDC and other FCA staff generally are disclosed to the firm or individual that is the subject of the action.  The FCA will discard this for the decisions it's proposing to transfer to FCA executives: the FCA will not disclose communications between FCA staff and the FCA executives responsible for making the decisions.  This may significantly reduce the information available to the subjects of these decisions in order for them to understand the basis for the actions being contemplated and effectively to make representations in response.

Persons in RDC proceedings have an opportunity to make oral representations.  The FCA proposes that there will be no such opportunity for decisions taken by FCA executives.  There would be only narrow and rare exceptions: where the FCA executives consider that it would impact on the fairness of the decision (for example where due to personal circumstances the subject of the notice cannot make written representations) or where oral representations are required due to the urgency or complexity of the matter in question.

Currently, where a decision is made by a committee of FCA executives, three FCA executives must constitute that committee.  The proposal is to reduce that to two.

And the FCA executives would not be advised by an independent legal team, but instead the same team that already may have been involved in the matter.

These procedural erosions may in time result in a greater number of referrals of FCA decisions to the Upper Tribunal.  Much will depend on the extent of the FCA's transparency in practice in the course of making these decisions.

A couple more devils in the detail

The FCA can make own-initiative variations of permission (OIVOPs) and own-initiative impositions of requirement (OIREQs) with immediate effect, to address serious concerns about the firm or its business.  Presently, it will contemplate doing so only in urgent cases.  It now proposes to remove the requirement for urgency on the basis that it is not helpful as a "pre-condition"; instead, the focus will be on the seriousness of the situation, including risk of harm to consumers, particularly in cases where the FCA has exhausted its engagement with a firm.

Finally, the FCA's consultation paper includes proposals with important ramifications for senior managers, directors and executive directors.  Presently, the RDC has responsibility for deciding whether to vary, on its own initiative, an approval granted to an SMF manager, or for deciding to impose or vary a requirement in relation to a director or senior executive or to appoint or vary the terms of a temporary manager under FSMA ss.71B-71C.  These actions can have substantial effects on the roles and future employment prospects of senior individuals within the industry.  The FCA proposes that all of these decisions would instead be taken by FCA executives.  

I've got something to say about all this

You're in luck.  You have until 17 September 2021 to submit responses to the FCA's consultation.  The FCA aims to publish a Policy Statement in November 2021.