Nigel Davenport and Natalie Ward analyse the FSA's revised enforcement process, looking at its content and likely impact

' The FSA's review of its enforcement process was keenly anticipated by the insurance industry and enforcement agents alike.

The regulator accepted that it needed to be "fair and seen to be fair; efficient and effective". It wanted to convey the impression that it took well-founded criticism seriously and had made every attempt to amend the way in which the enforcement process was carried out.

The resulting review, published in July and led by David Strachan, the FSA's retail firms director and insurance sector leader, has promised many changes.

First, the investigatory stage of the process. A major problem highlighted was that not all of the FSA's investigators are equally experienced or trained to the same level. This failing was exacerbated by the fact that firms and individuals under investigation were unable to refer their cases to more senior FSA staff.

The FSA now intends to:

  • Build on scoping visits, setting out concerns at an early stage
  • Encourage more openness in setting out the FSA's concerns
  • Ensure that enforcement team members' skills and experience are of a high standard and that more senior managers are included.
  • It proposes to achieve this by:

  • Making greater use of secondments and experienced external advisers
  • Developing a procedure by which cases can be elevated for review by FSA senior management and post case review boards
  • Introducing a post FSA enforcement care service shortly after enforcement action has been completed.
  • However, the cases put forward for review by senior management are in practice likely only to be high impact cases or those that set a precedent. Other cases may not be privy to this benefit.

    The most difficult area faced by the review committee was the role of the regulatory decisions commission.

    Prior to the review, there was some confusion as to the extent of the commission's independence of the FSA. Many firms and individuals under investigation were sceptical as to the extent to which the commission acted as a genuine controlling force over the FSA.

    Pre-review practice gave enforcement teams direct access to the commission after the conclusion of representations meetings, without parties under investigation being present. This led many firms under investigation to refer matters to a tribunal - a pattern the FSA was keen to prevent developing, as this exposed the FSA to scrutiny and criticism.

    The FSA now intends to:

  • Retain both practitioners and non-practitioners on the commission
  • Ensure the commission has independence in its individual decisions, while ensuring it remains accountable to the FSA board
  • Reduce the commission's membership from 24 to 16 members
  • Ensure flexibility in the operation and membership of panels by the commission
  • Ensure all substantive communications between enforcement teams and the commission are disclosed
  • Allow the commission to have its own dedicated legal function initially led by two lawyers (so it does not need to seek advice from the FSA)
  • Ensure a greater number of interactive representations meetings take place, which will be more informal and less adversarial
  • Introduce decision notices setting out how key points have been made by the commission.
  • The report's acceptance of the need for a clearer distinction between the roles of the commission and the FSA is a positive step and held to be consistent with industry feedback.

    In addition, the decision to discontinue the FSA's private access to the commission and to disclose all substantive communications between the two bodies is encouraging.

    However, the report has been criticised for continuing to allow the FSA's enforcement team a greater amount of access to the commission prior to oral hearings than that given to the firm or individual being investigated.

    Nonetheless, the moves outlined in the report should go a long way to restoring faith in the commission's neutrality, while helping to stem the increase in referrals to a tribunal.

    Criticism of the commission's involvement in settlement negotiations has also been addressed.

    Pre-review, the commission was consulted at the outset of settlement discussions in relation to the level of the fine to be imposed.

    The FSA executive then carried out negotiations with the firm or individual involved, and the commission made the final decision on the case.

    Difficulties arose when negotiations broke down and the commission's analysis of the case became distorted by its involvement in the discussions. This meant there was no chance of any 'without prejudice' discussions.

    From now on, the commission will have no involvement in settlement negotiations. These will be handled by the FSA executive, which will decide on sanction levels subject to the approval of two executive decision-makers. The commission will deal only with contested matters.

    There were additional concerns regarding discounts for early settlements - namely that they had never actually been quantified. Historically, there has been confusion between credit given for co-operating with investigations and credit for early settlement.

    The FSA will now introduce a transparent discount scheme on the following basis:

  • Settlement at an early stage - 30%
  • Settlement up to the written representations stage - 15%
  • Settlement up to decision notice - 5%.
  • In reality, settlement amounts will only be semi-quantifiable, since the full amount of the penalty will not be known during the process. The sum to which the discounts will be applicable will be subject to negotiation, so the tariffs are likely to be flexible.

  • Longer process

  • However, although the discount scheme is an incentive to settle early, it could result in cases being settled unfairly if they are not examined sufficiently thoroughly.

    One key criticism of the enforcement process, namely that it took too long, was not dealt with in the report. In fact, as a result of the review the process is now likely to take even longer. This is due to the inclusion of additional stages, such as the legal review of a case before it is passed to the RDC once the investigation has concluded.

    Criticisms of the reforms and the extent to which they will actually alter the pre-review situation persist. But the review has addressed several anomalies within the process and makes some very welcome proposals.

    Whether they deliver upon their promise will only become clear in time through their practical application. IT

    ' Nigel Davenport is an associate and Natalie Ward is a solicitor in Eversheds' insurance and reinsurance department

    Why was the review commissioned?
    The FSA announced plans for a review following criticism over its handling of an investigation into alleged mis-selling of endowment policies by Legal & General.

    The regulator was accused of inadequately executing its enforcement procedures and reaching a decision without fairly considering all of the evidence submitted.

    The objectivity of the regulatory decisions commission was also called into question.