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Regulatory investigations – Introduction

The aim of this note is to give practical guidance on the conduct of investigations instituted by the FCA. Reference will also be made to the investigatory

powers of the PRA where relevant.

The starting point for a firm finding itself under - or assisting in an - investigation by the FCA will be whether it should institute its own investigation into the

same facts. Often this is the most sensible course. Reasons why the firm may wish to do so include:

The application of the Principles may well lead the firm to the conclusion that it should conduct its own review notwithstanding the

regulator ’s interest, since the firm’s own review can usually be conducted much more quickly - which will generally be in the interests

of employees and customers.

If there are concerns about whether individuals have breached their duties to the firm/remain fit and proper, the firm will wish to consider

for itself whether it needs to suspend staff and/or institute disciplinary proceedings.

If the investigation highlights an area in which business may not be being conducted in accordance with the rules/the firm’s own

standards and procedures, it will wish to establish as quickly as possible whether this is the case and implement a remedial programme

and mitigate any further breaches or losses.

It will enable the firm to be better informed of the issues and thus able to deal with the investigation more quickly and effectively. It may also

be that the FCA can be persuaded to modify the scope of its investigation depending on the outcome of the firm’s own work.

The firm will be much better placed to make representations to the regulator about concerns which the regulator may raise during the

investigation or at its conclusion.

If disciplinary proceedings follow, it will be sure that it has considered not only the issues which the FCA thought relevant, but any

surrounding facts and circumstances which may provide useful context and mitigation.

The factors which may make an internal investigation unattractive for a firm, but will rarely point to the conclusion that it should not be undertaken, include:

The firm’s own work may well not be privileged, and the FCA would expect to receive copies of anything relevant - including often the final

report. This can put the FCA further up the learning curve than it would otherwise have been - albeit often only in terms of timing.

It may add to the overall expense in terms of cost and management time.

This note includes practical guidance for a firm conducting an internal investigation - and this material is equally applicable to an internal investigation which

is run in parallel to a regulatory investigation.

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1 Informal requests for information

Both the FCA and the PRA may request the production of documents or information without issuing an information request. This process is often called

voluntary production.

There is little that the appropriate regulator cannot ask a firm for even where there is no exercise of compulsory or formal powers. Both the PRA and FCA

will expect a high level of co-operation. It is not easy to challenge such requests and often counterproductive to do so.

The FCA has said that it will not normally seek to request voluntary production of material which it would not have had a right to obtain through use of its

compulsory powers. Both regulators are obliged to maintain confidentiality in any information provided to them voluntarily.

It is not always clear when the matter is being handed from supervision to enforcement (though if a member of the supervision team becomes part of the

investigation team, the firm would expect to be told). And note that the firm must permit the FCA to have access to the firm’s premises during ordinary

working hours with or without notice (though the FCA has said that it will usually aim to give notice).

In the past, the FSA has said that its standard practice is to use its statutory powers for the production of documents, the provision of information and

interviews. This is for reasons of fairness, transparency and efficiency.

Should the firm request that a formal

request for production be made?

The duty of co-operation in Principle 11 is broadly drafted and both regulators will rely on it to secure the

production of information and documents in the early stages of many matters - some of which may develop into

full scale investigations, others of which will not.

Even if the decision is reached that a firm wants a formal production request issued, care should be taken to

ensure that there is no suggestion that the firm is refusing to co-operate with the requests for voluntary

production. The appropriate regulator should be told why this stance is being taken.

Reasons why a firm might wish to ask for a formal production request include:

To avoid any suggestion that the firm had breached confidentiality in providing the documents to the

regulator. NB though often the terms agreed with clients provide for the firm to be able to provide

information without breaching confidentiality where the firm believes that to do so would achieve

compliance with its regulatory duties. This encompasses providing documents on the basis of Principle

11.

To gain greater certainty about the scope of the request. The benefit in this regard may not be significant.

Where there are serious concerns that the provision of a document may put a firm in breach of data

protection legislation (either in the UK or abroad).

If duties of confidentiality are the main concern, it may be appropriate to deal with the requests for information

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effectively on a voluntary basis but to request from the appropriate regulator a formal production notice for any

documents about which there is a confidentiality concern, once those documents have been identified by the firm.

The appropriate regulator should clearly be told about the basis for this request. This approach may also be

effective where a firm is concerned about its obligations under data protection legislation.

The duties on a firm The FCA expects to request meetings with employees and access to business premises and to the firm’s

documents. In order to comply with Principle 11 a firm should (SUP 2.3.3G):

Make itself readily available for meetings with the appropriate regulator as reasonably requested.

Give the appropriate regulator reasonable access to any records, tapes, files, computer systems, which

are in the firm’s possession or control and provide any facilities the representatives or appointees may

reasonably request.

Produce specified documents, files etc. as are in the firm’s possession or control and as are reasonably

requested.

Print information from the firm’s computer systems and render it into legible format.

Permit the appropriate regulator to copy documents or other material at the firm’s premises and at the

firm’s expense.

Answer truthfully, fully and promptly, questions put to it by the appropriate regulator.

Also to comply with Principle 11, the firm should take reasonable steps to ensure that employees, agents and

appointed representatives do the same.

Disciplinary proceedings will not usually follow from a failure to comply with requests for voluntary production or

interviews, but such failures would be viewed in their context.

The duties imposed on individual

employees

The firm may be asked to take reasonable steps to ensure the compliance of its employees with the appropriate

regulator’s requests.

Employees who are approved persons owe their own duty of co-operation under Principle 4 - “an Approved

Person must deal with the FCA and the PRA and any other regulators in an open and co-operative way and must

disclose appropriately any information of which the FCA or PRA could reasonably expect notice.”

The FSA maintained that no disciplinary proceedings would be brought simply because someone chose not to

attend a voluntary interview or to answer particular questions. But an adverse inference could be drawn from

such a failure.

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Employees who are not approved persons do not owe a duty to the FCA or PRA to co-operate. But:

They owe duties to the firm as their employer which may be breached if they refuse to comply with the

firm’s direction.

In a serious case there may be fitness and propriety issues.

The firm itself is under a duty to take reasonable steps to ensure that employees comply.

Suppliers under material outsourcing

arrangements

A firm must take reasonable steps to ensure that each of its suppliers under material outsourcing arrangements

deals in an open and co-operative manner with its regulators in the discharge of their functions in relation to the

firm.

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2 Information requests

Information requests

Section 165

The FCA and PRA can require authorised persons to provide information or documents that are “reasonably

required” in connection with the exercise by either regulator of its statutory powers.

“Documents” means any way of recording information - anything readable, plus tapes, films, recordings

etc.

“Information” is not defined, but the FSA relied on this provision to include replies to oral and written

questions.

There does not need to be a formal investigation instituted. Nor does there need to be a regulatory concern

about the firm asked to provide information.

Documents protected from production Documents and information in respect of which duties of banking confidentiality are owed are not required to be

produced unless:

The person to whom the request is made is the person, or a member of the group of the person, under

investigation;

The person to whom the duty of confidentiality is owed is the person under investigation or a member of

that person’s group;

The person to whom the duty is owed consents; or

The requirement is specifically authorised by the investigating authority - section 175(5) FSMA.

AND: Documents which are protected under section 413 FSMA, and arguably those which would otherwise be

privileged, are not required to be produced - see separate guidance on privilege.

How the power is exercised The appropriate regulator may exercise these information gathering powers by notice in writing or by sending an

authorised officer to collect the information or documents.

A reasonable period of time is allowed for compliance with a written notice. Information and documents must be

provided “without delay” if an authorised officer attends to collect them.

Failure to comply Failure to comply without reasonable excuse may be treated by the Court as a contempt of Court punishable by

an unlimited fine and/or a prison term.

Intentionally destroying/concealing/falsifying documents which are or are suspected to be relevant to the

investigation is an offence under FSMA carrying a prison term and/or fines.

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Deliberately or recklessly providing information in response to an information requirement which is false or

misleading in a material particular is an offence under FSMA carrying a prison term and/or fines.

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3 Practical issues in responding to information requests

Can the request be challenged? Practically speaking the answer is generally “no.” The FCA and PRA are only obliged to conclude that the

documents or information are “reasonably required” in connection with the exercise of their statutory functions.

This is very broad and the firm would in all likelihood lack the information necessary to consider the issue in its

entirety.

The firm would in any event wish to give very careful thought to any challenge and how it would be viewed by the

regulator.

If the question is whether the request can be challenged in relation to one or more identified documents, matters

become somewhat easier.

Who can be required to provide

information or documents?

Any person who is, or was, an authorised person.

Any person who is connected with an authorised person - “A” - which means any person who is or has been:

A member of A’s group.

A controller of A.

Any other member of a partnership of which A is a member.

In relation to A, a person who is or has been an officer or manager of A or an agent of A or of a parent

undertaking of A.

Does the requirement extend to

information which is not recorded?

Yes - people can be expected to answer questions from memory.

Whether the power under section 165 extends to conducting interviews is open to debate - although both the FCA

and PRA clearly have other powers to conduct interviews. In any event, the difference between a discussion with

either regulator in which questions are put and answered and an interview may not be great.

There may be occasions on which the firm, or individual, wishes to see the interview conducted under the

appropriate regulator’s compulsory powers rather than on a voluntary basis. Reasons for this include possible

concerns about confidentiality and clarity of scope, but more importantly so far as individuals are concerned, the

right not to have answers which were given under the use of compulsory powers used in criminal proceedings or

market abuse cases.

NB approved persons’ duty to co-operate under Principle 4.

Can the regulator ask the firm or its It is difficult to be definitive.

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employees for their opinions on issues

or facts?

The appropriate regulator should be using these powers to ascertain facts. Generally a distinction is drawn

between opinions and facts. However, there may be circumstances in which an opinion is relevant to the events

which have happened.

If there is concern about producing opinions to the appropriate regulator, it may be worthwhile asking for

clarification of their basis for concluding that the opinion is relevant.

NB privileged material does not have to be provided and great care should be taken in reaching the conclusion in

a particular case that it should be and then only under an agreement as to limited waiver of privilege.

A document contains both privileged

material and relevant non-privileged

material

Consider whether the entire document is in fact privileged by reason of the inclusion of privileged material - does

it fulfil the “dominant purpose” test?

If not, the privileged material can be redacted and the non-privileged material only disclosed.

Relevance Where it is clear that a document is a collection of separate items or entries - a diary, minutes - then it may well

be possible to agree with the regulator that material which is on any view irrelevant should not be provided. A

redacted copy can be prepared and produced to the regulator.

It should always be clear whether or not a document has been redacted.

Material stored electronically Has to be produced in “legible form.”

Documents held by third parties Both regulators have the power to require the production of the material by the third party.

If the material is such that the firm has control over it - i.e. can require its production to the firm, the firm will be

expected to get it from the third party and make it available.

NB the firm has an obligation to state where any documents are which would fall within a requirement for

production but which are not in fact produced.

There may be an argument about whether documents which are on the firm’s premises are within its possession

or control - the test for production in a regulatory context - even if they belong to an employee. In any case of

doubt or difficulty, the appropriate response if a firm is not able to produce particular documents is to inform the

regulator of this fact and the reasons why. An open and candid approach to the regulator in relation to any

difficulties in the production of documentation or information is best and should help to avoid any suggestion that

the firm has tried to mislead the regulator or failed to comply with its obligations.

Documents held by former employees If the documentation would fall within a request for production made by a regulator, they should be consulted as

to their views/told about the approach that the firm has taken. It is important not to give the impression that a

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request for production is complete if it is known/suspected that there is relevant information which belongs to the

firm which the firm has been unable to access and produce.

Information held outside the jurisdiction In general terms, the Principle 11 duty of co-operation means that attempts should be made to obtain information

from group companies even if it is held outside the jurisdiction. The specific circumstances should be considered.

If there are concerns about confidentiality, which may be more of an issue under the law of the place where the

information is held than they are in the UK, the point should be discussed with the appropriate regulator and a

pragmatic solution is often found.

The firm will wish to consider the potential discoverability of documents in any actual or contemplated litigation in

the UK in the context of bringing additional documentation into the jurisdiction.

Information which would have fallen

within the request has been destroyed

If relevant, the regulator will need to be told what is known about the destruction.

Care needs to be taken not to give the impression that any document production exercise is complete if

the destroyed material would have fallen within its terms.

Destroying documents (or causing or permitting them to be destroyed) which are known to be relevant to

an ongoing FCA or PRA investigation/one likely to be commenced, with the intention of concealing facts

or providing false or misleading information is a criminal offence.

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4 Search warrants

Search warrants

Section 176 FSMA

The FCA and PRA need a search warrant to enter premises by force. This is similar to what is known colloquially

as a “dawn raid.”

Note, however, that a firm must allow the FCA to enter its premises with or without notice during ordinary

business hours. That said, the FCA normally expects to give notice of its visits.

So the FCA can, and does, attend at premises and ask that information be provided without a search warrant.

This section deals solely with search warrants. It is important that staff knows that there are two procedures, the

difference between them and what they should do in the event that the FCA or PRA invokes either of them.

The FCA or PRA may apply to a justice of the peace for a warrant to enter premises where documents are held.

The FCA or PRA can apply for a search warrant where:

A person on whom an information requirement has been imposed fails to comply with it in whole or in

part.

There are reasonable grounds for believing that were an information requirement to be imposed, relevant

material would be destroyed, removed or tampered with.

There is a memorandum of understanding between the FSA and the police which covers search and seizure

warrants; it does not impose requirements but does set out best practice. This has been retained on the FCA

website.

The warrant must specify, amongst other technical details, the name of the person who applied for it, the

premises to be searched and as far as practicable the items sought. The warrant has to be provided to the

occupier at the start of the search.

It is important that all relevant staff knows what procedures to follow in the event that a search warrant is obtained

and executed. Appropriate training should be given and kept up to date.

A warrant entitles a police officer to:

Enter the premises.

Search the premises and take possession of any documents or information that appear to be of the kind

in respect of which the warrant was issued.

Take steps to preserve or prevent interference with the relevant documents or information.

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Take copies of relevant documents or information.

Require any person on the premises to provide an explanation of any document or information that

appears to be relevant or to state where it might be found.

Use such force as is reasonably necessary.

An investigator may accompany the police officer and if he is so accompanied, the investigator may exercise the

powers referred to above, provided that he is under the supervision of the constable.

NB that neither regulator is able to obtain by search warrant information that it is not able to obtain under its other

information gathering powers. So privileged material may not be taken and the limitations in relation to material

covered by banking confidentiality apply.

Material taken under a search warrant must be returned within three months unless criminal proceedings are

instituted.

Intentionally obstructing the execution of a search warrant is an offence - carrying three months’ imprisonment, or

a fine of up to £5,000 or both.

Other bodies having the power to apply

for search warrants

Include HMRC and the Competition authorities. The principles are similar.

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5 Practical issues in dealing with search warrants

Generally Ensure that there is clear, concise internal guidance on the procedures to be followed.

Guidance needs to be available to all those who may have to deal with search warrants, including, importantly,

reception or security staff as they are often the first to encounter the officers.

There should be a readily available contact list of people, both internally and externally, who need to be

telephoned immediately in the event of a search warrant being executed.

The “Golden Rules” Make it clear that the firm’s stance is to be co-operative.

Do not be hostile or obstruct the investigation. Be polite.

Do not be overly compliant. The investigators’ powers are carefully defined/limited.

Do not do anything which could compromise your or the firm’s position (e.g. do not destroy documents or

alert third parties about the raid). Make sure all your team/staff know this.

All communications with the Investigators must be honest and truthful. Deliberately misleading the

Investigators may be an offence and/or have serious regulatory consequences. Misleading can include

half-truths and incomplete statements which deliberately leave the Investigators with an inaccurate

impression.

Accompany each Investigator at all times.

Keep a copy of all documents copied or removed by Investigators.

Obtain a signed receipt for all items copied or removed by the Investigators. Ensure that items in the

receipt are clearly identified.

Keep a full note of everything that happens (where the Investigators go, all questions and answers, which

documents they look at, points of dispute, timing).

Seek immediate legal advice if at any stage you are uncertain as to your rights and responsibilities.

On the arrival of the Investigators Verify the authority of those present - check the warrant for any obvious errors or omissions.

Copy the warrant.

Ask the officers to wait whilst a responsible person is contacted. If at all possible, show the officers into a

separate room away from staff/clients.

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Internal and external lawyers should be contacted immediately.

The officers should be asked to wait for the arrival of legal advisers (internal or external). They may do so; but if

they decline to wait, there is practically speaking nothing which can be done. The fact of the request and the fact

of the refusal should be noted.

The officers should not be left unaccompanied on the firm’s premises. A member of staff should accompany them

throughout.

Ensure that the firm appoints one single point of contact for dealing with the officers and co-ordinating the team.

This will make communications easier and clearer and will mean that there is less danger of wires becoming

crossed.

Important administrative arrangements Ensure that any document destruction policy is suspended - this relates to documents, emails and tape

recordings of telephone calls. Get together:

A team of potential shadowers (members of the internal/external legal teams).

Administrative staff - who can photocopy material.

A senior executive with a good knowledge of the firm.

An IT specialist - who knows how the systems work.

Consider emailing all the firm’s employees. This will not be appropriate in all cases.

Consider suspending internal/external email (generally or for individuals or groups). This will not be appropriate

in every case.

Set a room aside for the investigators. They should not be left unaccompanied. Ask the investigators to wear

badges so that they are readily identifiable.

Set up a dedicated internal and external email distribution list.

Circulate contact details of the internal and external team.

Get in touch with PR consultants/in-house PR advisers. Ask them to develop a holding statement if required.

Let senior management know.

At the start of the investigation Meet the team of shadowers and ensure that they understand their role.

Ensure that the IT specialist understands what he/she is to do.

Ensure that the shadowers and IT specialist know to seek advice whenever they are unsure and that they know

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to whom to turn for advice.

Try to work out where privileged material is likely to be held and/or a list of in-house counsel whose

communications may be privileged.

Agree the ground-rules with the investigators:

Manner of shadowing.

Dealing with disputes on privilege, relevance and confidentiality.

Photocopying procedures.

IT procedures (discuss their plans to review electronic data).

Confidentiality.

Shadowing the investigators Do not obstruct the investigators. Aim for mutual respect. Recognise that each person is just doing their

respective jobs.

The investigators should be accompanied at all times (within reason) until they leave the premises. That said,

care needs to be taken not to irritate them.

An index should be prepared of everything done by the investigators noting:

Documents requested, not produced, examined, confidentiality asserted, copied and/or retained and

where privilege or relevance is disputed.

Keywords used in searching.

Documents seized under seize and sift powers.

Questions asked and answers given.

Any procedural defects in the investigation.

Any informal comments made by the Investigators.

Any other matter raised during the investigation.

No subjective comments should be recorded on this list in case it becomes disclosable.

At least two copies should be made of everything copied by the investigators. If the investigators ascribe

reference numbers to documents, a note should be made of these. It is important that copies are made of any

original material taken.

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Power to require the production of

documents

These should be specified in the search warrant - sometimes in quite general or comprehensive terms.

The investigators can take originals. Wherever possible, the firm should keep copies. Objections to the

production of documents:

If it is clear that the material falls outside the scope of the search warrant.

If the material is privileged.

Banking confidentiality. Documents subject to banking confidentiality may still be subject to production -

advice should be taken.

Note that the ownership of documents is generally not a basis for objection to their production - i.e. provided that

the documents fall within the scope of the warrant, it is irrelevant whether they belong to the firm/some other

person.

Practicalities of raising an objection on the basis of relevance:

In reality, either it will be clear from the face of the search warrant that particular documents are not

covered by it or it will be very difficult to raise an objection on the basis of relevance.

If a point is raised and it is not possible to resolve it, the firm may be able to secure the agreement of the

officers to put the disputed documents into a sealed envelope/box for the issue to be further debated later.

Practicalities of raising an objection on the basis of privilege:

Identify whether it is likely that particular files will contain privileged material - eg the subject matter of the

files, or their owner, may indicate that it is likely that privileged material is included.

If it is likely that there is privileged material, tell the investigators this and give brief details why - “File

consists of correspondence with external counsel in relation to project X” etc.

Suggest that the firm be allowed to examine the files and produce only non-privileged material - either

while the investigators wait or subsequently. The investigators may be more likely to agree to this if a

named individual in in-house legal or external counsel undertake to be responsible for the task.

If the officers will not wait, ask that the files which may contain privileged material be placed in sealed

envelopes/boxes so that their treatment can be considered further later.

If all else fails, which it may, simply record the fact of the request/discussion and the outcome.

Make a note of any objections raised.

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Computers Provided that it is clear that the search warrant covers it, the investigators may take computers/hard

drives/laptops/hand held devices.

If these are likely to contain privileged material, make this point and try to agree a method for identifying

and protecting privileged communications.

This may in practice mean simply securing the investigators’ agreement not to interrogate or examine any

computer until a method has been agreed for the identification of privileged material. It will not usually

prevent the investigators from taking equipment with them.

It may be that the investigators can be persuaded to agree that the firm will conduct searches for

particular documents and/or this may be all that the search warrant extends to. If so, the firm’s contact

person for the execution of the warrant should agree a sensible plan for doing so.

Do not give the investigators log-on information. If relevant, explain that the firm’s policy is not to provide this, but

that the firm is still anxious to co-operate. If need be, an employee will need to log on to the computer and then

assist the investigators in any search.

If data is encrypted, the duty to co-operate would extend to providing the “key” to encrypted material.

Power to ask questions The investigators have the power to require anyone on the premises to provide an explanation in relation to any

document or piece of information which they come across.

Consider who will answer questions if raised and try to encourage the investigators to deal with this solely

through the central point of contact.

Take notes of any exchange.

The line between questions and an interview is not always easy to draw. Generally, however, the interview power

is only exercised after a search warrant has been executed - often some time later.

Material which is out of the office but

which would be covered by the warrant

if it was in the office

Strictly: The warrant is specific to premises. The firm’s duty is to co-operate with the execution of the warrant, but

this does not extend to bringing property within its scope which is not already there at the time of the execution of

the warrant.

As a matter of practice: The firm will want to consider whether documents which are not currently on its premises

(e.g. because they are at an employee’s home) should be provided. It may be that it is the right thing to do so.

NB that where the warrant has been issued on the application of either regulator, the firm will also need to bear

Principle 11 in mind.

Care must be taken in any representation made to the investigators about the completeness of any documents or

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information, provided where it is known that there is relevant material which is not on site.

Copies A receipt should be given for all information and documentation and equipment removed from the premises.

Check it is accurate.

The firm should be allowed to keep copies of anything removed. Ask for this and record any exchange.

Arrangements may need to be made to photocopy/download material quickly.

If necessary, prioritise what should be copied.

Tell the investigators if there are particular reasons for needing to keep copies - over and above the relevance of

the material to the firm’s own investigation (e.g. needed for ongoing business).

Make arrangements to receive copies of anything taken away which was not copied before.

Power of arrest The police have their usual powers of arrest and will use them as they see fit.

Power of search The investigators can use force to enter premises, though this should not be necessary as access should be

afforded them.

They can also exercise powers of search, although the firm is obliged to co-operate - e.g. open filing cabinets,

direct the officers to where material will be found. The aim should be to eliminate the need to search for material.

Generally the investigators will want to see material in situ.

At the end of the day The investigators may want to hold a de-brief meeting.

Try to resolve any “brown envelope” issues.

Reserve the right to raise further issues about privilege or confidentiality later.

Obtain a copy of the list of material the investigators have taken and cross check it to the firm’s list.

Hold a de-brief meeting with the internal/external team.

Review the (copies of the) documents taken.

Consider whether the firm needs to commence its own internal investigation.

Update the PR team.

Consider whether there are any corporate disclosure issues.

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6 Skilled person reports

Skilled person reports

Section 166

The FCA or PRA can require a person to provide it with a report on any matter in relation to which it could have

required information or documents under section 165 - ie anything reasonably required in connection with the

exercise of either regulators’ statutory functions.

The skilled person can be appointed by the firm or the FCA/PRA directly. In either case, the firm bears the cost.

There are various provisions required to be included in the contract between the skilled person and the firm.

NB any person who has provided similar services to the firm is obliged to provide reasonable assistance to the

skilled person - usually this is relevant to auditors.

The firm is required to provide all reasonable assistance to the skilled person - this includes:

Giving access to the firm’s systems and records; and

Providing explanations.

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7 Practical issues in dealing with skilled person reports

Agreeing the scope of the report It may well be possible to narrow the scope of the report in discussion with the appropriate regulator. Clearly this

needs to be determined at the outset, and care should be taken to consider the matter within the firm and then

discuss with the appropriate regulator what would best meet their concerns and needs. For example:

Could the work be done in stages?

Can the terms be narrowed so that the work is likely to be more focused?

Is any aspect of the work already covered by the firm’s own work and could the regulator be persuaded to

use this?

Does the regulator sufficiently understand the underlying issues to be able to determine appropriately

what is required? Would further discussions with them help in clarifying the particular part of the business

so that they could revise the proposed scope of the skilled person report?

The regulator should be made aware of any difficulties which the firm is likely to face in providing the

necessary resources for the project. This may lead to revising the scope of the report and even if it does

not, it is likely to minimise difficulties later, or suggestions that the firm is not co-operating, if the problem

has been flagged early on.

Creating new material New documents which are created for the purpose of assisting the skilled person are unlikely to be privileged.

Care needs to be taken if there is any risk of associated civil litigation (although for the documents to be subject

to production, they would of course still have to be relevant to the issues in the civil claim).

Commenting on the report The firm should have an opportunity to comment on drafts of the report, although for obvious reasons it has no

editorial control.

A parallel report? In some circumstances the firm may wish to consider obtaining its “own” report so that if there are issues -

particularly issues of judgement or opinion - with which it wishes to take issue when the skilled person reports, it

has some basis for doing so.

Even if such a report did not cover the full field to be addressed by the skilled person, there may be one or more

defined issues where it would be appropriate.

Such an exercise would be privileged if it consisted of legal advice to the firm. However, this will not always be

the case. Moreover, if the intended use is to counter conclusions which the skilled person has reached, privilege

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might need to be waived in due course in any event.

The report Will not be a privileged document and so is subject to production in any civil litigation to which it is relevant.

There is very little which can be done about this.

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8 The Appointment of Investigators

Investigations into general and specific concerns - sections 167 and 168 FSMA.

Investigators may be appointed if it appears to the FCA or PRA that there is good reason to do so in relation to any aspect of an authorised firm’s business

or its ownership and control.

Investigators may also be appointed if it appears to either regulator that there are circumstances to suggest that a regulatory offence or breach, or money

laundering or market abuse has been committed, or there is a lack of fitness and propriety on the part of one or more individuals.

Document production Any person may be required to produce specified documents.

The documents have to be relevant to the purposes of the investigation.

Since there is a relevance test, a request which simply refers to documents by date or author (rather than subject

matter) may well be objectionable in that by definition it would include irrelevant material.

Interviews For an investigation under section 167, interviews may be conducted with the person under investigation or any

connected person - thus this power extends to those who are or have been partners, managers, employees,

appointed representatives, agents, auditors, solicitors, bankers and actuaries of the firm.

Requirements for third parties to provide

information

Unconnected third parties may be required to produce documents.

There is no power to interview third parties in an investigation under section 167.

In an investigation under section 168(1) and (4) - certain criminal and regulatory offences - the power to interview

extends to unconnected third parties as well.

Where the investigator requires a third party to produce information, the information must be relevant to the

investigation and it must be “necessary or expedient” for the regulator to obtain it from the third party rather than

from the subject of the investigation.

In an investigation under section 168(2) - insider dealing, market abuse, breach of the general prohibition and

breach of the rules on financial promotion - the investigator may require any person whom he considers may be

able to give relevant information which is or may be relevant to the investigation to provide it: by producing

documents, attending for interview or otherwise giving all assistance which he is reasonably able to give.

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9 Investigations at the request of an overseas regulator

The FCA and PRA’s view is that Principle 11 of the Principles for Businesses requires a firm to comply with requests from overseas regulators for the

provision of information.

Investigations to assist overseas

authorities

Section 169

The FCA and the PRA can appoint an investigator to investigate any matter, or require a firm to provide

information or documents at the request of an overseas regulator.

An overseas regulator is an authority in a country outside the UK which is a home state regulator or which

exercises any function corresponding to any function of either the FCA or the PRA under FSMA.

Both regulators have discretion whether to use their information gathering powers or to appoint investigators at

the request of an overseas regulator. It has been suggested that the FSA paid insufficient attention to the nature

of such requests, which it effectively passed on from overseas regulators, and that the scope of these requests

should have been carefully considered and were in principle susceptible to challenge - at least where the request

was made of a third party.

The powers are the same as those under section 168(1) - document production from the firm and unconnected

third parties; and interviews of the subject of the investigation and unconnected third parties where it is necessary

or expedient to do so. Representatives of the overseas regulator can - at the appropriate regulator’s discretion -

attend and participate in the interviews.

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10 FCA/PRA investigations - challenging the decision to investigate

Identify why the firm objects to the

investigation

No regulatory investigation is welcome. But if the firm is considering objecting to the institution of the

investigation, it is important to identify exactly what that objection is based on.

Often the only forceful objection is that there is associated civil litigation which the regulatory investigation might

prejudice, though even this is not easy to substantiate as a valid objection.

There is very little point in objecting to an investigation unless there are good prospects of the objection being

upheld - to do so will only aggravate the regulator unnecessarily which is ultimately unhelpful to everyone.

Consider informal methods first Is there scope for suggesting that the firm should investigate first? The results of the firm’s investigation will have

to be provided to the appropriate regulator, but this still gives the firm more control over the procedure and timing.

The appropriate regulator is more likely to be amenable to this if the firm involves external advisers to

conduct the investigation.

Is the appropriate regulator amenable to a discussion about the scope of their investigation? Can it be narrowed?

Can it be given more focus?

There are downsides to challenging the

decision to investigate - even if such a

challenge is successful

Consider the impact on the long-term relationship between the firm and the FCA/PRA.

Will the firm look as if it is addressing matters of concern promptly and with the seriousness they deserve? What

impression will this leave the FCA/PRA with as to the firm’s approach?

There are adverse public relations considerations to challenging the ability or decision of a regulator to

investigate a firm.

The FCA/PRA’s own procedures There is no appeal procedure in relation to the decision to investigate.

Simply refusing to comply with the FCA/PRA’s requirements is a high-risk strategy and one which does not

ultimately resolve the question of who is right and who wrong. It is not recommended.

Both regulators operate a complaints procedure. But where the issue is whether the appropriate regulator was

right to investigate at all, rather than some question about the methods of investigation, invoking the complaints

procedure is unlikely to resolve the issue. It also leaves the firm potentially in breach of its obligations - to comply

with the investigation - whilst the question is resolved.

Judicial review of the decision to

investigate

This is not easy.

Essence of the application is that the decision to investigate was:

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Irrational or so unreasonable that no reasonable regulator could have reached it; or

Procedurally improper.

Given the low threshold that has to be met for starting an investigation, these grounds are hard to make out. The

Courts are likely to be disinclined to second-guess the decisions of the FCA or PRA, particularly in the current

climate.

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11 Investigations - practical points

Notification of the commencement of

the investigation

The investigation is formally commenced by the appointment of investigators.

The appropriate regulator is required to notify the person who is the subject of the investigation.

BUT: the subject of an investigation into insider dealing, market abuse, breach of the general prohibition or

breach of the rules on financial promotion (section 168(2)) does not have to be notified at the outset - it may not

even be clear at the start who is responsible for the relevant conduct. Normally, the subject will be told once it is

clear who they are, but this will not be done if it would prejudice the appropriate regulator’s powers to run the

investigation effectively.

AND the subject of an investigation under section 168(1) or (4) does not have to be notified if to do so would be

likely to result in the investigation being frustrated.

The notification does not have to include details of the scope of the investigation, but the reason for it is given.

Usually neither the PRA nor the FCA will publicise the fact that it has started an investigation.

Who should be told about the

investigation?

Within the firm, notification of the fact of the investigation should be on a “need to know” basis.

The same points apply as arise in the course of an internal investigation - for which see above notes.

Are there restrictions on who can be

told about the investigation?

The appropriate regulator may ask that the firm not notify particular individuals if it believes that to do so would be

likely to result in the investigation being frustrated.

In any case of doubt, the views of the appropriate regulator should be sought.

Separate representation for individuals

Individuals who are named in the notice

of investigation may request separate

representation

If the employee has been dismissed already, then he should usually be left to organise his own representation.

At this point, trying to encourage co-operation between the individual and the firm and its lawyers may be hard.

If the individual remains employed and the firm believes that he was not in breach of his duties, it may in fact be

unhelpful, both to the individual and to the firm, to arrange for separate representation. It is a pretty clear signal

to the appropriate regulator - however it is presented - that the individual’s and the firm’s interests are not aligned

- or that the firm thinks they may not be. This may encourage a view on the part of the regulator that the firm

thinks the individual is guilty of some misconduct.

It will inevitably result in some loss of control over the investigation so far as the firm is concerned and will

mean that the firm is less well informed about that individual’s contribution to the investigation than would

otherwise be the case.

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Attempts should be made to agree with those representing the individual what will be done about sharing

information, drafts of statements and representations etc. If the individual remains employed, he remains

under a duty of co-operation with the firm which should include reasonable co-operation in these

respects.

In any event, both presentationally and substantively, consider whether if one employee is offered

separate representation the same should be done for all.

Any decision depends on the facts of the case and should be prompted by what is in the best interests of the firm.

But as a general rule, if it becomes clear that there is a divergence of interests between the firm and the

individual, but the individual remains employed, many firms would wish to offer that individual separate

representation.

In any decision to arrange separate representation for an individual, the basis on which the individual will work

with the firm and its advisers should be agreed. A common interest privilege agreement should be drawn up.

Thought needs to be given to whether and to what extent the firm’s and the individual’s interests are or remain

aligned as the matter progresses.

Can the firm pay for separate

representation for individuals?

Check whether the D&O insurance policy offers coverage for costs in investigations - often it will.

The same principles apply as arise in the case of an internal investigation - for which see above notes.

General stance in the investigation The firm should co-operate fully and be clear in its communications with the regulator that that is what it is doing.

NB that the commencement of an investigation does not alter the firm’s obligations under Principle 11 or the

individuals’ duties under Principle 4.

The firm should instruct its employees, where relevant, to co-operate with the investigation.

It is perfectly acceptable for the firm to communicate through its external lawyers.

27

12 Regulatory investigations - document production

Document production There will usually be a scoping discussion at the start of an investigation which will permit issues to be raised

about practical difficulties in collating documents. This is intended to be the start of an ongoing dialogue.

Often document requests are sent in draft first and the firm is encouraged to comment on what is achievable and

in what timeframe.

Attempt to refine the request. From what is known of the scope of the investigation, is it right that the documents

requested are relevant?

Simply identifying documents by reference to a particular author, or date, for example, will by definition

produce both relevant and irrelevant material.

Can the appropriate regulator be persuaded to take information in stages?

Agree a sensible timetable for production - not everything may need to be done at once. It is important to

manage expectations about what will be available when.

Tell the appropriate regulator as soon as it becomes apparent that there are problems in complying with

the request in whole or in part. Are documents hard to identify/locate? Managing expectations is key.

List all documents to be provided and keep a copy set of what has been provided. It is critical that the

firm is able to identify what has been provided.

Be clear about any deficiencies to avoid any suggestion that the firm has been less than candid in its

response.

Review the documents for privilege, relevance and confidentiality prior to production.

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13 Regulatory investigations – interviews

The power to interview The FCA and PRA has power to compel any person whom they consider is able to give information which is or

may be relevant to an investigation to attend and give evidence.

Consequences of failure to attend Punishable as a contempt of Court - on an application to Court by the appropriate regulator.

NB also Principle 11 of the Principles for Businesses and Principle 4 of the Principles for Approved Persons -

duties to co-operate.

A firm employing an individual who failed to attend without reasonable excuse would wish to consider disciplinary

proceedings against that employee.

Has the regulator asked the right people

to attend for interview?

If the appropriate regulator wishes to interview an individual, there is generally not much that can be done to

dissuade them from seeing that person.

However, the firm should consider whether the appropriate regulator has not asked to see someone whose

evidence might be helpful to the firm and/or that regulator in terms of putting the issues into context. Volunteering

someone for an interview with a regulator should only be done with their consent and the usual view is that no

one should be pressurised into agreeing to this. It is usually only appropriate with senior staff. It may also be that

the relevant information can, at least in the first place, be communicated to the appropriate regulator in writing.

Preparation for the interview It is essential that all interviewees are properly prepared for interview. Not only will the quality of their evidence

be better substantively, they will also be more self-confident.

The relevant regulator should be asked for a list of questions the interviewee is likely to be asked. In

practice, the most which can usually be hoped for is a list of broad topics. Even then the interviewee

should be told that there is no guarantee that the regulator will stick to this list.

Relevant documents should be identified - often the relevant regulator will provide a bundle of the material

which they wish to question the interviewee about.

The interviewee should be taken through the file of documents to which the regulator has referred, and

any additional documents which have been produced to the regulator and which seem relevant to the firm

and its advisers given the likely scope of the interview.

The interviewee should be asked open questions about the documents with the intention of allowing him

to refresh his memory. Clearly the interviewee should not be led.

29

It is not only wrong, but unhelpful, to try to suggest that the interviewee should try to explore any form of

“case theory” in his interview.

Similarly, care must be taken in the preparation sessions not to give the interviewee information which he

did not already have.

It is usually very unhelpful - and may be inappropriate - for the interviewee to be told that his evidence is

out of kilter with that of others.

The interviewee should be given time to reflect on the documents and the preparation session and if

appropriate another session arranged prior to the formal interview.

The interviewee should be given a list of tips to reflect on prior to the interview. The interviewee should

take this away and reflect on it again immediately prior to the interview.

Who should accompany the

interviewee?

Generally, both the FCA and the PRA will allow the interviewee to have a legal adviser present at the interview.

If the interviewee has separate representation, it is often possible to agree that the firm’s legal adviser

should also be present.

It is well worth requesting that an observer be present to represent the firm. This should be someone who

is not associated with the underlying issues - and need not be a lawyer. It could be a senior individual

within the firm. The aim is to gain an overview of what the relevant regulator has been told and to provide

continuity.

The regulator should be reassured that this person’s attendance is on the basis that they will not contribute to the

interview/interrupt the proceedings.

Procedure at interview The interviewee should be told prior to the interview that the relevant regulator gives the same formal warnings to

all interviewees about the consequences of giving inaccurate information and so on. Not to do so risks the

interviewee being more nervous than he needs to be as a result of the fairly stark warnings which are

administered. He also needs to be told that the interview will be taped and that he will be asked to sign the seals

on one set of tapes. Again, this level of formality can unsettle interviewees if they are not forewarned.

The privilege against self-incrimination does not apply - so the interviewee may not decline to answer a question

on the basis that to do so would tend to incriminate him.

It will usually antagonise the regulator concerned, and not help the interviewee, for external lawyers present (or

representatives of the firm) to interrupt the questioning. However, sometimes it is clear that the interviewee is

confused by the question/the question could be broken up into parts/the interviewee cannot sensibly answer

30

without sight of the document being referred to and so on. These essentially practical points can be raised, but it

is better if the interviewee is sufficiently prepared that he is in a position to do so himself.

Objecting to questions on the grounds that - for example - they call for speculation or an opinion is a very difficult

exercise and generally counter-productive. Moreover, those conducting the interviews are often not lawyers and

not in a position to argue such points on the basis of the legality. Again, the best method of dealing with

questions which call for speculation or asking the interviewee what he imagines someone else thought of a

particular point is to ensure that the interviewee is alive to such issues and can take the objection for himself.

Procedure following the interview The transcript is provided to the interviewee/firm. Sometimes it is suggested that the firm should not take

possession of the transcript in order to avoid disclosure in civil litigation. This is often unrealistic. Even if it avoids

disclosure - which may not be a certainty - it is at the expense of doing the best job possible in considering and

correcting the transcript (this work would need to be done at the regulator’s offices - it still has to be done).

Transcripts The final versions of the transcripts need to be kept.

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