The FCA and disclosure – the little statement with big potential impact for regulatory enforcement
14 Nov 2024
Financial crime and regulatory law barrister Tom Bushnell explains why a recently published statement on the FCA’s website could have a significant impact on regulatory enforcement in England and Wales.
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On 11th November this year the Financial Conduct Authority (FCA) published on its website a statement about its approach to disclosure in regulatory enforcement cases.
At just 324 words, “Enforcement regulatory disclosure review: outcome” was brief, and perhaps easy to miss. But the statement (which has the subheading “Following a review, we have improved our disclosure processes in regulatory enforcement cases”) has the potential to dramatically change FCA regulatory enforcement cases.
This article sets out the primary ways this statement might impact regulatory enforcement cases and poses questions of the regulator on what it will do next.
The background
The FCA statement starts by explaining how “In Seiler and others v FCA [2023] UKUT 00133, the Upper Tribunal recommended that we should review certain elements of the disclosure process in regulatory enforcement cases.”
This is perhaps an understatement. Actually, the Upper Tribunal has recommended that the FCA review its disclosure processes before. Para 920 of the Seiler judgment sets out the history:
920. As regards the Authority’s disclosure failings in this case, it is of considerable concern that it is a recurring theme in Tribunal decisions that the Authority is castigated for failings in its disclosure obligations: see Hussein v FCA [2018] UKUT 186 (TCC) Alistair Burns v FCA [2019] UKUT 0019 and Forsyth v FCA [2021] UKUT 162. In relation to Forsyth, recommendations were made regarding disclosure procedures, including a recommendation that the Authority should consider whether its staff are properly trained.
The Tribunal went on to find that there was a “a continuing problem with the competence of those to whom the Authority delegates the disclosure process and therefore the adequacy of their supervision” (para 922). And it was this incompetence and poor supervision that the Tribunal recommended the FCA review.
The FCA’s response
To the FCA’s credit, its disclosure review appears to have gone further than the Tribunal suggested.
According to the 11th November statement, the Authority has made “a number of changes” to its disclosure processes. These include improving training and clarifying the roles and responsibilities of staff and managers.
But the most significant development is a shift in the test it will apply on deciding whether material should be disclosed. As the statement sets out:
“Under our new broader approach, we will disclose all material that is relevant to the facts of the matter, save where it is disproportionate, not in the public interest, or otherwise inappropriate to do so […]. Disclosure reviews will be aimed at identifying all the relevant material and will not be focused on only looking for potentially undermining material. This will reduce the risk that we mistakenly fail to disclose a document. [Emphasis added]“
As a matter of law, the FCA is only required to disclose material on which it relies to make its case as well as material which, in its opinion, might undermine its decision to take action (s. 394 Financial Services and Markets Act 2000 and in the Tribunal see the similar wording of Rule 6 of Schedule 3 to the Upper Tribunal (Procedure) Rules 2008).
Put more simply: the law states the FCA must disclose material which helps its case and material which might harm it.
In its 11th November statement, the FCA seems to be saying it will go further than this. It appears to commit to disclosing all material that is “relevant” to the facts of the matter (unless disproportionate etc), not just that which assists its case, or undermines it.
If carried out, this represents a significant change which will, in my view, have major implications for enforcement litigation. These implications include:
1. Subjects of enforcement action will be able to better defend themselves
Obtaining a complete evidential picture of events is invariably a crucial element of building a successful defence in a regulatory enforcement case.
In document heavy matters – and those in which recollections have faded – the ability to marshal all the relevant evidence can prove crucial in allowing the target of enforcement action to fully understand what took place, and thereby provide a cogent response to allegations. Sometimes key documents or communications can only be properly understood by reference to context provided by another.
Until now, the FCA’s disclosure regime has often made doing this difficult. The statutory disclosure regime relies on the FCA identifying the material which undermines its own case. As the Tribunal saw in Seiler, this does not always work.
The regulator’s apparent shift to disclosing a wider pool of material should assist defence teams to build up a fuller picture of the evidential matrix. The subjects of enforcement action are therefore likely to welcome the FCA’s change.
2. The practical burden will shift to the subjects of enforcement action
There are likely to be practical ramifications too. If the FCA pursue this new approach, I expect the subjects of enforcement action to receive much larger volumes of material.
Subjects will need more time (and their lawyers: more skill) to handle the increased material. Those who cannot afford legal representation may find defending their rights trickier than they do already.
It seems likely the FCA may need to relax some of the tight timescales it currently gives to subjects of statutory notices to respond.
3. There may be unintended dangers for the FCA
The FCA’s apparent shift in focus should reduce the risk of the regulator failing to disclose a key document. It might, however, pose a different risk.
As the FCA explains, its disclosure work will no longer “be focused on only looking for potentially undermining material”. But as any competent prosecutor or regulator will tell you, looking for potentially undermining material should be an important part of building a strong cases against the right targets.
Only by making a genuine effort to identify undermining material can a prosecutor or regulator have the information it needs to either drop weak cases; or strengthen those which are properly brought.
The FCA will need to guard against forgetting to look for material which undermines its cases. If it does fall into this trap, it may find itself taking action against individuals and firms who don’t deserve it; and losing more cases as a result.
What of existing cases?
The FCA’s stated changes seem to me to be potentially highly significant. Far more important, perhaps, that the brief statement announcing them might suggest.
It isn’t clear how this change in disclosure policy will affect cases that are already ongoing. Will parties currently engaged in Upper Tribunal cases against the FCA receive a new, broader file of disclosure? It is hard to see a reason why they shouldn’t: the statement says the review applied to “any regulatory case” and admirably admits that the new approach will “reduce the risk that we mistakenly fail to disclose a document” – a desire presumably shared by anyone currently engaged in an FCA case.
What about the FCA’s criminal prosecutions?
The 11th November statement appears to only relate to regulatory cases, rather than criminal prosecutions.
In criminal prosecutions, the FCA must apply the Criminal Procedure and Investigations Act 1996 (CPIA) scheme. Whilst this uses different language, its effect is broadly similar to the statutory regulatory scheme. Prosecutors rely on “used” evidence to support their case; they disclose “unused material” which either undermines the prosecution case or assists that of the defence; and they must schedule a description of all other “relevant material” generated by the investigation (unless it is incapable of having any impact on the case).
The FCA is yet to experience a disclosure disaster of the type of the Serious Fraud Office has become infamous for. The biggest recent challenge to its approach to disclosure was that of two defendants convicted of insider dealing in Abdel-Malek and Choucair [2020] EWCA Crim 1730, but ultimately the Court of Appeal upheld the FCA’s approach.
However, the FCA will need to decide whether it relaxes, at all, its approach to disclosure in criminal cases to match its approach in regulatory cases. Assuming not, then the FCA will need to be careful that its newfound focus on relevance does not dilute its institutional experience in applying the CPIA.
Grasp the nettle
The FCA concludes its 11th November statement by saying it will monitor the effectiveness of its changes and conduct a further review in a year’s time.
In the meantime – and in my view – the Authority should be commended on its new approach (assuming, of course, that its deeds match its words).
At a time when disclosure in complex, document heavy cases is a controversial (and politicised) issue, the FCA appears to be trying to grasp the nettle. Other regulators and law enforcement agencies should take note.
Tom Bushnell is a barrister within the business crime team at Hickman & Rose. He specialises in financial crime and financial services regulation. He has extensive experience of FCA enforcement cases, both regulatory and criminal. He is currently acting for multiple individuals under investigation by the FCA for regulatory and criminal misconduct, and an individual who has referred his Decision Notice to the Upper Tribunal. Before joining Hickman & Rose, he prosecuted for and defended against significant FCA prosecutions, including assisting the FCA with its prosecution of Abdel-Malek & Choucair, and as junior counsel in its landmark prosecution of NatWest
