As of January 2022, we are well underway with the high-profile investigation into the Woodford Equity Income Fund (WEIF), who are being Investigated by the Financial Contact Authority (FCA), following the suspension of the fund in June 2019. In a letter from Nikhil Rathi, FCA Chief Executive, to Mel Stride, House of Commons Treasury Committee Chair, in December 2021, outlining the latest on the case, Mr Rahti explained that the FCA has now gathered all of the evidence on the case, and they are now in the analysis phase. Expert witnesses have been engaged, and with the aid of expert legal counsel, they are evaluating the available evidence. This suggests the FCA is now in the final stages of its analysis and is soon expected to make decisions whether to take action and, if so, what action should be taken and against whom. In response to the FCA, Mr Stride made it clear the matter is of “keen interest” to the treasury committee and that the FCA must resource the investigation and regulatory action they recommend to reach a swift resolution. We will continue to update our readers as matters progress in the Woodford case.
In the meantime, we will take a look at what to expect if you are investigated by the FCA. We hope this will be particularly helpful to small and medium-sized businesses that may not necessarily have unlimited access to in-house counsel and expertise familiar with financial compliance and investigations compared to the larger financial institutions.
What are the investigatory powers of the FCA?
The FCA has a wide range of powers available to investigate and take disciplinary and enforcement action under the Financial Services and Markets Act 2000 (FSMA), as amended by the Financial Services Act 2012. The law allows the FCA to investigate and seek information from authorised firms and their staff (and in some cases, people not within the regulated sector) where there is an alleged breach of their rules. The FCA’s investigatory powers include:
- Requiring evidence in the form of information and documents from authorised firms (and others) which is “reasonably required”.
- Requiring information from issuers and other persons where there are concerns of market abuse – this includes information the FCA reasonably requires to protect the UK’s financial markets and exchanges.
- Requiring section 166 reports – this relates to section 166 of FSMA, which give the FCA power to require authorised firms to provide reports on matters of concern or appoint a “skilled person” to provide such a report.
- Appointing skilled persons to collect and update information – if the FCA considers that an authorised firm has breached its rules requiring them to collect and keep up to date specified information, they may require the firm to appoint a skilled person to collect or update the information or may itself appoint a skilled person to do so.
- Appointing investigators – to conduct general investigations into the nature, conduct or state of the businesses (or a particular aspect of the businesses) of certain persons.
The Process: What happens when being Investigated by the Financial Contact Authority?
There are several stages to an investigation. Depending on what happens at each stage, the matter may proceed to the next or come to an end (e.g. if there is insufficient evidence or it is clear that no breach of the FCA rules has occurred). The stages of an FCA investigation are as follows:
Referral for investigation to the FCA
A referral occurs when the FCA is informed of a potential breach of their rules (this often happens as a result of the FCA’s own supervisory process). Once a matter has been referred for investigation to the FCA, the FCA’s Enforcement and Market Oversight Division will open a new case.
Notice of Appointment of Investigators
Having opened a new case, the FCA will nominate investigators to review the matter. This will result in a Notice of Appointment of Investigators being sent to the individual or business concerned.
Once the notice has been sent, scoping discussions will be arranged between the investigator/s and the business or person concerned to discuss:
- why the FCA has appointed investigators
- the scope of the FCA’s investigation.
- the disciplinary process – i.e. the steps involved
- approximate timing of each step
- the people and evidence the investigators will need to see
It is important to note that at this stage, the FCA investigator/s may not explain everything you need to know (i.e. exactly why you are being investigated), either because they are yet to establish more details or as a deliberate tactic.
Interviews may take four different forms, with the FCA choosing which is most suitable given the circumstances and the nature of the breach, as follows:
- Voluntary and not under caution
- Voluntary and under caution
- Under caution and under arrest
- Compelled under statutory powers
Regardless of the type of interview, you will be given a chance to have a legal advisor with you. We recommend that you do not agree to enter any FCA investigation meeting without a specialist FCA investigation Solicitor to guide and assist you. This is to ensure you understand your rights, the implications of what you say, the effect of any caution read to you, and whether it is advisable to answer all or specific questions. It may be recommended not to answer questions where you may incriminate yourself by making admissions to a criminal offence, there is little or no admissible evidence against you, there has been a lack of disclosure by the FCA before the interview, or on the grounds of impaired mental or physical health.
Preliminary findings letter and preliminary investigation report
Once the interviews and information gathering process is completed, the FCA investigator will typically draft a preliminary findings letter and investigation report and send this to the individual or business being investigated. This will be done before a recommendation to take enforcement action is issued to the Regulatory Decisions Committee (RDC). The recipient then has 28 days to confirm the facts are complete and accurate and/or to provide additional comments. Based on the response, a final decision will be made by either the RDC, FCA staff under executive procedures or FCA staff under the settlement decision procedure. As a result, a warning notice or disciplinary sanctions may be issued.
Final words on being Investigated by the Financial Contact Authority
If you have been informed you will be Investigated by the Financial Contact Authority, or if you have reason to believe you will be, we recommend engaging a Solicitor who specialises in FCA investigations as early as possible. They will quickly review the details of the case, recommend a strategy for the earliest possible outcome to meet your needs, and represent you at each stage of the investigatory and enforcement process. By taking the correct action as early as possible, it is often possible to bring FCA investigations to a swift resolution with minimal negative impacts in terms of cost and reputation.