Recent cases have highlighted the potential advantages for regulated businesses (firms) in adopting a co-operative approach when dealing with regulators and, in particular, the Financial Services Authority (FSA).1 In this regard, firms frequently retain independent lawyers and/or professional services firms to investigate worrisome conduct and to produce a report in anticipation of regulatory action. According to the FSA, not only will such an approach ‘save time and resources for both parties’ but a willingness on the part of a firm to volunteer the results of its own investigation to the FSA is something the FSA may take into account when deciding what, if any, action to take.
To date, however, there has been relatively little formal guidance as to how such reports are to be prepared and the implications of preparing them. Helpfully, the FSA has now produced additional guidance covering several important issues arising in connection with the reports. The guidance has been published in the form of amendments to the FSA’s Enforcement Guide (the Guide).2 Banks and other financial institutions likely to be increasingly subject to regulatory enforcement in the prevailing economic climate should pay close attention.
Scope of the Guidance
The guidance covers a wide range of important issues including (i) privilege; (ii) the provision to the FSA of material underlying a report; (iii) and the potential for onward disclosure of reports or the underlying material by the FSA to third parties. While the FSA suggests that the new guidance ‘largely reflects our current approach to those issues in practice’, the Guide now provides subtle but important warnings for banks and financial institutions in an era of enhanced co-operation between domestic and international regulators.
FSA welcomes a proactive approach
Regulators such as the FSA, perhaps short of sufficient time and staff to pursue potentially complex and long-running investigations, often encourage firms to adopt a proactive approach to obtain reports, effectively shifting the investigatory and cost burden onto firms. The new guidance indicates that while the FSA may use such firm-commissioned reports and give firms credit for disclosing them, the extent to which the FSA will rely upon such reports, and give credit, may depend on whether the FSA is consulted at the outset on various issues relating to the scope and purpose of the report.
Consultation required before commissioning a Report
Banks and financial institutions should note that the FSA expects to discuss several issues at the outset of an investigation, well before a report is produced. Those issues include:
- the extent to which the FSA will be able to rely on a report in subsequent enforcement proceedings;
- the extent to which the FSA will have access to underlying evidence or information used to produce the report;
- the extent to which material in respect of which a firm might claim legal privilege or other professional confidentiality will be disclosed to the FSA;
- how relevant facts will be established and how evidence will be recorded and retained;
- the identification and management of conflicts of interest;
- the extent to which the report will describe the role and responsibilities of identified individuals;
- whether the investigation will be limited to ascertaining facts;
- whether it is intended that the report will include advice or opinions about breaches of FSA rules or requirements;
- how the firm will inform the FSA of the progress of the investigation and how firms will communicate the results; and
- the timing of the investigation and report.
Legal privilege and disclosure of underlying materials
The FSA acknowledges that legal advice obtained by a firm is privileged and that the FSA cannot require the production of such advice or other privileged material.3 The amendments to the Guide, however, and the accompanying Handbook Notice, suggest that the FSA intends to adopt a narrow interpretation of what constitutes privileged material.4
Moreover, while the FSA acknowledges that firms may not have a legal obligation to disclose privileged material, it will nevertheless encourage firms to consider whether to waive privilege over that material. The FSA states that:
‘If the FSA is to rely on a report as the basis for taking action, or not taking action, then it is important that the firm should be prepared to give the FSA underlying material on which the report is based… a reluctance to disclose these source materials [including for example notes of interviews] will… devalue the usefulness of the report and may require the FSA to undertake additional enquiries.’
The FSA also makes it very clear that it will be able to require production of reports and other professional advice (such as work done by non-legal professional services firms, eg accounting firms and forensic consultants) that are not obtained under the umbrella of legal professional privilege. If an investigation is at all likely to result in a report, firms should bear this in mind when considering the structure of their investigation team.
international aspect
Regulatory investigations are increasingly international in scope and effect, often with the spectre of multijurisdictional litigation following the investigation being a distinct possibility. Co-operation between international regulators is now a reality, borne of a desire to regulate efficiently and arising from statutory obligations. For example, the FSA has a statutory obligation to co-operate with other regulators, both nationally and internationally. This co-operation includes sharing information, where appropriate.5 Consequently, firms and their advisers must consider the potential international dimensions and implications (both regulatory and in a litigation context) at the outset of an investigation and before producing a written report or disclosing material.
Onward transmission of material by the FSA
Firms, particularly banks and financial institutions with operations and exposure worldwide, will inevitably have legitimate concerns about onward transmission of material provided to the FSA in the course of an investigation. The FSA acknowledges these concerns and the risk that unnecessary onward transmission of material may limit future disclosure by firms. The FSA seeks to provide (some) comfort in this regard:
- the FSA is subject to statutory control that restricts the FSA’s ability to disclose certain information disclosed to it; 6
- the FSA will ‘consider carefully’ whether it would be appropriate to disclose information volunteered by the firm even where the FSA is permitted to do so; and
- the FSA will normally notify a firm of any planned onward disclosure and offer the firm the option to make representations. Naturally, notification may not be forthcoming if it would prejudice an investigation or be inconsistent with the FSA’s international obligations.
Limited waiver of privilege
The FSA helpfully acknowledges that the doctrine of limited waiver of privilege is permitted under English law. Firms may not need to disclose privileged material in private litigation even though the material has already been disclosed to the FSA. However, the FSA notes that it cannot agree to receive documents on conditions that fetter its statutory functions. Consequently, the FSA will not agree to accept material on the basis that it will only use the material for supervision and not enforcement purposes.
The amendments to the Guide do not provide binding assurances on the treatment by overseas regulators of material the FSA discloses to them. Jurisdictions that do not recognise doctrines such as limited waiver of privilege or are subject to freedom of information regimes should be of particular concern to firms, especially where private civil litigation is ongoing or contemplated.7
Conclusion
In light of the growing trend for firm-commissioned reports, clarification of the FSA’s approach is welcome. In particular, banks and financial institutions will now be able to assess with more certainty how best to commission, structure and use such reports where the FSA is involved, so that the firm and its advisers become part of the solution, rather than the problem. However, banks and financial institutions must remember that although close co-operation with the FSA at an early stage and throughout the investigative process is likely to be beneficial, it is imperative that due consideration is given at the outset to the wider implications of that co-operation.
Antony Corsi, partner, Sarah Thomas, associate, and Ian Pegram, professional support lawyer in the global disputes practice, Fulbright & Jaworski International LLP. E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it ; This e-mail address is being protected from spambots. You need JavaScript enabled to view it ; This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
Notes
1) See ‘FSA gets serious over Bribery and Corruption Enforcement’ in IHL169 (p8).
2) The Enforcement Guide describes the FSA’s approach to exercising the main enforcement powers given to it under the Financial Services and Markets Act 2000 (FSMA). The amendments were added to s3 of the Guide, entitled ‘The Use of Information Gathering and Investigation Powers by the FSA’, and became effective from 6 May 2009. The amendments and the consultation process feedback were explained in the FSA’s Handbook Notice 87, published on 24 April 2009.
3) Section 413 FSMA 2000.
4) Handbook Notice 87 provides additional explanation to the amendments.
5) For example, pursuant to s354 FSMA 2000 the FSA, ‘must take such steps as it considers appropriate to co-operate with other persons (whether in the UK or elsewhere) who have functions… similar to [the FSA] or in relation to the prevention or detection of financial crime’.
6) Section 348 FSMA 2000, subject to various exceptions and gateways.
7) With respect to England and Wales, the FSA’s position is that firm commissioned reports are likely to be exempt from disclosure under the Freedom of Information Act.