Sally Butt and Chris Brennan discuss how a robust record-keeping system, the right team in place, and constructive dialogue are key to a satisfactory response from an FCA enquiry
The transfer of consumer credit regulation to the FCA brings with it a wide range of changes for lessors. In recent years, the FCA has increased its scrutiny of those it regulates, both through industry-wide reviews or firm-specific action.
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Even the best run businesses will sometimes encounter regulatory difficulties. As the saying goes: "To err is human; to forgive, divine". Whether the FCA will choose to forgive a regulatory breach will in part depend on how a lessor responds to the issue. Dealing efficiently and effectively with it can significantly mitigate the severity of the FCA response.
Are your records in order?
The starting point is the creation and maintenance of a robust record-keeping process. When the FCA comes knocking, its first request will be for documentation. Many FCA reviews are desk-based, meaning that the FCA will rely solely on the documentation a lessor provides. If a lessor is unable to provide relevant documents promptly this creates two problems. First, it gives a poor first impression of the business which may inform how the FCA proceeds with its enquiry. Secondly, if an event or action is not documented, the FCA will assume that it did not happen. Lessors should understand their record-keeping obligations and ensure that these are being maintained and tested.
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By GlobalDataThe next step is to gather and collate documents for delivery to the FCA. This can be a difficult exercise, particularly where requests made by the FCA extend beyond core regulatory documentation. Bear in mind that the FCA often asks for emails and other internal correspondence such as minutes of meetings. When responding to requests, the key to success is putting in place the right team and tools to carry out this significant task accurately, but quickly and cost-effectively too.
The team should include representatives from the business, compliance, legal, HR and IT. Also consider whether outside assistance is required including experienced regulatory lawyers and forensic IT specialists. There are a number of technological solutions for gathering, collating and reviewing documents. While such tools can appear expensive, they may ultimately help to save costs and vastly improve the quality of the process.
Dialogue with the FCA
Immediately consider engaging in a constructive dialogue with the FCA in order to secure more reasonable parameters for both the scope and timing of an FCA request. The FCA may wish to interview employees of your business, including senior management. Interviews will be conducted on a voluntary or compelled basis. A compelled interview can be a very daunting prospect. The interviewee is required to answer questions or risk facing proceedings for contempt of court. Such interviews are very formal in nature and are recorded. Bear in mind that an interviewee is entitled to advance notice of any documents which the FCA wishes to refer to in interview and is entitled to legal representation. Preparation in advance of an interview is key.
Sanctions
The worst possible outcome, of course, is disciplinary action. One of the biggest sanctions can be a requirement for a lessor to conduct a Past Business Review. This involves reviewing all advice or sales conducted during a specified period and making sure that customers are compensated where they have suffered loss as a result of regulatory breaches by the firm. The FCA is also increasingly looking to take disciplinary action against individuals. Recent cases have resulted in senior management being fined or banned, sometimes both.
Clearly, the most obvious way to avoid regulatory action being taken against you or your business, is to ensure that the business is run in compliance with regulatory requirements. However, it’s obviously very difficult to achieve perfection and processes can sometimes fail. If that does happen, the quality of the response will be closely linked to the quality of the outcome. Although regulatory problems will be an infrequent issue for most businesses, it still pays to consider now how you would respond if this effects you. Regulatory enquires are like fires: they are very rare, but knowing how to deal with one when it starts is vital to the survival of your business.
Sally Butt and Chris Brennan are partners at Addleshaw Goddard LLP
