FCA investigations, supervision and authorisations

The FCA can use its investigation powers to compel a person to answer questions in an interview. These powers are generally used where the FCA is investigating misconduct that does not amount to criminal conduct or market abuse or when they are interviewing witnesses. When a person is compelled, they must answer questions and do not have an automatic right to silence (see ‘interview under caution’ section below). If a person fails to answer questions without a reasonable excuse they can be dealt with as though they were in contempt of court for which a prison sentence or fine can be imposed.

Where the FCA interviews a person, they are allowed to have a lawyer present. The possible consequences for an adverse finding for market misconduct are serious, including a potentially hefty fine and a prohibition from working in the financial services industry. Therefore it is important to get specialist legal advice before attending an FCA interview. Likewise, there are legal risks in attending a compelled interview as a witness upon which you will require legal advice to protect your interests.

Your lawyer will be able to explain the process, your rights and options and what is likely to happen in the interview, discuss matters with the FCA and ensure you obtain disclosure of information and documents prior to the interview and help you to prepare for the interview. They will be able to attend the interview with you and advise you throughout and beyond the interview itself.

For criminal offences, including criminal market abuse, those who are considered to be suspects by the FCA are interviewed under caution. These interviews are either arranged on a voluntary basis via correspondence or can be carried out following an arrest.

The caution is the same one that the police use when they are investigating criminal offences: ‘You do not have to say anything. But it may harm your defence if you do not mention when questioned something which you later rely on in court.  Anything you do say may be given in evidence.’ This is often known as the ‘right to silence’ and preserves a suspect’s right not to incriminate themselves.

If you are being interviewed under caution, you have the right to have a lawyer present. It is crucial to take advice about whether or not to answer questions as there may be serious repercussions at a later stage whether you answer questions or not. Criminal insider dealing offences carry a maximum sentence of 10 years’ imprisonment and an unlimited fine. You may also be made subject to compelled requests for documents, devices and passwords prior to or after such an interview upon which you will need advice to ensure you comply with the law and protect your interests as far as possible.

Your lawyer will be able to help you prepare for the interview, advise you on the approach which will put you in the best position going forward and provide assistance and support throughout the process.

Below is a table of the key criminal and civil market conduct offences it can investigate and the current maximum penalties:

The FCA is also empowered to investigate and prosecute a broader range of criminal offences, including:

The FCA’s Conduct Rules, found in the COCON section of the FCA’s Handbook, set out the overarching rules concerning the conduct of certain persons working in regulated financial services firms.

There are five Conduct Rules which apply to all such persons:

• Rule 1: You must act with integrity.
• Rule 2: You must act with due skill, care and diligence.
• Rule 3: You must be open and cooperative with the FCA, the PRA and other regulators.
• Rule 4: You must pay due regard to the interests of customers and treat them fairly.
• Rule 5: You must observe proper standards of market conduct.

There are a further four Senior Manager Conduct Rules which only apply to senior managers:

• SC1: You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively.
• SC2: You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system.
• SC3: You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively.
• SC4: You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

The FCA is committed to ensuring that senior managers of firms and other staff fulfil their legal and regulatory responsibilities. It considers disciplinary action against senior managers of firms and other individuals to be one of its key tools in deterring firms and individuals from committing breaches. Accordingly, where the FCA considers that a person subject to the Conduct Rules may have failed to comply with one or more of the rules, the FCA frequently uses its enforcement powers to open an investigation into that person.

Following an investigation by the FCA’s Enforcement team and a finding by the FCA’s Regulatory Decisions Committee (RDC) that a person has breached the Conduct Rules, the FCA may impose a number of disciplinary penalties on an individual, including:

• Issuing a private warning to the person.
• Publishing a statement of that person’s misconduct (a public censure).
• Imposing a financial penalty.
• Imposing a prohibition order (i.e. a ban) prohibiting a person from working in any regulated roles (a full prohibition order) or specific regulated roles (a partial prohibition order).

Even where the FCA does not conduct a formal Enforcement investigation into individual misconduct, a finding by an employer that an employee has breached any of the Conduct Rules can still have serious repercussions. In some cases, this may lead to disciplinary action being taken by the firm which can include a reduction in remuneration, the issuance of a written warning and even dismissal, which would in turn be reportable to the FCA and could lead to regulatory scrutiny.

Furthermore, the fact of a finding of a Conduct Rule breach will likely impact the employer’s ability to certify that person as fit and proper and will have to be disclosed on both any regulatory reference for the individual in question for the next six years as well as in the context of any future senior manager application. In practice, this can have a significant detrimental effect on a person’s ability to move into another role in the regulated financial services industry.

Insider dealing is a criminal offence under s.52 Criminal Justice Act 1993 and carries a maximum penalty of 10 years’ imprisonment and / or a fine.

It may be committed where a person who has inside information about certain securities (e.g. shares in a listed company) does one of the following whilst in possession of that information:

• deals in those securities on a regulated market (this includes shares, spreadbetting and contracts for difference (CFDs));
• encourages another person to deal in those securities; or
• discloses the information to another person, other than in the proper performance of one’s employment, office or profession.

Inside information is information which:

• relates to particular securities or a particular issuer of securities;
• is specific or precise;
• has not been made public; and
• if it were made public would be likely to have a significant effect on the price of any securities.

There are a number of statutory defences to the offence of insider dealing, including:

• that the person did not expect, at the time of dealing, that a profit (or avoidance of loss) would occur due to the fact that the information in question was price sensitive;
• that the person reasonably believed that the information had been disclosed widely enough such that no-one would be prejudiced;
• that he would have done what he did even if he had not had the information;
• in respect of unlawful disclosure of inside information, that he did not expect any other person, because of the disclosure, to deal in securities.

These defences are technical and complex in their nature and it is recommended that anyone considering such a defence obtains specialist legal advice.

Insider dealing and market manipulation can be dealt with either as a criminal offence or as a civil / regulatory offence. Where the FCA suspects regulatory and/or criminal misconduct, it does not have to decide immediately whether any later proceedings will be criminal or regulatory in nature. In most cases, the FCA will open a dual-track investigation and will only decide whether to pursue criminal or civil / regulatory action once it has investigated the matter thoroughly.

The key differences between the criminal and civil / regulatory regimes are (a) the standard of proof; and (b) the possible penalties. In criminal cases, the standard of proof is the criminal standard (beyond reasonable doubt) and the possible sanctions are up to 10 years’ imprisonment and/or a fine. In civil / regulatory cases, the standard of proof is the civil standard (on the balance of probabilities) and the possible sanctions include a fine and/or a prohibition from working in the financial services sector.

The FCA’s Enforcement Guide sets out the factors which the FCA may consider when deciding whether to begin criminal proceedings for market abuse rather than taking regulatory action. The FCA will consider (among other things):

• How serious is the misconduct? The more serious, the more likely a criminal prosecution;
• Are there victims who have suffered loss?
• What is the extent of the loss? The greater the loss the more likely a criminal prosecution.
• What effect did the misconduct have on the market? If there was significant disruption to the market, the more likely it will be criminal.
• The level of profit made or loss avoided.
• The likelihood of it happening again or if it has happened in the past.
• Whether any compensation has been paid to the victims (although the payment of compensation does not of itself mean that criminal prosecution will be avoided).
• Whether the person has been voluntarily cooperative with the FCA (although co-operation does not of itself mean that criminal prosecution will be avoided).
• Whether an individual’s misconduct involves dishonesty or an abuse of a position of authority or trust.
• The assistance the individual has given the FCA in proceedings against other individuals in a group.
• The personal circumstances of the individual (age, vulnerability etc).

Market manipulation can be prosecuted criminally or as a regulatory offence. Market manipulation can take the form of several types of behaviour including:

• making misleading statements;
• creating misleading impressions; and
• making misleading statements or impressions in relation to benchmarks.

This is where a person makes a statement (usually through some form of media), knowing that it is false or misleading, with the intention of inducing someone to enter into or to refrain from entering into a certain agreements or investments.

This might occur, for example, if the CEO of a listed company publicises false information on X regarding the company’s financial health, with the intention of inducing investors to purchase shares in the company.

Misleading statements can be prosecuted as a criminal offence under s.89 Financial Services Act 2012. The maximum penalty is 10 years’ imprisonment and/or a fine. It can also be dealt with as a civil offence under Article 15 of the Market Abuse Regulation for which the penalties include a fine and/or a ban from working in financial services.

This is where a person acts or engages in a course of conduct which creates a false or misleading impression as to the market in, or the price or value of, certain investments, and in doing so intends (a) to induct another person to buy, sell or exercise rights in the investments (or refrain from doing so) or (b) to make a gain or cause a loss to another person.

This might occur, for example, if a person purchases a large number of shares in a listed company at a highly inflated price, creating an impression that there is a lot of market interest in the company, and thereby intending to induce other investors to purchase shares.

Misleading impressions can be prosecuted under s.90 Financial Services Act 2012. The maximum penalty is 10 years’ imprisonment and/or a fine. It can also be dealt with as a regulatory matter under article 15 of the Market Abuse Regulation for which the penalties include a fine and/or a ban from working in financial services.

This offence was created following the LIBOR scandal which related to the improper rigging of an interest rate benchmark known as the London Interbank Offered Rate (LIBOR). It is now an offence if a person (a) makes a false or misleading statement intended to influence the setting of a benchmark or (b) acts or engages in conduct which creates a false or misleading impression in relation to the value of an investment knowing that the impression may affect the setting of a benchmark.

Misleading statements or impressions in relation to benchmarks can be prosecuted under s.91 Financial Services Act 2012. The maximum penalty is 10 years’ imprisonment and/or a fine. It can also be dealt with as a regulatory matter under article 15 of the Market Abuse Regulation for which the penalties include a fine and/or a ban from working in financial services

Section 19 of the Financial Services and Markets Act 2000 (FSMA) provides that no person or firm can carry on a “regulated activity” in the UK unless it is authorised to do so, or is exempt. Carrying out a regulated activity without authorisation is a criminal offence, punishable by up to two years’ imprisonment and/or a fine. Often this type of offence also results in money laundering offences being committed. A conviction for money laundering can result in a prison sentence of up to 14 years and/or a fine, plus any proceeds of the criminal activity can be confiscated.

For the purposes of FSMA, a regulated activity is, in broad terms, an activity specified in the FSMA (Regulated Activities) Order 2001 which is carried on as a business and in relation to a specified investment. This is a complex area of law and legal advice should be taken if you are in any doubt as to whether you are conducting, or propose to conduct, regulated activities.

The FCA’s Unauthorised Business Department investigates a large number of unauthorised investment businesses including unauthorised collective investment schemes, investment and insurance frauds, deposit taking, boiler room frauds, land banking scams and Ponzi schemes.

Boiler room frauds

Share scams are often run from what are known as “boiler rooms” where lots of individuals cold-call investors offering them often worthless, overpriced or non-existent shares. High returns are promised, but investors usually end up losing their money.

Land banking scams

Land banking companies divide land into smaller plots to sell to investors, on the basis that once it is available for development it will soar in value. However, the land is often in areas of natural beauty or historic interest, with little chance of planning permission being granted and investors never see a return for their investment.

Ponzi schemes

Ponzi schemes promise investors high returns or dividends that are not usually available through traditional investments. This helps to make the scheme seem genuine and profitable to the early investors, and encourages them to attract more people and money. In reality, payments are made to existing investors using money from new investors. Ponzi schemes collapse when the supply of new investors and money dries up. Investors usually find that most or all of their money is gone, and the fraudsters who set up the scheme have claimed much of the money for themselves.