FCA: The dos and don’ts of internal investigations

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Allowing firms to investigate potential misconduct does not mean businesses are “marking their own homework”, says the FCA.

Speaking at a Pinsent Masons conference in London yesterday, FCA director of investigations Jamie Symington discussed the circumstances in which it is acceptable for firms to carry out their own investigations.

He said it has long been common for firms to carry out investigations when things go wrong – either by themselves or commissioned to a third party – on their own initiative or through agreement with the FCA.

But he said such investigations can become “problematic” where there is also the possibility of action by the regulator. In such cases, he said it is imperative that any internal review does not prejudice the FCA’s investigation.

Symington said: “We recognise firms understand their own businesses and have access to systems and data, so should be best placed to examine what has happened when problems arise. But in some cases, such as criminal investigations, internal reviews have no place at all.”

He added: “Internal investigations need to be better understood if there is to be confidence in our enforcement responsibilities. For example, in media commentary on one of our recent cases this practice was characterised as firms being allowed to mark their own homework.

“If internal investigations are to play a useful role, clearly the regulator cannot, and cannot be seen to, naively accept firms’ conclusions. And let me be absolutely clear, that is not how we work.”

Symington said a firm planning to carry out an internal review must first decide whether it is appropriate to notify the regulator.

Other crucial factors in determining whether an investigation is appropriate are for the investigation to be sufficiently independent, and for the firm to be transparent with the FCA.

He said typical points the FCA would seek to establish with a firm planning to carry out an internal review include: to what extent will the regulator have access to the underlying evidence, how will evidence be recorded and retained, and timescales.

Symington said the FCA often clashes with firms over legal privilege, claiming some firms deliberately try to “game” the system to withhold information.

He said: “One of the most common areas of dispute is firms’ interviews with employees.

“Sometimes there is only lawyers’ notes of such interviews: no recordings or notes by others. Then firms may claim legal privilege because the notes have been made by lawyers.

“This looks to us like a gaming process in order to shroud important evidence in legal privilege. We find that particularly unhelpful and particularly unwelcome.”

He said some firms have also suggested that to avoid legal privilege they can only read the output of an investigation aloud to the FCA, and not provide it in writing.

Symington said: “That is absolutely absurd. If a regulated firm wishes to share information with us, there should be no question it should be done properly and in a transparent manner with a proper record.

“The public would find it absurd that a firm would read something aloud but not provide a copy, or show us something and then yank it back.”