Handling regulatory interventions: Considerations for responders

Intervention powers: an overview

Set out below is a summary of some of the key supervisory intervention tools and powers which are available to the FCA and/or PRA where it suspects serious misconduct may have occurred and harm needs to be prevented immediately.

• Own-initiative powers: The FCA and PRA have the power to impose new requirements, vary requirements already imposed by either regulator or cancel requirements on authorised firms, on the regulator’s own initiative. This is known as the ‘own-initiative requirement power’ or ‘OIREQ’.  Similarly, the FCA can impose a variation or cancellation of permission on a firm, known as the ‘own-initiative variation power’ or ‘OIVOP’. The FCA must satisfy certain conditions before using such powers, including whether a firm is failing to satisfy the threshold conditions or it is desirable to exercise the power to advance the regulator’s operational objectives.
• ‘Voluntary’ requirements and variation of permission: The FCA and PRA may also ask firms to ‘voluntarily’ accept a variation of permission or the imposition of a requirement (known as a ‘VVOP’ or ‘VREQ’ respectively). If firms refuse, the FCA may then decide to impose the variation or requirement under its own-initiative powers (as outlined above).
  
  Firms should be aware that these types of interventions by the regulator may attract publicity. For instance, an OIREQ will be made public through the issuance of a ‘First Supervisory Notice’ and in many cases, VREQs will appear on the firm’s FCA register.  
• Product interventions: The FCA has the power to issue product intervention rules, with the effect that the use of certain product features is restricted, or that a product is not promoted to some types of customers or altogether. Perhaps the most widely-publicised example in recent years was the FCA’s permanent ban on the mass-marketing of speculative mini-bonds to retail investors, given the risks associated with these “speculative illiquid securities”³. 
• Unannounced visits (or ‘dawn raids’): The FCA and PRA have the power to carry out unannounced visits, commonly referred to as ‘dawn raids’ (provided that certain legal criteria are met).  These powers enable the regulators to enter and search a firm’s premises, conduct interviews with staff and to require production and take copies of documents onsite. This may include visits to staff working at  home. See here for our briefing on key practical steps for firms when responding specifically to a dawn raid.
• Request for senior management attestation: Both the FCA and PRA may request an attestation from members of senior management from a regulated firm to seek personal assurances that a specific action will be, or has been, taken, for example in relation to a concern about an actual or potential breach of regulatory requirements. 
• Prevention of dissipation of assets: The FCA may ask the court to make orders restraining a person from disposing of (or otherwise dealing with) assets, provided the FCA can show a good arguable case for granting the injunction.   
• Withdrawal of financial promotions: Over the past couple of years the FCA has significantly increased its intervention activity in response to poor financial promotions compliance⁴, and its recently formed ‘Financial Promotions Enforcement Taskforce’ may be a sign of more to come.

These are wide-ranging and discretionary powers and, as referenced below, the FCA has recently transferred decision-making for some of these powers back from the Regulatory Decisions Committee (the RDC) to its own executives with a view to making intervention a more streamlined process.

Recap on the changes made to FCA decision-making processes

In November 2021, the FCA set out some changes to its decision-making and governance framework whereby it transferred decision-making for some of its intervention powers from the RDC to its own executives, with a view to making the decision-making process more streamlined. This included decisions relating to the use of the FCA’s own-initiative powers, contested approval processes, initiation of certain court proceedings and some cancellation cases. The changes also included limiting oral hearings to exceptional circumstances only.  

These changes were made with a view to speeding up the decision-making process (by effectively removing the RDC from the process) and giving greater discretion to the executive. This means that the formal recourse for a firm or individual to contest the decisions made by the executive is a referral to the Upper Tribunal. This in itself, is limited, in that the Upper Tribunal can only dismiss a reference or remit the decision back to the FCA to reconsider its decision.

Checklist for firms when responding to early regulatory intervention

• Respond early and accurately: If contacted by either regulator with regards to a proposal to take immediate intervention action it is important for firms to respond promptly and be able to demonstrate that they are taking the intervention seriously, but it is equally important to respond accurately and open a dialogue with the regulator where appropriate, in particular where there are practical challenges around what you are being asked to do or where the proposed intervention goes further than necessary to address the relevant concerns.  For example, is it practically feasible for a financial promotion to be withdrawn from all platforms? Or do you need more time to achieve what the regulator is requesting? 
• Engage third parties/stakeholders as needed: Does the intervention require cooperation of another third party in the distribution chain or another entity within the company group? If so, it might be appropriate to inform the regulators of the need to involve third parties early on, so that they are sighted on any potential delay or additional complexity that needs to be taken into consideration.  Firms should also consider carefully what contractual obligations they may have to notify third parties of any correspondence with a regulator and whether they need the regulator’s consent to do so. 
• Governance framework: Ensure the firm’s governance framework incorporates a process for responding to intervention action, including escalation to the board and senior management where appropriate and an approval/sign-off process for correspondence with the regulators. It might be helpful to nominate a member of senior management and/or the in-house legal team with the responsibility for responding to early intervention, to help control the narrative and ensure clarity around who is responsible for communications with the regulators. 
• Working group and legal privilege: Connected to the point made above with regards to good governance around managing the intervention, firms should consider setting up a working group to act as the ‘client’ for the purposes of instructing lawyers and receiving legal advice on behalf of the firm. Communications between external/legal counsel and members of the working group for the purposes of seeking/giving legal advice are more likely to be protected from disclosure to a regulator or other third party.  
• PR strategy: Consider the possibility that that there may be an internal or external information leak and that a response may be required to the media and/or the firm’s clients and customers. Firms might want to consider preparing draft Q&As to deal with leaks or questions from external parties.
• Record-keeping: Keeping records of all steps and key decisions taken whilst responding to the intervention may assist in demonstrating to the regulator, either during the intervention or subsequently, that you responded proactively and had the appropriate governance processes in place to do so. This is often hardest to achieve responding to urgent intervention, and keeping written records takes valuable time, but a detailed audit trail of a robust approach to regulatory action may be the key to mitigating further intervention or investigation by the regulators.    
• Lessons learned: Once the intervention has drawn to a close, firms should consider conducting a lessons learned review to assess whether, and if so how, they could have responded better or more efficiently, and to implement any identified improvements or enhancements to the relevant policies and procedures, as well as considering whether it might be appropriate to conduct an internal investigation in relation to the matters that gave rise to the intervention from the regulator in the first place.