Special report: legal risk
Top ten legal risks | Keep your company on side with the law | The regulators: who's who | NatWest Three: could you be next? | What's my liability as a company director? | Get ready to be raided | Defective documentation | Survive an FSA investigation | Employers watch out

Investigations by the Financial Services Authority are best avoided: they are lengthy, time-consuming and costly. They may also result in sanctions on the firm or individuals including a fine or public censure, which can be damaging to your reputation and brand. In some cases, the FSA may even impose criminal penalties.

So how can an FSA investigation be avoided?

Once a firm has recognised that a regulatory breach may have occurred, how it responds and deals with the situation is very important in the FSA’s eyes. If the firm does not take prompt action — for example, by instigating an internal review or investigation — then the problem may escalate. The FSA will expect senior management to take a firm grip on the problem, and not delegate the handling of the issue to lower level staff.

If, say, an internal fraud has occurred, the FSA will expect the firm to verify urgently that its systems and controls are adequate to prevent further fraud occurring. The FSA will become very concerned if further frauds are detected subsequently, and this may give rise to more general concerns about the firm’s compliance culture.

If a firm takes effective and prompt action, the FSA may even decide not to refer the matter to the enforcement division for investigation. The regulator often says that it is not enforcement-led, and this means that many issues are dealt with privately at the supervisory level. That is certainly a better outcome for the firm than a formal investigation.

The FSA refers more serious cases to the enforcement division for formal investigation. But even at this stage, the firm or individual can still obtain credit from the FSA by responding appropriately.

The FSA’s Principles require regulated firms and individuals to co-operate with the FSA in any event. But the FSA will view a firm more favourably if it provides additional co-operation over and above the norm, such as by providing documents or by waiving legal privilege over advice it has received from its lawyers.

At an early stage in the investigation, the FSA will meet with the firm to explain how they will conduct the investigation — this is known as the “scoping visit”. Senior management should attend this meeting, as it is important in setting the tone for the investigation and demonstrating that the firm is taking the FSA’s concerns seriously.

Typically an FSA investigation will involve responding to a significant number of requests from the FSA for documents (often in large quantities), as well as arranging a programme of interviews. One person in the firm should be appointed to act as the main contact point for dealing with requests from the regulator in order to enhance co-ordination.

It is advisable for prospective interviewees to have some advance training and preparation. An interview may last several hours or even days. The interview with the enforcement division is usually formal and tape-recorded, and people sometimes make unguarded comments which do not look good on a transcript.

After the FSA has concluded the investigation stage, the enforcement division will decide whether to recommend pursuing disciplinary action. The alternatives at this point are for the FSA to close the case with no further action, or to issue a private warning (which, as it suggests, is a letter from the FSA indicating that the firm or individual came close to being disciplined).

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