CP21/25: FCA proposes changes to its decision-making process

  • Posted on: 3 August 2021
  • Written by: James Borley

When the Financial Conduct Authority (FCA) published their 2021/22 Business Plan on 15 July 2021 the Chief Executive Officer, Nikhil Rathim, promised a consultation into the decision-making procedures as part of its Transformation Programme. This consultation document (CP21/25) has now been published and whilst there is much that makes sense, there is also a valid concern that too much power will rest with ‘senior’ staff.

Current situation

Wen you read the detail within the consultation paper you become aware that the FCA will become 'judge, jury and executioner' for certain regulatory decisions. As many readers will know, my focus is more on the authorisation processes and notices, where, currently, decisions to issue a ‘statutory notice’ are taken by the Regulatory Decisions Committee (RDC) under the FCA’s Executive Procedures. Such decisions include:

  • OIVOP (own-initiative variation of permission) where the FCA seeks to vary (which typically means restrict or limit) a firm’s permission

  • Refusal of applications for authorisation/individual approval, where the applicant firm seeks to appeal a Warning Notice

  • Cancellation of permission, again where the firm seeks to appeal a Warning Notice

  • Commencing civil or criminal proceedings against firms or individuals

But we are typically missing a stage here.

Before a case will come before the RDC, there is a mechanism that allows for the issue to be discussed internally under the ‘Executive Procedures’, which is mentioned by the FCA in the consultation paper. Essentially, the FCA Board has delegated certain decision-making powers to the CEO who, in turn, may delegate further to certain individuals or committees. In the authorisations space, this has seen decisions to approve applications for permission or individual approval being delegated to and taken by relatively junior members of staff. This will, of course, be subject to those individuals’ work being assessed over a period of time before they are adjudged to have sufficient knowledge and experience to make such decisions, and then monitored as part of ongoing quality assurance. So far, so good.

Where the application does not appear to meet the relevant conditions of authorisation (usually known as the ‘threshold conditions’) the individual is unable to make a unilateral decision to refuse the application. Instead, and typically after much internal consultation with peers and advisory staff, a recommendation will be made to an internal committee, the ‘Regulatory Transactions Committee’ (RTC). Having chaired a number of RTCs myself in the past, I understand the process well, and the amount of work that will go into preparing the ‘evidence’ to support a recommendation to refuse an application. Where the RTC agrees with the recommendation, it will issue the firm a formal ‘Warning Notice’ advising the firm of the action the FCA proposes to take and why.

With novel issues however, such as the first crypto applications linked to the issue of e-money, we also see recommendations (to both approve and refuse applications) being taken to more senior FCA committees, even ExCo.

Where the firm wishes to ‘make representations’ to challenge the Warning Notice, it is free to do so. However, to ensure a degree of impartiality, such representations are taken to the RDC. Where the RDC agrees with the FCA, then it will issue the firm a Decision Notice. There is a further opportunity for the firm to ‘appeal’ this decision by referring the matter to the Upper Tribunal.

What is likely to change?

Essentially, the FCA proposes to cut out the middle-man in the process, and dispense with the RDC. Decision Notices will instead be considered and issued by internal committees under Executive Procedures.

Pros:

  • From the FCA’s perspective, this allows it greater flexibility to mobilise the appropriate resources for such decisions

  • The FCA also cites the need to act more quickly and decisively where it perceives harms to consumers and/or markets

  • It will “allow decisions to be taken with full appreciation of the wider context and full range of options”. This implies that this is not currently the case. The RTC is already staffed by ‘senior management’ from across relevant departments of the FCA to provide precisely that “wider context”. It is quorate with a Chair plus two other members, with legal support provided from within.

Cons:

  • “If it ain’t broke…” Notwithstanding the above pros, I have yet to see compelling evidence to suggest that the current arrangement does not deliver the right outcomes

  • Given the short timeline proposed for these changes – the FCA proposes this becomes operational from November 2021 – this may be seen as an additional tool to attempt to clear application backlogs in Authorisations. The FCA said in its Business Plan that it proposes to refuse more applications; any refusals should be evidence-based rather than for the sake of increasing the numbers

  • Natural justice being denied? Whilst a Committee of the FCA Board, the RDC is chaired by and composed of industry practitioners, providing an objectivity that an internal FCA committee simply cannot. Indeed, perhaps it is the fact that the RDC does not always agree with the FCA’s recommendation or suggests that the FCA hasn’t provided sufficient compelling evidence to support the recommendation, that the FCA is seeking to de-risk the possibility of such outcomes

On the last two bullets, we are already seeing the FCA flexing its muscles in this regard. In my last article on the Business Plan I referred to the increased prevalence of case officers pushing back on applications for authorisation. While the FCA expects firms to demonstrate they are ‘ready willing and organised’ its current timings before a case officer even looks at an application do not make such an approach ‘fair’. Indeed, the timings for determining an application embedded in legislation – 3/6 months for a complete application, 12 months for an incomplete application – would suggest that a fair amount of ‘back and forth’ is expected.

Then there is the question of ‘grounds’ for refusal – your evidence versus the FCA’s ‘evidence’ – and whether you see merit in challenging the FCA. Do you believe you will get a fairer hearing if you are able to make representations to the RDC or directly to the FCA?

The Consultation closes on 17 September 2021. If you wish to make your views known to the FCA, then please do respond by then.