Content Options

EG 5.1 1Settlement and the FCA – an overview

EG 5.1.1

1The FCA resolves many enforcement cases by settlement. Early settlement has many potential advantages as it can result, for example, in consumers obtaining compensation earlier than would otherwise be the case, the saving of FCA and industry resources, messages getting out to the market sooner and a public perception of timely and effective action. The FCA therefore considers it is in the public interest for matters to settle, and settle early, if possible.

EG 5.1.2

1The possibility of settlement does not, however, change the fact that enforcement action is one of the tools available to the FCA to secure our statutory objectives. The FCA seeks to change the behaviour not only of those subject to the immediate action, but also of others who will be alerted to our concerns in a particular area. There is no distinction here between action taken following agreement with the subject of the enforcement action and action resisted by a firm before the RDC (including action taken following a focused resolution agreement)2. In each case, the FCA must be satisfied that its decision is the right one, both in terms of the immediate impact on the subject of the enforcement action but also in respect of any broader message conveyed by the action taken.

EG 5.1.3

1Settlements in the FCA context are not the same as ‘out of court’ settlements in the commercial context. An FCA settlement is a regulatory decision, taken by the FCA, the terms of which are accepted by the firm or individual concerned. So, when agreeing the terms of a settlement, the FCA will carefully consider its statutory objectives and other relevant matters such as the importance of sending clear, consistent messages through enforcement action, and will only settle in appropriate cases where the agreed terms of the decision result in acceptable regulatory outcomes. Redress to consumers who may have been disadvantaged by a firm’s misconduct may be particularly important in this respect. Other than in exceptional circumstances, FCA settlements that give rise to the issue of a final notice or supervisory notice will result in some degree of publicity (see chapter 6), unlike commercial out of court settlements, which are often confidential.

EG 5.1.4

1In recognition of the value of early settlement, the FCA operates a scheme to award a discount2 for early settlement of cases involving financial penalties, suspensions, restrictions and disciplinary prohibitions2. Details of the scheme, which applies only to settlement of cases where investigators were appointed on or after 20 October 2005, are set out in DEPP 6.7. This chapter provides some commentary on certain practical aspects of the operation of the scheme.

EG 5.1.5

Some decisions2 on settlements and statutory notices arising from them are taken by two members of the FCA's senior management, rather than by the RDC (DEPP refers to these individuals as the 'settlement decision makers'). Full details of the special decision making arrangements for settlements are set out in DEPP 5.

1

EG 5.2 1When settlement decisions may take place

EG 5.2.1

1Settlement discussions between FCA staff and the person concerned are possible at any stage of the enforcement process if both parties agree.

EG 5.2.2

1The FCA considers that in general, the earlier settlement discussions can take place the better this is likely to be from a public interest perspective. However, the FCA will only engage in such discussions once it has a sufficient understanding of the nature and gravity of the suspected misconduct or issue to make a reasonable assessment of the appropriate outcome. At the other end of the spectrum, the FCA expects that settlement discussions following a decision notice or second supervisory notice will be rare.

EG 5.2.3

1In the interests of efficiency and effectiveness, the FCA will set clear and challenging timetables for settlement discussions to ensure that they result in a prompt outcome and do not divert resources unnecessarily from progressing a case through the formal process. To this end, the FCA will aim to organise its resources so that the preparation for the formal process continues in parallel with any settlement discussions. The FCA will expect firms and others to give it all reasonable assistance in this regard.

EG 5.2.4

2The FCA will engage senior management in discussions (either heads of department or directors), liaising where appropriate with the settlement decision makers, attending a without prejudice meeting during discussions or arranging for the attendance of an appropriately senior FCA representative.

EG 5.3 1The basis of settlement discussions

EG 5.3.1

As set out in DEPP 5, special decision-making arrangements apply in relation to settlement. The person concerned may agree all relevant issues with the FCA (in which case the settlement decision makers will give all relevant statutory notices). Alternatively, a focused resolution agreement may be agreed (in which case the settlement decision makers are responsible for giving the warning notice and the RDC for giving any decision notice).2 The FCA would expect to hold any settlement discussions on the basis that neither FCA staff nor the person concerned would seek to rely against the other on any admissions or statements made if the matter is considered subsequently by the RDC or the Tribunal unless those admissions or statements are recorded in a focused resolution agreement2. This will not, however, prevent the FCA from following up, through other means, on any new issues of regulatory concern which come to light during settlement discussions. The RDC may be made aware of the fact negotiations are taking place if this is relevant, for example, to an application for an extension of the period for making representations.

1
EG 5.3.2

1If the settlement negotiations result in a proposed settlement of the dispute, FCA staff will put the terms of the proposed settlement in writing and agree them with the person concerned. The settlement decision makers (and, as the case may be, the RDC)2 will then consider the matter2 under the procedures set out in DEPP 5. A settlement is2 likely to result in the giving of statutory notices (see EG 2.15.1 to EG 2.15.32).

EG 5.4 1Multiple parties and third party rights in enforcement action involving warning and decision notices

EG 5.4.1

1Enforcement cases often involve multiple parties, for example a firm and individuals in the firm. Enforcement action may be appropriate against just the firm, just the individuals or both. In some cases, it will not be possible to reach an acceptable settlement unless all parties are able to reach agreement.

EG 5.4.2

1Even where action is not taken against connected parties, these parties may have what the Act calls ‘third party rights’. Broadly, if any of the reasons contained in a warning notice or decision notice identifies a person (the third party) other than the person to whom the notice is given, and in the opinion of the FCA is prejudicial to the third party, a copy of the notice must be given to the third party unless that person receives a separate warning notice or decision notice at the same time. The third party has the right to make representations and ultimately can refer the matter to the Tribunal. Any representations made by the third party in response to a warning notice or decision notice will be considered by the settlement decision makers, who will also decide whether to give the decision notice or final notice.

EG 5.4.3

1In practice, third party rights do not frequently cause undue difficulty for settlement, either because they do not arise at all or because the third party agrees not to exercise such rights.

EG 5.5 2The settlement discount scheme

EG 5.5.1

2The settlement discount scheme allows a reduction in a financial penalty or period of suspension, restriction or condition1 that would otherwise be imposed on a person according to the stage at which the agreement is reached. Full details of the scheme are set out in DEPP 6.7.

EG 5.5.2

2Normally, where the outcome is potentially a financial penalty, suspension, restriction, condition or disciplinary prohibition,3 the FCA will send a letter at an early point in the enforcement process to the subject of the investigation. This is what the FCA refers to as a stage 1 letter. The FCA will aim to give 28 days’ notice of the beginning of stage 1 to allow the parties involved to make administrative arrangements, e.g. ensuring that key staff can be available to participate where necessary in any settlement discussions. Where appropriate, the FCA will offer a preliminary without prejudice meeting to explain the FCA’s view of the misconduct (including the key factual and legal bases for our view), and to give the firm or individual an opportunity to identify where they believe there are errors in the factual basis and to indicate the extent to which they agree with the outline findings.3

[Note: stage 1 is the period from commencement of an investigation until the FCA has a sufficient understanding of the nature and gravity of the breach to make a reasonable assessment of the appropriate penalty (or suspension, restriction, condition or disciplinary prohibition, or combination thereof). The FCA ,at stage 1, also needs to have communicated that assessment to the person concerned and allowed a reasonable opportunity to reach agreement as to the amount of penalty or the length of any suspension, restriction, condition or temporary disciplinary prohibition.]3

EG 5.5.3

2The settlement discount scheme3 does not apply to civil or criminal proceedings brought in the courts, or to public censures3, prohibition orders, withdrawal of authorisation or approval, limitations of the period for which any approval is to have effect,1 or the payment of compensation or redress.

EG 5.5.4

2There is no set form for a stage 1 letter though it will always explain the nature of the misconduct, the FCA's view on the sanction3, and the period within which the FCA expects any settlement discussions to be concluded. In some cases, a draft statutory notice setting out the alleged rule breaches and the proposed sanction3 may form part of the letter, to convey the substance of the case team’s concerns and reasons for arriving at a particular level of sanction3. The FCA will identify the key evidence on which its case relies at the commencement of stage 1. While the FCA will identify the key evidence that underpins our outline findings, the FCA will not generally provide evidence where that evidence is already in the possession of the firm or individual.3

EG 5.5.5

2The timing of the stage 1 letter will vary from case to case. Sufficient investigative work must have taken place for the FCA to be able to satisfy itself that the settlement is the right regulatory outcome. In many cases, the FCA can send out the stage 1 letter substantially before the person concerned is provided with the FCA's preliminary investigation report (see paragraphs 4.13.1 to 4.13.4). The latest point the FCA will send a stage 1 letter is when the person is provided with the preliminary investigation report.

EG 5.5.6

2The FCA considers that 28 days following a stage 1 letter will normally be the ‘reasonable opportunity to reach agreement as to the amount of penalty’ before the expiry of stage 1 contemplated by DEPP 6.7.3G3. Extensions to this period will be granted in exceptional circumstances only, and factors that will be taken into account in considering an application will include the extent to which factors outside the firm’s or individual’s control will have a material impact on their ability to engage in settlement negotiations within the period set out in the stage 1 letter3.

EG 5.5.7

2The procedure for the settlement discount scheme where the outcome is potentially a financial penalty, described in paragraphs 5.5.1 to 5.5.6, will also apply where the outcome is potentially a suspension, restriction or condition1.

EG 5.6 1Mediation

EG 5.6.1

1The FCA is committed to mediating appropriate cases; mediation and the involvement of a neutral mediator may help the FCA to reach an agreement with the person subject to enforcement action in circumstances where settlement might not otherwise be achieved or may not be achieved so efficiently and effectively.

EG 5.6.2

1Further information about the FCA's approach to mediation and the mediation process are set out on our web site.

EG 5.7 1The relevance of settled cases to subsequent action

EG 5.7.1

1Decisions recorded in FCAfinal notices or supervisory notices will be taken into account in any subsequent case if the later case raises the same or similar issues to those considered by the FCA when it reached its earlier decision. Not to do so would expose the FCA to accusations of arbitrary and inconsistent decision-making. The need to look at earlier cases applies irrespective of whether the decisions were reached following settlement or consideration by the RDC or the Tribunal. This reflects the fact that a person’s agreement to the action proposed by the FCA in the earlier case would not have relieved the FCA of the obligation to ensure that the final decision was the right regulatory outcome, both for the person concerned and more generally.

EG 5.7.2

1The FCA recognises the importance of consistency in its decision-making and that it must consider the approach previously taken to, say, the application of a particular rule or Principle in a given context. This applies equally to consideration by the RDC or by the settlement decision makers when they look at action taken by the FCA in earlier, similar, cases. This is not to say that the FCA cannot take a different view to that taken in the earlier case: the facts of two enforcement cases are very seldom identical, and it is also important that the FCA is able to respond to the demands of a changing and principles–based regulatory environment. But any decision to depart from the earlier approach will be made only after careful consideration of the reasons for doing so.