How to Engage Successfully with Regulators: Ten top tips

Regulatory issues can be easy or challenging, complicated or straightforward – much the same as regulators.

When faced with a regulatory issue – whether self-discovered, the product of a whistle-blowing disclosure or arising from an enquiry from a regulator – it can attract significant attention and take up already limited management time. It is also increasingly the case that organisations are criticised, not just for the original issue, but for how they respond to it.

Having a structure for the process of managing the issue (and the regulator) is often key to seeking to minimise the challenges and reducing any adverse impact of the outcome.

While each case will have its own nuances, certain key principles will always warrant consideration. We set out below ten points to keep in mind when navigating engagement with regulatory issues and with regulators.

1. Early engagement

Regulatory issues rarely age well. They require prompt identification, investigation and (where necessary or prudent) notification. Whatever the issue, early engagement with it and with the regulators is therefore key.

As regards engagement with the regulator(s) about the issue, formal regulatory obligations of openness and transparency (whether via Principle 11 or Fundamental Rule 7, or other firm and personal obligations) will provide a framework for considering notification aspects. The supporting Handbook guidance all speaks to timely notification with such phrases as "early stage" and "before making any internal or external commitments". More generally, early engagement provides greater scope to set the tone for future discussions and to calibrate the narrative before a regulatory ‘case theory’ mindset starts to emerge and harden.

Where there is delay, having clarity as to why and what was done to minimise it will be important in seeking to correct any impression as to tardiness and/or to provide proper context. Candour is important where acknowledging delays is concerned.

In the early stages of engagement with a regulator, the tone of the dialogue is key. As several of the points raised below demonstrate, having a plan helps to convey that you have control over an issue, which is a key aspect of developing the regulator’s confidence that the matter is understood and is being addressed.

2. Have a plan (and be flexible in its implementation)

While the regulator should be approached early, a rough plan as to how the matter will be addressed (based on a meaningful understanding of the fact pattern) should be formed ahead of any such contact. The aim will be to convey a sense of control and proactivity. This plan is likely to include how and when any internal investigation is going to be carried out and scope.

When developing the plan, consideration must be given to how it is going to be resourced. The size of the team appointed to implement the plan will be directed by the nature of the investigation. For some less time intensive issues, it may be appropriate for the matter to be managed by the General Counsel, Head of Compliance or Head of HR, etc,, as appropriate with the approval of the Board, whereas a Committee of the Board may be appointed for more significant issues. The team should include relevant experts from across the business (e.g., legal, compliance, IT, HR, Public Relations). On occasion, adequately resourcing the plan or independence/conflict of interest issues may involve appointing external resource.

The team / plan should be overseen by someone in the organisation with sufficient seniority to make decisions, hold others to account and drive progress in the investigation.

The outline plan, including details as to the person who will oversee it, should ideally be discussed with the regulator in the early stages. This will help to reinforce the sense of control and cooperation, as well as an understanding of the issues and how the firm intends to remedy them. In running through the plan, the regulator can also be calibrated as to the work involved and the timings.

3. Manage expectations

On that last point, it is always important to be realistic as to timescales and to manage expectations accordingly. While the aim is always to complete internal investigations as efficiently as possible, they can take time, particularly if the issues are complex, wide-ranging or span a longer period. All aspects of an investigation (e.g., organising and conducting interviews with relevant individuals and identifying, accessing, collecting and reviewing documents) are vulnerable to unexpected delays.

Expectations should therefore be managed, both internally and externally. When informing the relevant regulator of the expected timescale for an internal investigation, predictions should be realistic. The regulator will expect the firm to adhere to any deadlines shared with them. Building in ‘wriggle room’ or (better) scheduling dates on which updates as to progress can be provided (rather than setting hard deadlines) can help to demonstrate engagement and pragmatism.

4. Identify the regulatory problem

Once an issue presents itself, it is important to gain an early understanding of the problem. Its full scale and implications may take some time to emerge, but the fundamental problem will often be apparent in relatively short order. This will imbue the investigation with its regulatory context.

Once identified, the ‘problem’ and its resolution should be at the heart of the plan. This should look to involve resolving not only the ’problem’, but its root-causes.

Having a sense of the regulatory problem will also help to generate an understanding of the problem from the perspective of the regulator. They will look at the matter through the lens of the market, customers and/or other affected individuals or counterparties. Seeking to assess the position from that perspective early on will help to meet the regulatory concerns as the plan is being developed and implemented.

Problems with investigations can often arise from a misunderstanding between the regulator and the firm as to what the regulatory problem is – taking time to see the issue from the regulator’s vantage point can serve to puncture any misunderstanding and ultimately save time.

5. Make their life easy

People rarely make their lives easier by seeking to make a regulator’s life more difficult!

Seeking to understand the regulatory concern will help to focus the investigation on how to help the regulator. Regulators have extensive powers of compulsion and use them often and effectively. Cooperating with regulators by assisting them to understand the issues and facts will help to bolster the sense that the issue is being taken seriously and that there is an intention to be proactive, cooperative and transparent with the regulator.

Such a stance can translate into a more amenable regulator if and when issues of settlement fall for discussion, as well as a more lenient regulator when regulatory fines are being negotiated.

The scope and scale of assistance to the regulator will vary but looking to identify contemporaneous materials for disclosure and helping to educate them as to the context of the organisation and the chronology of events can assist both in conveying a sense of cooperation and also in accelerating through the investigation (itself a mechanism to reduce costs).

Naturally, the benefits derived from assisting the regulator must be carefully balanced with ensuring the firm’s own interests are kept at the forefront of its thinking, rights are not waived recklessly or defences overlooked. The aim is not to capitulate but to look at the organisation’s response (and the potential to defend or resolve by way of settlement) mindful of the regulatory context.

A feature of keeping a close eye on self-preservation will be the maintenance of privilege.

6. Manage privilege risk

Privilege is a fundamental and important protection which affords a right to withhold the communications protected by the privilege from disclosure to a variety of third parties, including regulators. As such, it should be carefully protected.

Understanding the application of privilege from the outset of an investigation (both as to contemporaneous materials and to the management of the investigation) is critical.

People involved in any investigation should be reminded of the usual mechanisms for ensuring that privilege will apply and for avoiding inadvertent disclosure or waiver of privilege. Given the constraints of privilege, the team involved in the investigation should be kept as tight as the matter will allow.

If the matters under investigation span different jurisdictions, it will also be important to consider whether and the extent to which privilege applies in those jurisdictions.

There may be circumstances in which, on a balance of the risks, it is decided that privileged documents should be disclosed to the regulator. Such decisions should be taken with caution (and with an eye on collateral risks later on (and potentially in different jurisdictions where different rules may apply)), and the manner in which the documents are provided to the regulator should be considered carefully, to ensure that their provision does not result in a waiver of privilege more widely.

7. Get ahead of the issue (with high level engagement)

The first stage of any investigatory process necessarily involves establishing the facts and identifying the issues, including the cause(s) of those issues. As information in respect of the problem emerges, and the plan develops, the nature of the problem and how to cure it will also start to emerge.

Getting ahead of an issue and starting to gestate a plan for remediation allows an organisation to show that it is being proactive in finding a solution (to the extent that it is within its gift/control). That helps to make the regulator’s life easier and to accelerate to the end of the problem.

There will always be systems and controls issues to address as issues are investigated. Every system can be improved. Such matters can provide ‘easy wins’ vis-à-vis the regulator in the sense of making improvements as matters develop. Of course, the firm may need to wait until the outcome of an investigation before embarking on significant remediation work. However, swift incremental improvements can help to show proactivity and nimbleness which should find favour with regulators.

Ultimately, if such remedial steps are carried out effectively, an organisation may be able to demonstrate to the regulator that it need not carry out its own investigation into the issues (or to avail itself of a section 166 skilled person). Avoiding a regulatory investigation obviously carries substantial benefits, not least because any investigation is likely to be time consuming and expensive.

8. Identify who is paying for the issue

An organisation should identify at an early stage whether it has an insurance policy that may respond to meet any costs incurred in dealing with the issues that have arisen. A notification under the policy is likely to be required promptly for coverage under the policy to be triggered. Remember though that regulatory penalties cannot ordinarily be recovered under insurance arrangements.

In the event that a third party looks likely to be liable, consideration will also need to be given early on as to how best to approach that avenue of recompense.

If the organisation itself looks likely to be on the hook for the problem, and with a need to recompensing affected persons, getting ahead of that issue will be important as having a plan to remediate will be a positive factor in discussions with the regulator.

9. Don’t forget third parties

Naturally, the initial focus when dealing with a regulatory issue tends to be inward-looking. However, there are additional and important third parties to consider, for example:

Auditors – early contact with the auditors is likely to be essential if the issues might impact either past or future financial statements;
The market – if a business is listed, there may be a listing obligation to make an announcement of the event to the market;
Customers / suppliers – depending on the nature of the issue, it may be appropriate to inform customers or suppliers. Great care needs to be taken when doing so;
Shareholders and other stakeholders – may wish to understand the issues, how they arose and what is being done to fix them and prevent them happening in future. Great care needs to be taken when disclosing matters to these groups;
Lenders – lenders may need to be notified depending on the nature of the matter (e.g., if it is triggered by some form of petition for insolvency or impacts borrowing covenants and warranties).

When sharing information with a third party, a balance must be struck between sharing the information necessary to meet regulatory or other obligations while also managing confidentiality restrictions and not compromising the organisation’s position. As noted above, clearly, privilege will be an important consideration.

It will be important to remember that if any reference to a regulator’s investigation is to be made, the regulator’s consent may be required before disclosing such information.

10. Factor in litigation risk

Regulatory issues may also give rise to civil litigation either from or against third parties involved (however tangentially) in the matter or as a derivative action by shareholders. It is therefore important to develop a litigation mindset from the outset of an investigation.

Privilege protections will remain prominent should litigation arise, reinforcing the need to consider such issues at an early stage. It will not be possible retrospectively to apply privilege to certain documents or communications.

It is also important to view any concessions made during the regulatory process through the lens of future liability and claims. For example, admission of certain conduct to the regulator could remove the possibility of a defence in any later litigation.

Other important considerations include what data is preserved and whether any sums paid to the regulator can be agreed to be paid by way of remediation, reducing or negating any future claims by way of civil litigation. It will not be possible to address all future litigation issues when engaged in managing regulatory issues. However, having an eye on the interaction of the two, though, will help to navigate issues early on.

As we have said, regulatory issues can be easy or challenging, complicated or straightforward – much the same as regulators. When engaging with regulators, keeping the above tips in mind can help to manage risk and advance the prospects of an early (and cheaper) resolution.