Internal Investigations: Navigating Regulatory and Employment Obligations

Published On March 1, 2019

Managing regulatory probes can be challenging, but financial services firms should not forget the employees at the centre of any allegations, nor the employment risks they pose.

It’s not unusual for a financial services firm with a regulatory issue to require an internal investigation. When faced with such an investigation, firms often struggle to consider their obligations beyond the overarching need to cooperate with the UK’s Financial Conduct Authority (FCA) and/or Prudential Regulation Authority (PRA). This is a dangerous strategy. Focussing exclusively on regulatory issues without considering the associated employment risks could expose firms to a liability.

There are various, competing priorities for firms from an employment perspective in the context of a regulatory probe, many of which we explore below.

Identifying employment risks at the outset of an investigation

When managing live regulatory investigations, there are a number of considerations to take into account even before an internal probe begins. An internal investigation will either precede, or run alongside, an investigation by the relevant regulator. The way in which an internal investigation is conducted will have an impact on both the likelihood and the outcome of any regulatory investigation, and subsequent employment litigation. Appropriate management at every stage of the process is therefore imperative. The involvement of the regulator can make things more challenging as firms can lose sight of an equally important participant: the employee at the centre of the allegations of misconduct.

Identify and monitor risks

As part of its “first response”, firms must identify any actual or potential risks of litigation at the outset of any investigation, and ensure that potential claims are effectively monitored throughout the entire process. It is a good idea to keep an active “risks log” for these purposes.

Manage internal communications

Before a probe begins, the investigation team should formulate and agree a communications protocol, so that all those involved are fully informed about how communications should be conducted, and the need to preserve confidentiality, in what will often be a sensitive situation.

Firms must also be careful to avoid inadvertently implicating themselves through the language used to discuss any pending investigation. For example, where an individual is being investigated and circumstances suggest that they may intend to rely on the statutory protection granted to “whistleblowers” to protect their position, do not describe them as a “whistleblower“. To do so may undermine a firm’s capacity to argue that no such protected disclosure has been made.

Select the right team

When appointing an investigatory team, it is sensible to involve both employment and regulatory lawyers specialising in financial services from the outset. Instructing external lawyers may enable a firm to maintain legal advice privilege over documentation produced in the course of the investigation. Limit the number of individuals involved in any investigation to a clearly identified group to reduce the risk of leaks.

The privilege minefield

Frequently, the rationale for protecting the shield of privilege focuses on withholding critical documentation from the regulator; however, it is also important to protect such documentation from disclosure in an employment claim or other related litigation.

Legal advice privilege will apply to all communications created for the purpose of giving or receiving legal advice. Understanding who is the lawyer and the client, in the context of an internal investigation, is not always clear-cut. If a firm utilises in-house lawyers and they act exclusively in their legal capacity, they may well be able to rely upon privilege. The lines can become blurred if in-house lawyers also carry out a managerial or other executive role. It is also crucial to understand that communications about an investigation will be privileged when between lawyer and client, but privilege will often be waived if these communications are circulated beyond the “client group”.

It is therefore important that all members of an investigation team avoid inadvertently waiving privilege by circulating documents unnecessarily, creating new summaries of legal advice, or attaching documents containing legal advice to other documents, such as board minutes.

Drawing up a clear communications protocol should enable a firm to manage and control the production of documents and ensure that privilege is protected. Restricting circulation and preventing accidental waiving of privilege can become more complex during a regulatory probe when multiple parties will need to be informed of the facts and involved in discussions. In such situations, the obligation to fully cooperate with the regulator must be balanced with the risks of creating additional records of communication that are potentially disclosable in a subsequent employment claim.

If an investigation has international or cross-border elements, firms must keep in mind that different jurisdictions will have different laws regarding disclosure and privilege, as well as different approaches when it comes to cooperation with their domestic regulatory bodies. A global protocol addressing the differing approaches and ensuring a consistent approach is critical in such situations.

Interviewing witnesses is central to every investigation. Interviewing employees and the status of the interview notes has been at the forefront of very recent legal commentary. Following a recent Court of Appeal decision, it is now clear that interview notes and related documents created during an internal investigation may be protected from disclosure to third parties by virtue of litigation privilege, if the documents are created for the “dominant purpose” of resisting or avoiding contemplated civil or criminal proceedings. The case further clarifies that it is not necessary for a regulatory body to have commenced a formal investigation in order for legal proceedings to be reasonably contemplated, although it ultimately will depend upon the facts.

But what about disclosure of such interview notes to the employee? If an employee is later charged with misconduct following an investigation, she or he is entitled to interview notes as part of the disciplinary process. At the same time, the employee may also, if she or he is later charged in relation to the misconduct, be entitled to disclosure by the prosecuting authorities of all relevant material provided to regulatory bodies following an internal investigation.

Employment risks during the investigation

The interview processes

A firm must take steps to ensure that an employee’s employment rights are protected during the interview process. Managing an employee’s request for the right to be accompanied to an interview is a particularly difficult balance between the employee’s right under employment law to be accompanied, and the need to avoid any suggestion of collusion.

While a firm may legitimately resist a request for legal representation at an investigatory interview, it must grant a reasonable request by an employee to be accompanied by a colleague or union representative of their choice. Any breach of an employee’s rights could compromise the fairness of any subsequent dismissal, and lead to an uplift of up to 25 percent in compensation awarded to a dismissed employee for breach of the ACAS Code. In practice, it is usual to allow employees to have a legal representative present in order to mitigate the risk of cross-contamination of possible witnesses.

Managing witnesses

There are a number of issues to consider when managing witnesses.

Firstly, some witnesses may be reluctant to be interviewed and to give evidence. If this is the case, it is important to understand why the witness is reluctant at an early stage, so that appropriate reassurances can be given. For example, if a witness is apprehensive about the repercussions of implicating particular individuals in their testimony, reminding them of any firm-wide policy protecting against retaliation may be helpful.

If a witness wishes to remain anonymous, the request should be considered, but a firm must bear in mind the possibility that public litigation could follow and so this cannot be guaranteed. To ensure cooperation, firms may also need to remind witnesses of their overall duties of good faith and fidelity, and to cooperate reasonably with their employer. If a witness refuses to be interviewed without any valid reason or explanation, this could constitute grounds for a disciplinary action.

How do you manage the scenario when a witness is put at risk of redundancy during an investigation? Once this happens a witness is likely to withdraw his or her cooperation. An employer can usually proceed with the redundancy, providing it ensures any internal investigation is not compromised. Any witness who is employed has an ongoing duty to cooperate but this should be balanced against the risk that confidentiality may be lost. The best solution is to consider how important the witness is to the investigation, and whether it is viable for a determination to be reached without him or her. If the witness is key, a firm will need to ensure that he or she has a contractual obligation to assist in the investigation and any subsequent proceedings. One way to achieve this is to include appropriate wording in a settlement agreement.

Employment risks at the conclusion of an investigation

Disciplinary sanctions

The priorities of the regulator will often diverge from the firm’s requirements for a fair employment process when it comes to considering appropriate disciplinary sanctions. To protect against employment claims, a firm must ensure that an investigation is as thorough and fair as possible and any subsequent disciplinary action is appropriate, proportionate and fully justified in the circumstances. However, there could be pressure (internally or from the regulator) to take swift disciplinary action against any alleged wrongdoer, particularly if there is already substantial adverse publicity or public interest in the matter.

Taking procedural shortcuts or otherwise, such as compromising the integrity of investigatory and disciplinary processes, is likely to result in employment liabilities. Mis-management of an investigation could lead, amongst other claims, to allegations of discrimination or detriment/dismissal on the grounds of whistleblowing, which can be expensive to defend, damaging to reputation, and result in a significant financial penalty.

If a firm strongly suspects wrongdoing, it can be tempting to suspend the employee in question pending the outcome of the investigation, particularly from a regulatory compliance perspective. However, such an approach is risky and could lead to claims for constructive dismissal. To prevent such claims, it is important that any suspension is proportionate and justified, and any period of suspension is kept to a minimum. In all cases, a firm must maintain regular communication with the suspended employee and keep them regularly updated regarding the process of any investigation. Suspension is also a high-risk strategy since it will almost always be seen as an indication of guilt, and will therefore impact upon both an individual’s reputation and their ability to secure future employment. In the event that a successful employment claim is brought, this could significantly increase the compensation that they are entitled to. For these reasons, any internal communications which mention an employee’s absence must be carefully managed.

Regulatory references

Careful consideration of disciplinary sanctions is also important in the context of regulatory references. Regulated financial services firms will be required to provide prospective new employers with detailed references for some senior management staff, and disclose information about anything which may affect an individual’s fitness and propriety to carry out a particular role. This includes details of any formal disciplinary action for breach of a conduct rule within the last six years of employment.

For employees who are certified and/or holding a senior management function under the Senior Managers and Certification Regime, it is best practice to consider the disciplinary issues separately to issues of breaches of the regulatory regime. Based on the findings, a decision can then be taken to continue to certify an employee, or whether to include the allegations in a regulatory reference.

Firms operating in the financial services sector are expected to tread a fine line between complying with their regulatory obligations, as well as their overarching duties to their employees. The consequences of stepping too far in favour of one over the other can have serious and long term consequences. With the increasing trend of global investigations with multiple agencies, this balancing act will become increasingly precarious.