The FCA has confirmed that, before launching an enforcement investigation, it will consider what is the most efficient and effective way of achieving its statutory objectives; that is, protecting consumers, enhancing market integrity and promoting competition. For example, the FCA may consider using one or more of its supervisory tools to address an issue instead of launching an enforcement investigation (see box "The FCA's supervisory tools").

But this approach on the part of the FCA is not new. The FCA has previously stated publicly that this is what it will do. However, in practice, it often continues to be difficult to predict when the FCA will use its supervisory powers and when it will launch an enforcement investigation into a particular matter. The approach that the FCA takes can vary depending on factors such as the attitude of a firm's supervisors, or the number of other live supervisory or enforcement issues that a firm has at any one time, as well as the FCA's own resources.

The FCA has stated that the overarching question it will ask itself before launching an enforcement investigation is whether an investigation would be likely to further the FCA's aims and statutory objectives. This question is the focal point for the FCA's new enforcement referral criteria. However, again, this is nothing new. One of the FCA's former enforcement referral criterion was phrased in very similar terms; that is, whether, overall, the use of the enforcement tool was likely to further the FCA's aims and objectives.

When determining whether an enforcement investigation is likely to further the FCA's aims and statutory objectives, the FCA will consider the following:

Strength of evidence. When considering this factor, the FCA will consider the strength of the evidence and what other evidence is, or may be, available. It will look at whether an enforcement investigation is appropriate, both as regards the seriousness of the failing in question, and the amount and availability of resources that will be required to investigate the matter fully and deliver an appropriate outcome. It will also consider: the priority of cases; any action in relation to the same firm or individuals; and the impact that opening an investigation might have, especially where the subject is an individual.

Purpose or goal. The FCA might take enforcement action for a number of reasons, including: deterring wrongdoers from repeating their behaviour (specific deterrence); the wider deterrence value of serving as a strong reminder to firms and individuals of the consequences of breaching the FCA's rules (general deterrence); holding those responsible for very serious breaches to account with proportionate penalties and sanctions (justice); and removing wrongdoers from the industry or imposing other restrictions where appropriate (protection).

Relevant factors. This third factor overlaps considerably with the second factor. For example, in terms of specific deterrence, the FCA might consider the reaction of the specific firm or individual to the breach in question. In considering general deterrence, the FCA might look at whether the issue in question is relevant to an FCA strategic priority or is otherwise widespread in the market. Regarding justice, the FCA might assess whether there has been widespread harm or potential harm to consumers, market integrity or competition, or whether the firm or individual failed to bring the issue to the attention of the FCA. When considering protection, the FCA might take into account whether the individual is a UK approved person or is based in the UK, and whether they are still working in the industry and, if so, at what level of seniority.

When introducing the new criteria, the FCA emphasised that they are not intended to be exhaustive and that all the circumstances of a particular case will be taken into account.

The FCA also said that not all of the criteria will be relevant to every case and additional considerations may apply in certain cases. As a result, the FCA has preserved for itself a considerable amount of flexibility and discretion in how it applies the new criteria or whether it applies these criteria at all in any particular case.

The FCA's new enforcement referral criteria are more detailed than the referral criteria that they have replaced. This means that there is now greater transparency about the kinds of questions that the FCA will be asking itself when considering whether to launch an enforcement investigation into a firm or an individual. However, there is no greater clarity in terms of how the FCA will go about answering these questions. This limits the effectiveness of the new criteria in enabling firms and individuals to try to predict with any accuracy whether a particular issue will be referred to the FCA's enforcement division. This is unsurprising; the FCA will not want to fetter its discretion to refer matters to its enforcement division for investigation.

In order to increase understanding about how the new criteria will be applied in practice, it would be helpful if the FCA were to inform firms that are being investigated why they have been referred to the enforcement division by reference to the new criteria. This information could also be published in statutory notices for the rest of the industry to see.

The publication of the new criteria is part of a broader piece of work that the FCA is currently undertaking in order to respond to recommendations made by the Treasury in relation to the FCA and the Prudential Regulation Authority enforcement processes at the end of 2014. The FCA is due to launch a consultation in summer 2015 detailing how it proposes to implement these recommendations.

Calum Burnett is a partner, and Sarah Hitchins is an associate, in Allen & Overy LLP's Banking, Finance and Regulatory Litigation Group.

The updated enforcement referral criteria are available at www.fca.org.uk/firms/being-regulated/enforcement/how-we-enforce-the-law/referral-criteria.