Changes to decision making at the UK FCA: supervisory control

The broader context - FCA Transformation

The transformation agenda set out in the FCA’s 2021/22 business plan has a number of complementary components, and is in part a necessary response to the findings of the Gloster Report (on the FCA’s handling of London Capital & Finance plc), and the Parker Report (on the FCA’s handling of Connaught Income Fund Series 1 and connected companies).

Authorisations decisions

The FCA’S business plan sets out, for the first time, the transparency measures through which it will measure progress against its strategic outcomes.  These outcomes include “ensuring firms start with high standards and maintain them” as the authorisation gateway is strengthened, and entry is made more robust.  

The FCA anticipates that these higher standards will result in refusal, withdrawal and rejection rates increasing.  This new statement of intent towards strengthening the gateway is also evident in the creation of a new Executive Director role specifically for Authorisations, and the recent "Use it or lose it" consultation on new powers to cancel or vary the statutory permissions of firms that are no longer using those permissions. 

The International Context

In the coming months, much of this attention will be internationally focussed, and similar regulatory considerations can be seen here.  Following the withdrawal of the UK from the European Union, the Temporary Permissions Regime came into effect, to provide continuity whilst the Prudential Regulatory Authority (PRA) and FCA considers authorisation applications from European Economic Area firms, up to the end of 2023.  Around 1,500 firms entered into the regime and are now being contacted by the FCA about the timing of their ‘landing slots’.

Earlier this year, the FCA published its approach to international firms, which includes details of: the circumstances in which those firms might present higher risk of harm to UK markets and consumers; possible mitigants for such harm; and the considerations that may lead the FCA to conclude that an overseas firm needs to establish a subsidiary rather than a branch.

UK’s overseas framework

In order to facilitate non-UK firms’ cross-border operations, there are certain legislative provisions that allow overseas firms to conduct business without the need to become authorised in the UK, including the Overseas Persons Exclusion and the Financial Promotion Order. These are particularly important for overseas businesses in the absence of the EU passporting regimes. 

HM Treasury has been reviewing these arrangements through a call for evidence which will inform an updated approach to the overseas framework.  The Treasury has been working on this subject with the FCA, PRA and Bank of England, and is intending to initiate a consultation on potential changes to the UK’s regime for overseas firm and activities by the end of this year.  The FCA’s business plan confirms that it will be seeking to ensure that any amendments to the regime appropriately address regulatory and supervisory risks from cross-border access and recognise the benefits of open markets.

Interventions

This broader move to position the FCA as a more assertive regulator is also likely to be seen in the Authority’s use of its powers to intervene on a real-time basis, either to impose a fundamental variation of permission or to impose a requirement in relation to a firm.  

The FCA’s policy statement on its new approach to decision making explains that an important driver is a “greater willingness to be more assertive in the use of our powers when we identify concerns with the potential to cause or increase harm to consumers”.  It is crucial that firms engage openly and co-operatively with the regulator if the exercise of FCA intervention powers is in prospect.

It is no longer necessary for the FCA to seek approval from the Regulatory Decisions Committee (RDC) before imposing business restrictions on firms. It will be interesting to see whether this, more assertive approach, leads to greater transparency when these interventions occur. 

Cancellations 

Under the new approach, decisions to take action in straightforward cancellation cases can also be made without reference to the RDC; whether or not the action and contested.  The FCA envisages this including cases where firms have failed to: pay their regulatory fees, submit the relevant regulatory returns, or meet the FCA Threshold Conditions.

However, recent Upper Tribunal decisions have highlighted cases where the FCA has treated as “straightforward” or “routine” matters that were complex or unusual.  This remains a risk and perhaps something we will continue to see challenged. 

A brave new world

The implications of the FCA’s new approach to decision making are wide-ranging and should not be underestimated.  In this two-part blog, we have considered pinch-points relevant to: authorisation, supervisory interventions and enforcement in the context of the regulator’s Transformation Programme.  This should inform firms’ approach to interacting with the regulator at all stages of the regulatory journey.