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Ten FCA and PRA enforcement predictions for 2023 – Part 1

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FCA and PRA enforcement themes and trends 2023: a shake-up

This pair of posts focuses on ten less-obvious enforcement predictions that we think will shape the UK financial services investigations and enforcement landscape during 2023 and beyond. 

For anyone who thought that the flow of Financial Conduct Authority (FCA) enforcement outcomes was dwindling, the last few months will have proved them wrong. Since December 2022 alone, the FCA has imposed seven fines (almost as many as it did during the whole of 2021).
 
The vast majority of the FCA’s enforcement action during 2022 focused on three categories of misconduct: financial crime, retail misselling and market abuse. In addition, we also saw cases relating to operational resilience, market announcement obligations and conflicts of interest. The Prudential Regulation Authority (PRA) focused on operational resilience too, as well as governance and certain types of regulatory reporting.
 
But to save dwelling further on the more obvious topics that will be very familiar to readers from past enforcement activity, we have pulled together ten different enforcement predictions that we think will shape UK enforcement in the next 12 to 18 months. Here are the first five. 

1.  The next Director of Enforcement and Market Oversight: a new era

In October 2022, the FCA announced in a press release that Mark Steward will step down as the FCA’s Executive Director of Enforcement and Market Oversight after almost eight years in the role (a considerably longer stint than his two immediate predecessors).

During his tenure, Mark Steward has overseen one of the biggest shake-ups to the approach to regulatory enforcement action in the UK. Since 2015, he has overseen a 144% increase in the number of open FCA enforcement investigations as part of his strategy to use enforcement investigations as “diagnostic tools”. This includes opening more than 1,500 new enforcement investigations during this period, imposing fines totalling almost GBP2.6 billion and bringing the FCA’s first criminal prosecution of a bank under the Money Laundering Regulations 2007.

We are still waiting for confirmation as to who will succeed Mark Steward, including whether the candidate will be an internal or external appointment, or whether we will see another “musical chairs” move between international regulators (before joining the FCA, Mark Steward previously held the equivalent position at the Securities and Futures Commission in Hong Kong). Whoever takes on the role will need to decide whether they continue along the same path in terms of approach, or whether they stamp their own mark on the direction of the FCA’s enforcement strategy and take a radically different approach.

2.  Supervisory interventions: further increases

While not constituting enforcement action in the traditional sense, one trend that we have observed and expect to continue is the increased emphasis that the FCA has placed on supervisory interventions. In the 2021/22 financial year, FCA own initiative interventions increased by 95% and voluntary interventions increased by 74% compared with the previous three years.

The FCA’s intervention powers provide a highly flexible tool and give considerable discretion in how they are applied. For example, they can be used to stop a firm from undertaking all or part of its business or to stop firms accepting new customers, where the FCA considers that this is necessary to mitigate a significant risk of harm. These powers are not new, but recent changes to internal decision making at the FCA have made them an attractive and nimble tool that can be used more often and more rapidly. Consequently, the trend of increased interventions in relation to a broader range of firms is expected to continue.

Interventions are often less visible and, historically, only a small proportion of these cases have been made public. It will be interesting to see if this changes as a result of the FCA’s new assertive approach. One benefit of intervention powers is that they can be used quickly, which means that regulatory messages can be communicated to firms much more quickly. In contrast, enforcement proceedings usually only lead to a public outcome several years after the underlying conduct occurred. We may, therefore, see the FCA publicising more interventions as a means of getting messages to the market, which is an approach that the PRA has also begun to adopt.

3.  Hybrid working arrangements: put to the test

When the pandemic hit in early 2020, we all remember the hasty plans that firms had to put into action to enable significant proportions of their workforces to work from home. The FCA and the PRA demonstrated a degree of sympathy towards firms at this time, as they also got used to permanent home working and grappled with the other impacts of the pandemic (both as regulators and employers).

Fast-forward to 2023 and hybrid working is here to stay for most firms. However, the FCA and the PRA now expect firms to have “future-proofed” their hybrid working arrangements, so that they can effectively manage significant proportions of their workforce who may be working away from their offices on any given day.

But what does this mean for enforcement? Many enforcement cases over the years have featured issues around adequate oversight and supervision of employees, and we think that hybrid working arrangements are likely to be the source of an extension to this line of cases. For example: did a firm provide an employee who made a serious work error with adequate equipment to allow them to perform their role from home? Could an employee reasonably claim that they had no-one to escalate an issue to, because they could not reach their line manager who was working from home and there was no suitable alternative in the office that day? Did a remote working environment increase the risk of a certain type of misconduct occurring or not being detected? What impact did extensive hybrid working have on the culture of a firm or a specific team?

The list goes on, but these kinds of issues are already arising in investigations, and will no doubt lead to the regulators taking a closer look at firms’ hybrid working arrangements, as well as whether they were fit for purpose.

4.  It’s all about data: continued focus on quality and timeliness of regulatory reporting

One area in which we have seen an increase in enforcement activity is regulatory reporting. While the FCA has brought multiple enforcement actions over the years in relation to transaction reporting and, more recently, suspicious transaction reporting, the PRA too has heightened its enforcement focus on regulatory reporting more recently.

This should not come as a surprise. In 2019, the PRA published a Dear CEO letter reminding firms of its expectation that they should submit complete, timely and accurate regulatory returns and announcing its intention to appoint skilled persons to review some larger firms’ returns. In 2021, the PRA published a further Dear CEO letter relaying its thematic findings from the skilled person reviews and its broader supervisory work. It identified multiple areas of concern, including in relation to a lack of governance and ownership of processes, weaknesses in end-to-end processes and a failure to invest adequately in regulatory reporting.

Consistent with this focus, we have now seen several enforcement actions taken by the PRA relating to liquidity and capital requirements reporting, with identified failings echoing those described in its 2021 Dear CEO letter. The PRA seems intent on sending a very strong message in this area and, if it continues to find weaknesses in firms’ reporting arrangements, we can expect further enforcement activity.

5.  Greenwashing: embedding new requirements before the FCA wields the “stick” of enforcement

No list of enforcement predictions is complete without a reference to “greenwashing” (and increasingly “greenhushing”, the practice of under-reporting or hiding sustainability matters to avoid public scrutiny).

Most practitioners would say that it is a case of “when” not “if” we start to see the FCA take enforcement action in this area. We agree, but the big unknown is the “when”. Although other regulators have fired the starting gun when it comes to taking enforcement action against firms for greenwashing, the FCA seems to be adopting more of a “wait and see” approach. For example, last month the FCA’s ESG Director, Sacha Sadan, was quoted in the press as saying that the FCA did not “want to go straight for the stick” of enforcement action for firms that may be overstating or misstating their ESG credentials, at least until the FCA has finished putting in place the “guardrails” for the industry.

So although enforcement action for greenwashing and greenhushing is likely to come, we do not expect to see any published enforcement outcomes this year.

This article first appeared on Practical Law (www.practicallaw.com) and is reproduced with the permission of the publishers.

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