Top financial services enforcement trends: individual accountability and culture

The Senior Managers and Certification Regime 

Enforcement action under the Senior Managers and Certification Regime (SMCR) remains modest.  

As at the end of the third quarter of 2021, the FCA had just over 20 Senior Managers under investigation. Most of these focus on suspected misconduct by the holders of three senior managers roles: executive directors, heads of compliance and chief executives. Interestingly, the FCA has confirmed that over half of its current enforcement investigations into Senior Managers concern potential breaches of their personal regulatory obligations in relation to their firms’ money laundering controls, which fits neatly with the FCA’s continued focus on the adequacy of firms’ financial crime controls.

The number of open FCA investigations in relation to Certified Persons is lower still, with fewer than 15 Certified Persons under investigation. These investigations focus on a broad range of issues, including allegations of market manipulation, complaints handling, insider dealing, systems and controls failings, conflicts of interest, and pensions advice. 

Non-financial misconduct 

Since November 2020, the FCA has taken enforcement action against four individuals by banning them from the financial services industry following criminal convictions for serious sexual offences relating to conduct that took place outside the workplace. 

Last year, one of these individuals challenged the FCA’s intention to take enforcement action against them, which led to the FCA making public, and the Upper Tribunal dissecting and criticising, the FCA’s approach to considering non-financial misconduct in an enforcement context. We suspect this case will prompt the FCA to reconsider how it approaches similar cases in the future but it is very unlikely to be the last enforcement we see from the FCA on non-financial misconduct.

In addition to bringing standalone cases against individuals who are found to have engaged in non-financial misconduct, we expect the FCA to scrutinise how firms are investigating non-financial misconduct. There may be opportunity for the FCA to introduce issues relating to non-financial misconduct into its enforcement investigations into more traditional regulatory issues; for example, looking at whether cultures where non-financial misconduct, such as bullying or harassment, are prevalent have contributed to the occurrence or continuation of regulatory breaches. 

Hybrid working 

Towards the end of last year, the FCA set out its expectations with regard to firms striking the right balance in relation to culture, governance and individual accountability in an environment where employees are working between the office and their homes. This included a statement reminding firms that the FCA can, in certain circumstances, visit employees’ residential addresses, which has sparked a lot of interest across the industry. 

Although the FCA has highlighted some potential benefits associated with hybrid working such as wellbeing and productivity, it has warned firms that hybrid working may increase the risk of employees feeling isolated and as if they have fewer avenues to speak up. It has also noted that firms may struggle to sustain their purpose and values if significant proportions of their employees are regularly working from home. 

The FCA has also made clear that firms need to consider how to maintain oversight, governance and appropriate supervision of the activities of employees who are working remotely on a permanent basis given hybrid working looks set to be the norm going forwards. This is an area that may feature in FCA and PRA enforcement investigations in the future in cases where an employee engages in misconduct while working remotely, as the relevant regulator may scrutinise whether that employee was adequately supervised and overseen.

Whistleblowing 

Both the FCA and the PRA continue to see whistleblowers as very valuable sources of information. Although unlike their US equivalents, neither the FCA nor the PRA offer financial rewards to whistleblowers, both regulators continue to receive healthy numbers of whistleblower reports. In 2020, the FCA received over 1,000 reports from whistleblowers, 26% of which led to the FCA taking action. 

Towards the start of 2021, the FCA launched its “in confidence, with confidence” campaign, aimed at encouraging individuals working in the UK financial services industry to report potential misconduct directly to it. 

Although the PRA has been less vocal than the FCA in this area, the PRA has taken supervisory action against several firms for having inadequate whistleblowing controls. We think it is likely that the FCA or the PRA may take enforcement action against other firms in this area in the future, either as a standalone topic or by highlighting a firm’s inadequate whistleblowing controls or culture around speaking out as one of the reasons why an issue or problem was not escalated or reported more quickly or, indeed, at all.

This post is based on an article “FCA and PRA Enforcement Action: Trends and Predictions” which first appeared in the January edition of PLC Magazine and a copy of the full article is available here and on the PLC Magazine website.