Top financial services enforcement trends: the FCA’s new approach
24 March 2022
The UK Financial Conduct Authority (FCA) is on a mission to become more innovative and more assertive. This transformation is beginning to show through in the way it takes action against the firms and individuals it regulates; as well as those it does not.
Visible impact of changes to decision making
Despite concerns being raised through the consultation process, the FCA has implemented its proposals to shift some decision making from the Regulatory Decisions Committee (RDC) to senior FCA staff.
Contested enforcement cases will still go to the RDC, meaning that the RDC remains the decision maker in cases where the FCA proposes some form of civil sanction (eg penalty or a prohibition). Consequently, the impact of these changes on most civil enforcement investigations is expected to be minimal.
However, to the extent that the FCA takes decisions to launch civil or criminal proceedings in the context of enforcement investigations (eg injunctions in market abuse cases, or decisions to prosecute under the Money Laundering Regulations), or decides to use interventionist supervisory powers (eg to vary a firm’s permissions or impose a requirement on a firm) these decisions will be taken by Executive Decision Makers instead of the RDC.
Be warned, these changes should also be seen as part of the FCA’s wider ambition to become more innovative, assertive and adaptive, with the regulator looking to intervene in new ways. We have already seen evidence of this with a tightening of the authorisations gateway, particularly for firms in the crypto sector; and the new streamlined process being used to impose supervisory restrictions more quickly in relation to financial promotions on social media.
More publicity at an early stage
The FCA has always been keen to publicise enforcement outcomes. However, following years of criticism that it should have taken more assertive action, sooner, in relation to a number of high-profile scandals and collapses, it is more eager than ever to advertise action it is taking at the earliest opportunity.
Historically, the publication of Final Notices was delayed if a third party who was referred to in the draft notice exercised their rights to challenge the inclusion of prejudicial statements about them. Instead, the FCA is now publicising the outcome of its investigation and the misconduct to which it relates and only delaying publication of the Final Notice itself.
We are also seeing wider publication of supervisory interventions. For example, press releases and statements drawing attention to the fact that cryptocurrency firms have not been authorised; or, that the FCA is concerned about but unable to take action in relation to a particular matter.
A shift in enforcement focus
Recently gathered data confirms that most of the enforcement trends we identified towards the end of last year continue.
Large banks are still often the subject of the most significant enforcement outcomes announced by the Prudential Regulation Authority (PRA) and FCA. That said, we have observed a shift in focus towards asset managers and firms providing investment advice. In fact, the FCA recently revealed that 13% of its open investigations into firms are into asset managers/funds; compared with 9% into banks.
There has also been a noticeable escalation in priority of the FCA’s consumer protection objective. Whilst the FCA maintains it is not a consumer champion; of its three operational objectives, protecting consumers appears to have been elevated to the top spot. This is reflected in new initiatives, such as the forthcoming consumer duty, and campaigns such as the FCA’s focus on the retail investment market. It might also explain why unauthorised business and retail conduct each occupy 32% of the FCA’s current enforcement caseload.
But … expect fewer joint investigations
There is some potential good news for firms and individuals, however. In a judgment issued by the Upper Tribunal last year, the FCA and the PRA were formally directed to review their approach to joint investigations.
The case concerned proposed enforcement action by both regulators against a former chief executive of a regulated firm. Ultimately, the tribunal directed the FCA and the PRA to take no action against the individual due to a lack of evidence.
In its judgment, the tribunal questioned whether it would have been better for there to have been a single investigation culminating in a single decision notice from the FCA, even though the individual came within the scope of both regulators’ remits. Alongside a variety of criticisms that the tribunal levelled at the way in which both regulators had handled their investigations, the tribunal formally recommended that the FCA and the PRA should review their approach to joint investigations. In particular, where conduct falls equally within the scope of both regulators, consideration should be given to whether there should be a single investigation by one of them and a single regulatory decision.
Both regulators have acknowledged the tribunal’s recommendations, but are yet to publicly comment on whether they intend to change their approach to commencing joint investigations.
The PRA continues to work closely with the FCA on enforcement investigations, with approximately half of the PRA’s open enforcement investigations being joint investigations with the FCA. However, the PRA appears keen to undertake more of its own standalone enforcement investigations. The two enforcement investigations that the PRA concluded in December 2021 may be a sign of this intention, as in both cases only the PRA took enforcement action.
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.