UK Financial Conduct Authority enforcement insights
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"Profound forces are reshaping financial services", according to the UK's Financial Conduct Authority (the FCA). In a recent speech, Nikhil Rathi, CEO of the FCA, echoes many of the future challenges and priorities set out in the FCA's Business Plan, this time sprinkled with some references to Kim Kardashian and Nicki Minaj. We consider here what the Business Plan and Rathi's speech might mean to firms from an enforcement perspective.
Rathi repeats a strong message from the 2021/22 Business Plan that the FCA wants to transform itself again. The FCA continues to recognise the impact of the pandemic, Brexit, technology and the drive to a greener economy. These factors contribute to: an increasing population of adults with vulnerability characteristics; evolving methods of accessing and using financial services; and the emergence of new products and services. Consequently, the FCA is reviewing how and what it regulates.
In his speech, Rathi explains that the FCA wants to be a regulator that "tests [its] powers to their limits" to ensure market integrity, and that over time it plans to "become as much a data regulator as a financial one". In terms of its approach to enforcement action, this follows the ongoing narrative that the FCA will be willing to take more risks and to act quickly.
The FCA's priorities for 2021/22
The FCA continues to focus on some of the outcomes set out in its previous Business Plan, as well as the new Consumer Duty, whilst also focusing on what it considers to be the six most important cross-market issues: fraud, financial resilience, operational resilience, diversity and inclusion, environmental, social and governance work, and international cooperation.
Testing the FCA's powers to the limit
In the 2021/22 Business Plan, the FCA emphasises its role in preventing serious misconduct that leads to harm. It is clear from recent FCA communications that it intends to act more quickly and assertively; speed up its enforcement response; and intervene in real-time more often.
Conscious of past criticism that it acts slowly or is too risk averse, Rathi confirms that the FCA wants to have a bolder risk appetite when it deals with serious misconduct. This includes the use of criminal powers in serious cases of financial crime or money laundering, as seen by the recent prosecution of a bank in the FCA's first criminal prosecution under the Money Laundering Regulations 2007.
Rathi also states that the FCA will litigate more if it needs to, although without stating how and when the FCA would decide whether it needs to. He suggests it might need to litigate where it can contribute to legal certainty, providing considerable benefits for industry. Perhaps we can expect to see a repeat use of the Financial Markets Test Case Scheme.
The FCA's push to be data-driven and, ultimately, a data regulator
In its 2021/22 Business Plan, the FCA stresses its ongoing interest in becoming more data-driven. It wants to ensure that it collects the right data efficiently, noting the high cost to firms in providing such data. As well as automating further data collection, analysing data across systems and strengthening its holistic firm assessments, the FCA intends to gather publicly available information on firms and products (such as social media monitoring and web scraping) in order to identify and prioritise firms or harms for investigations. Data-driven monitoring will be a particular focus, for example, in the FCA's work on financial resilience.
In his recent speech, Rathi states that, through a myriad of programmes and initiatives, the FCA sees itself "accelerat[ing] [its] goal of becoming a data and digital first regulator". In the future, the FCA believes that compliance checks may be "completed in near real time".
The FCA is aware that it is increasingly regulating "data-heavy" businesses. It is therefore alive to the risk that, "as demand for data increases, firms may be able to use, market or restrict data in ways which create poor user outcomes". We may see an increasing focus on this concept in the FCA's enforcement action. The FCA also works as part of the Digital Regulators Cooperation Forum (a partnership with certain other organisations) to cooperate and develop common capability, including in artificial intelligence and data ethics, and it is due to report on the results of its call for input on "Accessing and using wholesale data".
Further reforms on the horizon
Unsurprisingly, Rathi also notes that the FCA wants to "anchor to and shape" international regulatory standards.
Back on the national horizon, the FCA has already highlighted various reforms or other changes that firms will need to understand and quickly implement in order to avoid regulatory scrutiny:
- reforms to the listing rules;
- the new world without LIBOR (in relation to which the FCA has worked with EU and US partners to "align the outcomes of differing legislative approaches");
- increasing environmental, social and governance work; and
- "far-reaching" reforms to wholesale market regulation.
While the FCA seeks to transform itself, it may also transform the regulatory landscape, including many of the rules and requirements that firms must follow. In addition, we are likely to see a push from the FCA to bring more enforcement action (including criminal prosecutions) quickly and boldly.
Firms should: (i) keep up-to-date with applicable regulatory requirements and; (ii) review their own culture, procedures, systems and controls to allow time to quickly identify and rectify any issues. We saw some slowing in the FCA's investigatory work during the pandemic, but the FCA is clearly keen to adapt to the current forces at play.