Financial Conduct Authority (FCA) Risk Outlook and Business Plan 2014 – key enforcement themes
The FCA Business Plan published on 31 March 2014 sets out the FCA's programme of work for the year ahead and is intended to address the risks highlighted in Risk Outlook, published the same day.
These documents are essential reading in understanding the FCA's priorities for the year ahead. In this article we principally focus on the FCA Business Plan and provide our thoughts on the highlights from an enforcement perspective.
"Executive Summary" and "Achieving our objectives" chapters
The Executive Summary of the Business Plan focuses on three new activities for the FCA:
Consumer credit will be integrated into the FCA's activities from 1 April 2014, which will affect around 50,000 consumer credit firms. The FCA states that it will be able to carry out more intensive regulations than previous regimes were able to.
The FCA mentions that it has a programme of specific work that it intends to focus on in 2014/15 relating to consumer credit, including carrying out work on a market study into the credit card market, thematic work and implementing a cap on the cost of high-cost short-term credit.
Implementing the measures set out in the Financial Services (Banking Reform) Act 2013
Numerous references are made to the FCA's focus on implementing measures in the Banking Reform Act to give effect to the Senior Managers and Certified Persons Regimes. There is no doubt that these changes will have a significant impact on the way the FCA regulates firms and individuals.
The FCA states that it will introduce "a Senior Managers' Regime in deposit-taking institutions (including banks) to ensure that the most important responsibilities are assigned to specific, senior individuals who can then be held accountable for them. We intend to create a Senior Managers' Regime that: encourages and incentivises senior persons to take accountability for their actions, raises the overall standards of governance in firms and strengthens our ability to hold senior managers to account for the conduct in their institution". The FCA also says that it will introduce a Certified Persons' Regime for individuals not included in the Senior Managers' Regime but who are performing a role that involves, or might involve, a risk of significant harm to a firm or its customers. There will be consultation on these proposals later this year.
In relation to approved persons, the FCA also states: "In 2014/15 we will continue to focus on the accountability of boards and senior people in firms that carry out Significant Influence Functions (SIFs), as well as firms that fail to do what they say they will or are repeat offenders. We will devote resources to tackling those who abuse the market, including through criminal prosecutions".
New regulator to oversee the UK's payment systems
The FCA will start preparing for the operational launch in April 2015 of a new regulator to oversee the UK's payment systems, which will be a separate legal entity with its own statutory objectives and board, under the FCA.
In addition to these three new activities, the FCA sets out several other key activities that it will focus on in the coming year:
- continuing to advance the FCA's new competition objective and undertaking Market Studies to analyse competition and weaknesses in the markets;
- continued use of thematic reviews;
- continued "tough and meaningful action" against firms and individuals who fail to follow the FCA rules;
- engagement with key international policy development and cooperation with other regulators to pursue cross-border enforcement;
- assessment of anti-money laundering processes and controls in major banks and those staff responsible for them; this will be extended during 2014/15 to some smaller firms that might present high levels of money laundering risk, as well as carrying out focused thematic work;
- an "increasing" focus on how well firms analyse consumer complaints about PPI; and
- consideration of the case for a 15-year time limit on complaints to the Financial Services Ombudsman.
There is also focus on how the FCA will continue to use the full range of its criminal, civil and regulatory powers to support its priority of securing better results for consumers and reinforcing its commitment to ensuring markets function well. Reference is made to the FCA's key enforcement priorities for 2014/15, which include:
- taking decisive action where firms fail to manage risks effectively or observe proper standards of market conduct
- removing from the industry the firms or individuals that fail to meet FCA standards;
- continuing to pursue the firms or individuals who abuse UK markets by using the FCA's criminal and civil powers;
- taking action where firms fail to treat customers fairly, penalising those who are responsible and ensuring that effective redress is delivered quickly;
- continuing to pursue major investigations into LIBOR and the FX markets, working with other agencies in the UK and overseas;
- taking robust action against consumer credit firms that do not meet FCA standards; and
- taking action against firms that target consumers with unauthorised products.
Protecting consumers chapter
This chapter focuses on how the FCA will secure an appropriate degree of protection for consumers. The FCA states that it will focus in particular on the accountability of individuals carrying out significant influence functions in firms, as well as consumer protection, anti-money laundering, anti-bribery, wholesale conduct and market abuse. The FCA will also take over ongoing consumer credit enforcement cases from the Office of Fair Trading.
In relation to preventing financial crime, the FCA gives examples of targeting consumer fraud, such as boiler room or carbon credit scams, liaising with the police and other enforcement agencies where necessary. Interestingly, the FCA highlights a trend we have noticed of an FCA focus not only on whether AML processes are followed, but also on the quality of judgments about money laundering risk and the firms' AML culture.
Also worthy of note in this chapter is the statement that the FCA intends to conduct thematic work on protecting client money and custody assets (CASS). Enforcement action is already taking place in this sector and we can expect to see increased levels of enforcement following any thematic reviews.
Enhancing Market Integrity chapter
While the "Protecting Consumers" chapter comes first in the Business Plan, it was market integrity issues that Martin Wheatley chose to highlight in his speech at City Week 2014 on the day the Business Plan was published and it is market integrity issues which have dominated in the press.
Thematic work will clearly be a central part of the FCA's work over the next year. As part of its supervisory work, the FCA will carry out thematic reviews to investigate issues in specific products and sectors and enforcement action could follow. Mr Wheatley highlighted in his speech two of the most important wholesale-related reviews announced in the Business Plan:
- thematic work on trader controls around benchmarks (Q4); and
- thematic work on controls over flows of information in investment banks (Q2).
Benchmarking thematic review
There will be a review into control and governance of traders around inputs to benchmarks. Mr Wheatley said that he hoped over the medium to long term there will be a move away from a climate of multi-billion dollar enforcement suits to one where benchmark challenges are dealt with proactively by firms and regulators alike. He raised the following questions: how do firms apply the lessons from LIBOR? What are the behavioural drivers of conduct risk in benchmarks? Do firms manage their conflicts of interest? Are front office controls sufficiently robust? And, just as important, are firms incentivising risk taking through the use of discretionary compensation? The FCA wants firms to be clear about the relationships between benchmarks and trading activity. They need appropriate controls in place and these must be underpinned by the right culture. Further, the FCA expects firms to have considered the lessons from LIBOR and to have applied these to their use of other benchmarks and to be managing trader behaviour.
The FCA will be asking: do senior executives have enough influence over culture and behaviour? Do they encourage their traders to operate within acceptable standards?
Conflicts of interest in the use of information
As Mr Wheatley said in his speech, the question here is relatively straightforward: are firms properly protecting and managing information, putting their clients' interests in front of their own? In other words, does information flow too easily across information barriers? In the second quarter of this year, the FCA will be launching a review into the effectiveness of controls over flows of information, looking at key issues.Also worthy of note is the FCA's reference to extended AML assessments and enhanced whistleblowing activity.
Extended AML assessments
In 2014/15 the FCA will continue its Systematic Anti-Money Laundering Programme (SAMLP) assessments of major banks. It currently conducts "deep-dive" assessments of four banks each year, undertaking detailed testing and extensive interviewing of key staff responsible for implementing AML processes and controls. In 2014/15 it will extend this to some smaller firms that might present high levels of money laundering risk. It will also continue to publish AML thematic work.
Enhanced whistleblowing activity
The FCA is keen to promote a culture whereby people feel prepared to speak up about wrongdoing within a firm. Whistleblowing is an important part of this as it gives us a direct insight into practices that are taking place in firms. In 2013, there was a 65% increase in the number of actionable pieces of intelligence the FCA received from whistleblowers. It has put more resources in place and enhanced its processes to deal with this effectively. In 2014/15 the FCA will consider whistleblowing trends and identify under-represented sectors where it can direct an outreach programme to encourage whistleblowers to come forward. It will also provide regular reporting on whistleblowing trends.Building competitive markets chapter
Unsurprisingly, given its new competition objective, a whole chapter is devoted to how the FCA intends to build competitive markets. A major part of this is answered through the use of market studies. It is clear that the market studies will be comprehensive, and the sectors covered by market studies will evolve as new issues emerge.
1 April 2014, the first birthday of the FCA, was an important date for the regulator; the responsibility for the regulation of consumer credit transferred from the OFT to the FCA, effectively doubling the number of firms that the FCA regulates.
Despite an even bigger workload, the FCA has indicated that there will be no respite in the number of thematic reviews and market studies being undertaken. Also key in the enforcement arena will be the further increased focus on SIFs and work carried out on the Senior Managers' and Certified Persons' Regimes, extension of anti-money laundering assessments and a desire for increased reliance on whistleblowing.
Looking further ahead, in April 2015 the FCA will become a concurrent competition regulator, meaning that the FCA will be able to enforce competition law in financial services concurrently with the Competition and Markets Authority. April 2015 will also see the operational launch of a new regulator, under the FCA, to oversee the UK's payment systems.
As always, Europe and the wider international arena will – in the FCA's words – "continue to heavily influence our work". In the market integrity chapter, the FCA recognises that the integrity of the UK financial markets is heavily reliant on the security and activity of the wider European and international financial system and, for that reason, influencing international policy is critical, particularly since much of our markets and wholesale regulation is shaped by European policy developments.