UK Financial Conduct Authority enforcement themes and trends
Levels of enforcement action taken by the UK Financial Conduct Authority (the FCA) have been in decline since 2014/15. The first half of 2017/18 (H1) showed no sign of change on this front. Although the past six months will not be remembered for high levels of enforcement action and large financial penalties, this period is notable for the FCA's 'new' approach to enforcement.
Recap: H1 2017/18
During H1 2017/18, the FCA concluded only four enforcement cases resulting in financial penalties of just under GBP 300,000. Such low levels of enforcement activity have not been seen for a number of years. Even back in 2002 the Financial Services Authority concluded 30 enforcement actions and imposed just over GBP9.9m in financial penalties. The second half of the year looks like it will be busier; the FCA has already imposed two substantial financial penalties during H2 2017/18, and we will have to wait and see whether more are to follow.
However, although the number of financial penalties has been low, there has been a steep increase in the number of enforcement investigations being opened by the FCA. As at 31 March 2016 the FCA had 247 open enforcement investigations. The FCA now has 453 open enforcement investigations, representing an 83% increase in 18 months.1
Key areas of focus for the FCA's new enforcement investigations include financial crime, financial promotions, market abuse and compliance with listing and disclosure requirements.
The FCA has emphasised individual accountability as one of its enforcement priorities since it was established. However, to date the FCA has achieved successful enforcement outcomes in relation to a relatively modest number of individuals.
The introduction of the Senior Managers and Certification Regime in March 2016 has reinvigorated the FCA's appetite for holding individuals to account within an enforcement context. This sentiment is reflected by the fact that 66% of the FCA's current enforcement caseload is attributable to investigations into individuals. Of these investigations, four are into Senior Managers, seven are into Certified Persons and 129 are into approved persons.2
Although there is a significant number of open investigations into individuals, it is likely that only a relatively low proportion will translate into actual enforcement action. Although the Senior Managers and Certification Regime has helped to clarify in the eyes of the FCA who is responsible for what within in scope financial institutions, it did not bring with it new legal powers to make it significantly easier for the FCA to achieve successful enforcement outcomes against individuals.
Market abuse investigations accounted for just under 50% of all new enforcement investigations opened by the FCA in 2016/17. As at 31 March 2017, the FCA had 122 open market abuse investigations. However, during 2016/17, the FCA only managed to take successful enforcement action in three market abuse cases (up from only one the previous financial year).
With such a significant number of open market abuse investigations, it is likely that we can expect more enforcement outcomes in this area. However, results may not be quick. The FCA has previously acknowledged that market abuse investigations are proving to be more complex, and therefore more time-consuming to investigate. As a result, we should not expect to see a significant increase in the number of successful market abuse enforcement outcomes in 2017/18 (or even perhaps in 2018/19).
Financial crime remains one of the FCA's key areas of focus and features extensively in the FCA's latest Business Plan. During 2016/17, the number of open enforcement investigations relating to financial crime almost tripled to 56.
Within these investigations, the FCA is showing more willingness to exercise its powers to conduct criminal investigations into potential breaches of the Money Laundering Regulations 2007, especially where those potential breaches are serious or repeated. If successful, we may see the first criminal prosecution brought by the FCA under the Money Laundering Regulations 2007 over the next couple of years.
Another particular area of focus for the FCA in relation to financial crime is cyber security. With a variety of high-profile cyber attacks having affected a range of industries over the past few months, the FCA has been keen to reassure itself that firms have appropriate safeguards in place to avoid failing foul of these kinds of attacks. Should a future high profile cyber attack impact the financial services industry, it is likely that the FCA will take a keen interest in the matter from an enforcement perspective.
Approach to enforcement
The FCA has introduced more governance internally in relation to its enforcement investigations. This governance is intended to ensure consistency and senior oversight over open investigations. However, experiences of the FCA's new governance measures have been mixed. In some cases, these governance arrangements have already given rise to delays in the progress of enforcement investigations. In other cases, the FCA has decided to progress certain aspects of its investigations at a much earlier stage than would have previously been the case. For example, in some cases we have observed witness interviews being conducted quite early on in enforcement investigations, before the FCA has gathered very much documentation or information about the matters under investigation.
Although the FCA is investigating significantly more cases, the real 'test' for the FCA's renewed approach to enforcement will be how these cases are concluded. We understand that the FCA does not intend to dramatically increase the levels of enforcement activity we have seen in recent years. This has led us to expect that a significant proportion of current enforcement investigations will be closed with no public enforcement action taken. However, only time will tell whether this turns out to be the approach taken by the FCA.
1.As at 26 September 2017.
2.As at 26 September 2017.
This case summary is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication. For more information please contact Karen Birch – firstname.lastname@example.org, or tel +44 20 3088 3710.