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Journey to the FCA: an enforcement perspective

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Constance Christabel
Christabel Constance

Senior PSL


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27 November 2012

More forward-looking, better informed, and with a greater appetite to get things done. This is the vision for the new Financial Conduct Authority (FCA) according to the much-awaited FCA approach paper “Journey to the FCA” published on 16 October 2012.

This paper is important reading for all those involved in the financial services industry as it deals with how the FCA will approach the shift in its role and powers under the Financial Services Bill (FS Bill) as well as its initial focus and priorities. From an enforcement perspective the key messages are that the FCA will continue with its credible deterrence approach but with a greater appetite for earlier intervention and ensuring individuals, particularly senior management, take responsibility for the conduct of the business. We can expect the FCA to continue the FSA’s current aggressive approach to enforcement action and to take action earlier and more publicly than its predecessor.

New objectives – competition mandate

The FCA’s objectives will underlie its work (including its enforcement agenda). The FCA’s strategic objective is that relevant markets function well. Whilst pursing this overarching strategic objective the FCA must also seek to advance its three operational objectives of (1) securing an appropriate degree of protection for consumers, (2) promoting and enhancing the integrity of the UK financial system and (3) promoting effective competition in the interests of consumers.

The paper puts particular focus on how the FCA will deal with its competition objective and the difficulty of balancing favourable competition and consumer outcomes which can often be at odds with each other. This is primarily because the competition objective is new and as a result the FCA will to some extent be feeling its way with it. Indeed, the paper specifically seeks feedback on how the objective should be achieved. It is clear, however, that this new objective will be central to all the FCA does.

To achieve its competition objective the FCA can either intervene using its existing range of tools (including rule-making powers) or, where the causes of poor consumer outcomes fall outside its remit or where a more radical remedy is required, it can use its power to refer issues to the competition authorities for review and possible action. The FSA has published draft principles of cooperation between the FCA and the OFT on competition issues which are intended to sit alongside other concordats on consumer protection as an annexe to the Memorandum of Understanding between the FSA and OFT (which will all be updated in light of the new regulatory structure).

Market and customer remit will be wide

The FCA’s far reaching objectives mean its market and customer focus will be wide. It is repeatedly noted in this paper that the FCA’s remit is not limited to the retail market and it will also be paying close attention to the wholesale market. Although the FCA’s primary focus will be on consumers there will be increased focus on wholesale conduct as it believes that activities in the retail and wholesale markets are connected and risks caused by poor wholesale conduct can affect consumers (such as where charges and fees within wholesale markets are passed down to retail consumers or where structured products that originate in investment banks are packaged and sold in the retail market).

Specific enforcement priorities

The FSA’s agenda of credible deterrence will remain central to the FCA’s enforcement approach. Building on the work of the FSA, the FCA will continue to be committed to a number of its initiatives, including the FSA’s focus on senior management, insider dealing prosecution, obtaining redress for consumers and financial crime.

However there will be change. In addition to the new powers available (summarised below) there will be changes to the FCA’s culture and how it pursues actions.

  • Early intervention: The FCA intends to intervene in misconduct earlier by improving the way it gathers intelligence, changing its organisational culture and adopting a new style of supervision. The Enforcement division will support this initiative by working more closely with other FCA departments to address the causes of problems and to prevent risks from materialising. This includes the FCA’s new Policy, Risk and Research division, which will act as the FCA’s “radar” for what is happening in the markets and to consumers and is intended to identify issuers sooner and tolerate lower levels of risk. It also includes the FCA’s Supervision division, which will be carrying out firm assessments continuously under the new Firm Systematic Framework (which replaces Arrow assessments). The FCA will be prepared to make supervisory judgements about a firm’s business model, culture and forward-looking strategy, such as product selection, training and recruitment or remuneration practices.
  • Transparency: The FCA will seek to be more transparent, including publishing (to the extent legally possible) cases where it has intervened but no formal enforcement action has been taken. The FCA’s new power to publish warning notices at the start of the disciplinary process facilitates this desire (see further below).
  • Working with the Prudential Regulation Authority (PRA): Before taking action against a dual-regulated firm the FCA will consult with the PRA. If the issue is relevant to both organisations the FCA and PRA will decide whether (a) to conduct a joint investigation, (b) for one of them to conduct its own investigation keeping the other informed as the investigation progresses or (3) in limited circumstances, to lead separate but coordinated investigations.
  • Regulatory Decisions Committee (RDC): The FCA intends to retain the current allocation of decision making between the RDC (a non-executive committee of the FSA Board) and its senior executive. However, it is possible that this may change as the paper states that “Any decision to change the current procedure will be a matter for the future FCA Board following a public consultation.” Tracey McDermott (then acting director of the FSA’s Enforcement and Financial Crime division) said at the recent FSA Enforcement Conference that it is expected that a review of the RDC and the processes it employs will be high on the agenda of the new FCA board.

New powers

Tellingly the paper’s focus on the FCA’s new powers pays particular attention to its early intervention powers.

  • Product intervention: Its new power to ban the sale of products to prevent harm to consumers. Use of the power will ordinarily be subject to a consultation process but, in cases where there is a need for prompt intervention, the power can be exercised without consultation, although for no more than 12 months. The paper states that these temporary powers will only be used where it appears necessary or expedient because the delay involved in consultation would prejudice the consumer interest.

The new product intervention powers link to the FCA’s increased focus on product governance. Of particular note here is that more responsibility will be placed on providers to ensure that products only reach the customers for whom they were designed and that they function as expected.

  • Misleading financial promotions: The FCA will have a new power to ban misleading financial promotions. This power means the FCA can remove promotions immediately from the market or prevent them from being used in the first place, without going through the usual enforcement process.

This power will apparently be used for specific promotions and not against the firm as a whole. It can be used on its own or before enforcement action is taken and will work separately from the FCA’s general disciplinary powers. The power is particularly intended to help the FCA raise standards for new products or new modes of promotion (eg social media).

The paper also outlines the FCA’s approach to a number of other key new powers.

  • Publication of information in warning notices: The FCA will be able to publicly announce that it has begun formal disciplinary proceedings against a firm or individual by publishing details of a warning notice if it considers it appropriate after consultation with the respondent to the notice. As the warning notice comes at an early stage of an investigation, before the firm has had a full opportunity to put its case and have it tested at the RDC, this power is controversial. At present the FSA can only publish a decision notice (after an RDC decision) and even this is a relatively recent power given to them last year (prior to that they could only publish the final notice which is right at the end of the process so, if the respondent elects, subject to a tribunal decision as well). The new power is likely to be used extensively.
  • Greater use of s166 skilled persons reports: The FCA will be able to appoint a skilled person without reference to the firm and the firm will have to pay. The firm’s current ability to seek to negotiate scope and the identity of the skilled person will in all likelihood therefore be reduced. As part of the new Firm Systematic Framework (which replaces Arrow assessments) there will be a greater use of s166 reports.
  • Super-complaints: Certain consumer bodies can complain that features of the market appear to be significantly damaging interests of consumers in what are known as “super-complaints”. The FCA will look at the issues raised in the super-complaint and publish a response within 90 days setting out how it has dealt with it and whether it has decided to take any action. Draft guidance as to how the FCA intends to deal with such complaints has been put on the FSA’s website and further guidance will be published in early 2013.
  • Information and referrals from the Financial Ombudsman Service (FOS): The FOS will be obliged to provide the FCA with information about the level and nature of the complaints it receives if it thinks it would assist the FCA in meeting its statutory objectives. The FOS will also be able to make a referral to the FCA where one or more firms persistently fails to meet the FCA’s standards where consumers suffer (or are likely to suffer) as a result. The FCA will publish a response to this referral within 90 days saying how it has dealt with the referral, including whether any action has been taken.

PRA approach documents

Although this article’s focus is on the FCA’s approach to enforcement the PRA will also have investigative and enforcement powers. These are mentioned in the updated PRA approach documents (one for banking supervision of deposit takers and major investment firms and one for insurers) which were published the day before the FCA approach document.

Many of the key enforcement messages are similar to those made in the FCA paper. The PRA will be a forward looking organisation whose focus and preference will be on early intervention and engagement (although not negotiation) with and by senior management. Senior management are expected to be proactive and will have an individual as well as a collective responsibility to ensure compliance with PRA requirements. Like the FCA, the PRA will commission reports by skilled persons to assist with its risk assessments.

The PRA believes that if its early intervention approach is successful enforcement action should be rare but, if enforcement is necessary, it will have a full set of disciplinary powers, including the power to impose financial penalties and publish public censures where a firm has failed to meet PRA policies or has ignored directions or restrictions imposed by the PRA. Similarly, the PRA will have disciplinary powers over individuals approved by the PRA or FCA to perform a Significant Influence Function (SIF).

Little detail is given about how the PRA and FCA will inter-relate on enforcement issues. The papers recognise that in some cases the two authorities will have a direct interest in the same issue but from different perspectives or at different levels of detail (eg the PRA may want to understand the risks to a firm’s capital and profitability of a redress package for a conduct matter but it will not want to be as close to the details of the remedial action as the FCA will). However, in other cases there will be a need for closer cooperation (eg public enforcement actions may have significant prudential implications). More guidance is needed as to how such cooperation will work in practice.


The FCA’s approach document does not contain any real surprises. Much of what it contains has been signalled before and aspects of it are already reflected in the current enforcement approach of the FSA. It is a statement of intent, however, and it reflects the different relationship which firms are going to have with their regulators under the new framework for the foreseeable future. The FCA is going to want to make an impact when it comes into existence and will be looking for cases to exercise its range of powers, meaning that the industry faces a difficult period ahead. It will be incumbent on the FCA to ensure that the decisions which it makes affecting firms’ businesses are properly considered, under strong oversight mechanisms, to avoid suggestions that its robust interventionist approach goes beyond that which is reasonable and legally permissible.

Where on the web

For further analysis on the changes to be introduced by the FS Bill please see:

Contributed by Calum Burnett and Christabel Constance.