Partner Abdulali Jiwaji and Associate Johnny Shearman’s article has been published in the following publications:
The Financial Conduct Authority (“FCA“) published its annual Business Plan and Risk Outlook in April for the coming year. Many of the FCA’s aims remain the same or substantially similar to last year, with individual accountability and changing the culture of regulated firms still high on the Authority’s list of priorities. However, strikingly there is less emphasis on enforcement action, which seems to be in line with comments made by Tracey McDermott, acting CEO of the FCA, in October 2015, that the level of enforcement action was “not sustainable – for regulators or for the industry“. In the following article we look at some of the messages coming out of this year’s Business Plan and identify where enforcement action may still be a prominent part of the strategy.
Culture and Accountability – Focus on senior management
It is perhaps unsurprising that the FCA has reiterated that the culture of regulated firms “has been, and remains, a priority“, particularly in light of the criticism the Authority received from some quarters following the scrapping of the thematic review of banking culture. The FCA seems to suggest that rather than broad, industry-wide reviews, they will concentrate on working with firms on an individual basis to tailor their approach. However, the exact manner in which the FCA will work with firms, and the measures of any success, remains, at best, uncertain. The FCA claims that a measure of its success in this area over the medium to long term will be “a culture of accountability at all levels“, but there is no indication of what factors will be taken into account to judge this outcome.
Linked to a change in culture on a firm-wide level is the continued focus on enhancing individual accountability in senior positions. The FCA is aided in this regard by the Senior Managers and Certification Regime (“SMCR“), which came into force in the banking sector in March of this year and was commented on in more detail in our July and November 2015 updates. The SMCR provides that management may be held accountable if a firm contravenes requirements in the area for which the manager in question is responsible. The FCA is looking to rely on this, and the data collection requirements of the SMCR, to continually assess key individuals within regulated firms and maintain a dialogue with firms as to what is expected of their senior management. Further, the FCA has made it clear that it intends to extend this accountability regime to all FSMA1 regulated firms in the future. Although the FCA’s predecessor failed in its pursuit of John Pottage, the former CEO of UBS Wealth Management, as covered in our January 2015 issue, the SMCR arguably eases the path for similar actions.
Markets – Focus on market abuse
This priority was added by the FCA this year on the back of the Fair and Effective Markets Review (“FEMR“), which looked at Fixed Income, Currencies and Commodities (“FICC“) markets. It is clear that the FCA views implementing the 21 recommendations made by FEMR as a major step in its wholesale markets agenda and will look to work with the Treasury on any of the recommendations which require primary legislation. Further, the Business Plan lists the supervising of the now regulated FICC benchmarks as a main priority of the Authority in the coming year. Additional power is given to the FCA in this area as the Market Abuse Regulation kicks in. It may be that the FCA wants to send a message that it is looking to refocus on market abuse given that those were only 2 public outcomes announced in 2014/15 for market abuse. For further analysis of the market abuse regime, see our January update.
Linked to the incoming Market Abuse Regime, though not specifically covered in the FCA’s Business Plan is its enforcement approach to insider dealing. The Authority has had more success in this regard, with the recent prosecutions of Martyn Dodgson and Andrew Hind, sentenced to four and half years and three and a half years respectively as part of Operation Tabernula. These represent the largest sentences to date and mark the fourth and fifth convictions of the estimated £14million Operation. The FCA is clearly keen to pursue enforcement action, no matter the expense, against those involved in insider trading and other market abuse.
Advice – Focus on misselling
Financial advice is another addition to the Business Plan this year, following the Financial Advice Market Review (“FAMR“). FAMR was, as with FEMR above, run in conjunction with the Treasury, and it is no surprise that the FCA wants to focus attention on its plans for implementing two of its widest-ranging reviews (especially given the criticism it received for scrapping the thematic review of banking culture). FAMR made a number of findings, in particular that financial advice for consumers needs to be simplified. The impacts of FAMR are seen as longer term objectives for the FCA, with a progress report due in 2017 and review of the outcomes of FAMR due in 2019.
Financial Crime – Focus on Anti Money Laundering
This year will see the Financial Crime Annual Data Return being rolled out. It is hoped that it will allow for the identification of firms with material weaknesses in their anti-money laundering (“AML“) controls which the FCA can focus on and work with to resolve any issues. In addition, the Fourth EU Money Laundering Directive requires implementation in the UK by 2017, and the FCA is planning to support and advise the Treasury in this respect. Interestingly, AML represents one area where the FCA has indicated how it plans to measure its success. It will give each regulated firm a scoring highlighting those which need improvement in this area. This scoring will not only allow us to see how well each individual firm is doing in this respect but also how well the FCA is doing in resolving problems. High scores across the board is surely what the FCA is hoping for. Those firms with a low score and which need improvement may find themselves on the Authority’s radar for potential enforcement action.
A key theme throughout the Business Plan is that the FCA is looking to be proactive in its supervisory role and look to work with firms on an individual basis. Arguably it could be said that the FCA is working towards more cooperative and manageable solutions as between it and regulated firms. This appears to mark a change in direction from the previous emphasis on enforcement. Hefty fines have been imposed on a number of key financial institutions but perhaps the FCA fears that will not give rise to the industry wide changes it seeks. However, it may also be that the FCA does not want to over-commit to wide-ranging enforcement objectives, given that a new CEO, Andrew Bailey, will be joining in July of this year. We will have to wait and see what impact the new CEO will have on the FCA’s enforcement activity and it will be interesting to note how Mark Steward, still fairly new in his role of Head of Enforcement, will fulfil his mandate under Mr Bailey.
1 Financial Services and Markets Act 2000
Sylvie Gallage-Alwis and Nikita Yahouedeou discuss the DGCCRF’s recent practical guide to online shopping and consumer rights in Le Monde du Droit
28 November 2023
28 November 2023