Partner Abdulali Jiwaji and Trainee Solicitor Elliott Fellowes examine the FCA’s consideration of Brexit, and what impact this will have on the agency’s commitment to enforcement activities.
Abdulali and Elliott’s article was published in FT Adviser, on 10 May 2018, Law360, 29 May 2018. The can be found here and here. A version of this article has also been published in Global Risk Regulator, on 5 July 2018, and can be found here.
On 9 April 2018, the Financial Conduct Authority (“FCA“) published its annual Business Plan. The Business Plan gives some helpful insights into the FCA’s intentions and priorities for the year ahead. It will be particularly interesting this year to see whether special projects relating to Brexit have any impact on the FCA’s enforcement agenda.
Juggling FCA resources
It is no surprise that Brexit related matters are a prominent feature of this years Business Plan.
High on the FCA’s agenda for its Brexit-related work is providing governmental support, in particular, to any transitional arrangement with the EU-27. The regulator identifies two potential issues here: firstly, in relation to firms regulated in the UK which operate across the European Economic Area (“EEA“); and secondly, EEA firms with a presence in the UK. The FCA states that it is prepared to “take action where appropriate” in relation to any transitional arrangements which impact UK regulated firms and their users. Further, the regulator will work to “ensure there is an appropriate transition to a future model” for the regulation of EEA firms.
In order to undertake the additional Brexit workload, the FCA states that it will be “reprioritising, delaying or reducing non-critical activity“. Whilst this sounds abstract what is clear is that budgetary constraints will force the regulator’s hand. The FCA has budgeted £30m for its Brexit related work, and intends to fund £14m of this budget through the delaying and reducing of non-critical work.
It is unlikely though that any of the scaling back will be permitted to impact on the important activities of supervision and enforcement, and in those respects it is likely to be business as usual.
FCA enforcement priorities
The Business Plan helpfully sets out some areas of focus for FCA enforcement activities.
Andrew Bailey, FCA chief executive, states in this year’s Business Plan that the regulator will focus on areas where “intervention will have the most impact“. This suggests that the FCA will maintain its enforcement activity in areas of cross-sector focus.
We see FCA enforcement being particularly focused on three key areas:
- Senior Managers and Certification Regime (“SMCR“)
The SMCR is being extended to all Financial Services and Markets Act 2000 (“FSMA“) firms – around 47,000 firms will be covered in total.
Of the thirteen fines imposed by the FCA during 2017, eight were against individuals and this trend of personal accountability seems set to continue. The FCA has made it clear that it expects robust governance and that it will hold individuals accountable for their actions or those of their staff.
This is an important stream of work for the FCA in its efforts to encourage a shift in the culture of institutions and to keep the focus on the tone from the top.
- Financial Crime/Anti-Money Laundering (“AML“)
A further cross-sector priority for the coming year is financial crime and AML. The FCA wants to increase consumer protection and hold London’s financial markets up as an example of a healthy regulatory system. In doing so, the regulator states that it will “use the full range of supervision and regulatory enforcement tools” at its disposal.
This will require the regulator to work with international and supranational agencies given the complex and global nature of the UK’s financial markets. The regulator is keen to ensure that post-Brexit Britain will continue to meet, and set, international standards on financial crime. Further, the FCA is currently undertaking diagnostic work in the e-money sector. The FCA has already confirmed that crypto currency derivatives are capable of being financial instruments under MiFiD II and therefore constitute a regulated activity. This is a fast-moving area and the FCA will see this as an opportunity to lead the pack in terms of the international approach to this sector.
- Consumer protection
Flowing from the financial crime and AML priority, the FCA also highlights its ScamSmart campaign aimed at protecting consumers from investment fraud. The FCA will work with The Pensions Regulator to combat scams which overlap pension and investment frauds.
Also on the FCA’s radar is the increase in fraudulent investment firms advertising online and in particular via social media. These scams target younger consumers in a manner in which traditional scams have not, and the FCA seems set on taking a proactive approach in this regard.
Approach to enforcement
We have certainly seen a shift in the FCA’s approach on enforcement over the past couple of years.
Under current head of enforcement, Mark Steward, the FCA opened 75% more investigations in the past year. In explaining this change, the FCA has indicated over the past year or so that it wants the market to understand that investigations are opened by the FCA as fact finding exercises, rather than as an enforcement tool.
Shortly before publishing the Business Plan, the FCA published a Mission Statement on its Approach to Enforcement, which provides some further context.
The Mission Statement emphasises that firms should self-regulate and take proactive steps to redress any harm. The FCA will give “substantial credit to wrongdoers who speedily address wrongdoing“. The message is that cooperation through an investigation may assist in heading off enforcement action. This is a noble aim, but the dynamics of the investigation process remain largely adversarial.
The Mission Statement goes on to say that “[o]pening an investigation does not mean we believe misconduct has occurred“. As to the opening of investigations, this suggests a wider approach is being taken, and this is felt in the 75% increase mentioned above. The consequence is a larger number of open investigations, with the inevitable market disruption and stress that goes with the process.
From the FCA’s perspective, alongside an increase in workload, the more open investigations there are, the more choice it has as to which cases to pursue. It can select the best cases, both from the point of view of strength of evidence and for the purposes of sending the right messages to the market. With this in mind, it is likely that in the later part of this year and early next year we will see a pick-up in enforcement activity reflecting the results of the investigations which are currently underway.
Dec 01, 2020
Dec 01, 2020