In 2015, the Financial Conduct Authority (FCA) upended the old adage ‘speak softly and carry a big stick’. Instead, it spoke harshly and brandished a very large stick: the regulator dished out nearly £1bn in fines to companies and individuals in the financial services sector. It was just as hard in its verbal treatment.
In 2016 though, the number of fines dropped dramatically. Only £23m was handed down, a 97 per cent reduction.
Taken at face value, one might be tempted to think the FCA has called a halt to punishing wayward firms and individuals. Any such thoughts, however, were sharply dismissed on 19 January by Mark Steward, the regulator’s director of enforcement.
“We have not gone soft,” he declared at a speech in London, “and nor will we.”
However, £23m is an exceptionally low figure by historic standards. You have to go back a decade to find a lower level.
So, in an era when discontent over the victors and losers of the post-financial crisis world lingers, why are we witnessing such low levels of fines?
Fines for Libor and other rate-fixing misdemeanours, which have been the FCA’s main focus of attention for several years, are nearing their end. It has been suggested that the increased scrutiny and wave of regulation of previous years has led to a general cleaning up as intended. Or maybe, under the new leadership of Andrew Bailey, the regulator adopted a more conciliatory approach in 2016.
This is misconceived. Taking a softer approach to enforcement is unlikely; particularly as public desire to hold corporates to account for their wrongdoing remains strong. As articulated by Mark Steward, we may not see a return to such high levels of fines, but make no mistake, we will see enforcement activity return with a vengeance.
The real answer to fines falling off a cliff edge is more likely to be as a result of the FCA responding to the demands of the current climate.
In 2016 we witnessed the FCA operating with a far broader lens; focusing on firms beyond big banks, beginning to deploy and use new regulations on behaviour, and returning to clamping down on bad practices that impact the man or woman on the street.
This trend is likely to play out in 2017 and beyond.
Take for example the broadening of the FCA’s scope beyond the big banks. Law firm Fox Williams' analysis of fines in 2016 shows that the FCA increased its focus substantially on smaller enterprises.
The FCA clearly wants to expand its influence beyond just banks and insurance firms. That is a marked shift from the previous two years, when it focused on large retail and investment banks. Going forward, smaller firms and non-banking companies, including insurers, credit companies and anyone handling client money, are likely to find themselves in the spotlight.
While big banks have ramped up their compliance spending, smaller firms have generally been less quick to do so and are likely to have less extensive compliance procedures. That suggests challenging times ahead.
We should also bear in mind that 2017 is the year in which the application of several new rules will really start to take effect.
A year into its implementation, we are likely to see further embedding of the Senior Managers’ Regime (SMR), putting more onus on the role of individuals in cases of wrongdoing. This increased focus was evident in 2016, when the number of fines for individuals overtook the number handed down to companies for the first time in several years.
Market Abuse Regulation (MAR) was another relative newcomer in 2016 and will also likely become a growing source of activity for the FCA in 2017.
To add to these regulatory changes, the FCA has also identified strategic priorities it wants to focus on. One of those is (as identified in previous years) financial crime and we can expect far more enforcement action related to this in 2017.
Indeed, if Libor was the poster child of misconduct over the past five years, financial crime will take its place this year.
I anticipate that money laundering, a growing concern for financial services in Britain, will be front and centre here. There was only one significant fine on this issue in 2016, but I expect to see a far greater focus for 2017 on how money flowing into the UK financial system is handled – and for whom.
Several financial crime cases are believed to be underway at present. The FCA will also have better access to information via the new annual Financial Crime Return, which came into effect on 31 December last year.
Another area of growing concern is consumer credit. In fact, the fines Fox Williams started to see against firms last year are symptomatic of the other major trend for 2017 – the return to prioritising cases affecting the person on the street.
IFAs, wealth management firms, insurance firms and brokers, and investment firms were all targeted last year. That will continue.
In its mission statement, released last year, the FCA made it clear that “loss” is part of a well-functioning market and cannot be avoided in practice. This is an important message as many firms have felt that the FCA seeks to hold firms responsible for any consumer detriment, even where this may have occurred as a result of poor customer choices.
This is recognised as a difficult problem to tackle, both by firms and the FCA itself. In formulating its approach, the regulator also noted how the issue of “disclosure” and imposing requirements on regulated businesses to provide certain types of information, or advise in a particular way, has not prevented poor choices from being made, nor to have the effects that regulators and policymakers anticipated. I anticipate this is an area where further policy will be developed.
Clearly, the landscape has changed since the days of the financial crisis. Blockbuster fines may be a thing of the past, but financial firms cannot and should not rest on their laurels.
Contrary to initial suggestions, 2016 suggests a clear, intentional and targeted shift in enforcement focus by the FCA; more types of firm are going to face scrutiny and more processes will be under the spotlight.
There will be plenty for firms to keep an eye on.
As Mark Steward was at pains to point out in his January speech: “Light touch has not returned.” The focus has just shifted.
Peter Wright is a partner and Sona Ganatra is a legal director at City law firm, Fox Williams
Key points
In 2016 the number of FCA fines dropped dramatically.
This is due to a return to clamping down on bad practices that impact the man or woman on the street.
Several financial crime cases are believed to be underway at present.
