What to expect next from FCA

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What to expect next from FCA

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.

It is no surprise that Brexit-related matters are a prominent feature of this year’s 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: first, in relation to firms regulated in the UK that operate across the European Economic Area (EEA); and second, 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 that 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.

FCA enforcement priorities

In order to undertake the additional Brexit workload, the FCA states that it will be “reprioritising, delaying or reducing non-critical activity”. While 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 through the delaying and reducing of non-critical work.

It is unlikely that any of the scaling back will be permitted to impact on the activities of supervision and enforcement, and in those respects it is likely to be business as usual.

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 the FCA will maintain its enforcement activity in areas of cross-sector focus.

We see FCA enforcement being particularly focused on three key areas:

1) Senior Managers and Certification Regime. 

The SMCR is being extended to all Financial Services and Markets Act 2000 firms – around 47,000 firms will be covered in total.

Of the 13 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 it expects robust governance and 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.

2) Financial Crime/Anti-Money Laundering.

A further cross-sector priority for the coming year is financial crime and anti-money laundering. 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 financial 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.

3) Consumer protection.

Flowing from the financial crime and anti-money laundering priorities, 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 that 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 traditional scams have not, and the FCA seems set on taking a proactive approach in this regard.

Key points

• The FCA published its business plan last month.

• It has budgeted £30m for Brexit.

• Investigations are opened by the FCA as a fact-finding exercise.

We have certainly seen a shift in the FCA’s approach to enforcement over the past couple of years.

Under current head of enforcement Mark Steward, the FCA opened 75 per cent more investigations in the past year. In explaining this change, the FCA has indicated 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 context.

The mission statement emphasises that companies 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.

Wider approach

The mission statement goes on to say that “opening 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 per cent increase mentioned. 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. 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 that are currently underway.

Abdulali Jiwaji is a partner and Elliott Fellowes is a trainee solicitor at Signature Litigation