FCA enforcement – more is less?
November 2018 | SPOTLIGHT | BANKING & FINANCE
Financier Worldwide Magazine
November 2018 Issue
In July 2018, the UK Financial Conduct Authority (FCA) published its ‘Enforcement annual performance report 2017/2018’ (Performance Report), an overview of the FCA’s enforcement activities during the regulators’ past financial year (31 March 2017 to 1 March 2018). Containing a comprehensive dataset of enforcement outcomes over the relevant period, the Performance Report provides both firms and practitioners with an invaluable insight into where, and how, the UK financial services regulator is using its enforcement powers. The Performance Report also permits some limited assessment of the impact of reforms to the FCA’s enforcement policies and processes championed by Mark Steward, the FCA’s director of enforcement and market oversight.
The published data in the Performance Report shows that the downtrend in financial penalties levied by the FCA – a marked feature of the past couple of years – has continued. Total fines imposed by the regulator in 2017/2018 were £69.9m from 16 cases, far below the £1.4bn in fines meted out by the FCA in 2014, the £905m levied in 2015, and less than half the £181m recouped by the regulator from 15 cases in 2016/2017.
Is a reduction in fines an indicator of a regulator on the retreat? Not necessarily. Some figures for past years were arguably distorted by the impact of the enormous fines paid by the banks following the LIBOR and FX manipulation scandals. Even if, once those atypically high penalties are taken into account, the downward trend remains, this is not inconsistent with a light-touch or permissive regime.
In a March 2018 consultation on its ‘Approach to Enforcement’ (a final version of which is expected later this year), the regulator argued that good enforcement outcomes are not always achieved by higher fines. Mr Steward suggested in June that through using existing tools the regulator could intervene earlier, and make use of a range of remedial sanctions as an alternative to deploying financial penalties as a deterrent – the £160m programme of restitution required of Vanquis Bank Limited being one such example.
Alongside a greater focus on using consumer remediation as much as fines to sanction misconduct by regulated firms, and consistent with the desire to intervene far earlier where wrongdoing is suspect, the FCA’s enforcement division has sought to be quicker to open cases. The anecdotal experience of practitioners has suggested that this new policy has led to substantially more ‘live’ enforcement investigations, a trend for which 2017/2018 data now provides some quantitative support: with 504 cases open as at 31 March 2018, the regulator has increased its caseload by 20 percent over the last year.
In particular, the 2017/2018 data reveal a sharp uptick in the number of culture and governance cases opened by the FCA. As of 31 March 2018, the regulator has four times as many (61) culture and governance cases open as it did a year earlier (15). Culture and governance has always been a key focus for the FCA, and it is clear from the regulator’s Annual Report for 2017/2018 that these issues remain a priority. As the Senior Managers and Certification Regime (SM&CR) becomes more fully embedded both in deposit takers and dual-regulated investment firms, and then eventually is rolled out to all regulated firms, this is an area which will remain a key area of focus for the FCA generally, and its enforcement teams specifically.
2017/2018 has also seen a significant increase in the number of financial crime cases on the regulator’s books: 86 cases open as at 31 March 2018 represents almost a third more open investigations than the 55 the FCA had open in April 2017. Retail conduct and unauthorised business investigations have also increased, albeit incrementally. Interestingly, and perhaps contrary to the experience of practitioners and messages being sent to the market, the number of insider dealing investigations has declined some 10 percent over the FCA’s 2017/2018 financial year.
While the FCA’s new expansive approach to opening cases was supposed to be tempered by a concomitant willingness to close investigations where appropriate, 2017/2018 data suggest that the regulator is more reticent to close down cases than it is to open them. The question is how the FCA intends to progress all these investigations timeously and in circumstances where demands for further resource to meet these new challenges are likely to be met with little sympathy.
Accepting that the material available to enforcement to deal with this increase in investigations is finite, Mr Steward has argued that the “challenge” for the regulator is “to become vastly more efficient, strategic and focused, especially in conducting investigations more quickly and expediently”. Yet practitioners remain sceptical that a 20 percent increase in workload unaccompanied by additional resource will not inevitably result in poorer enforcement decisions, taken more slowly – concerns which are not allayed by evidence within 2017/2018 data to show that the FCA is already taking longer to conclude its cases.
In addition to an increase in the volume of cases currently open, 2017/2018 data shows that, on average, the time it takes for an FCA investigation to conclude has also increased. In 2016/2017, it took 23.2 months for a case to conclude by way of settlement agreed between regulator and the subject of the enforcement action, and 33.6 months where the subject elects to contest any enforcement proceedings before the FCA’s Regulatory Disputes Committee (RDC).
Regulatory cases necessarily take time to conclude, and it is not clear that the recent increase in average time to conclusion is a product of enforcement teams having to spread themselves thin to cover a burgeoning number of live investigations. It is nonetheless a cause for concern that contested cases can take – on average – the best part of three years to conclude. Irrespective of the outcome, the consequences for individuals of being the target of regulatory investigation is almost always catastrophic, with the potential to cause significant and ongoing financial and psychological harm.
The Performance Report’s message is clear: the FCA is opening a significantly greater number of investigations. Yet this rapid increase in open cases begs a number of important questions. Will the FCA genuinely prove able to close down investigations as quickly as it is currently opening them? If not, how can it guarantee quality of decision making, and the application of robust and fair processes in circumstances where enforcement staff are being asked to shoulder ever greater workloads? Will more cases lead to yet greater delays for individuals already waiting years for the opportunity to contest serious allegations of misconduct? Firms and practitioners may need to reserve judgment on all these questions until, at least, the FCA’s next performance review for 2018/2019 is published next year.
Hannah Laming is a partner at Peters & Peters Solicitors LLP. She can be contacted on +44 (0)20 7822 7752 or by email: firstname.lastname@example.org.
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Peters & Peters Solicitors LLP