From an enforcement perspective, the key message delivered in the first business plan published since Nikhil Rathi took over as Chief Executive nine months ago is that the FCA will be taking a more assertive approach.
A drive to be a more assertive regulator is one of the three key changes that the FCA is looking to make - the others being a move to be more innovative in taking advantage of data and technology and more adaptive in adjusting to the way that markets, products, services and consumer choices evolve.
In the first in a series of articles focused on regulatory enforcement, we take the opportunity to look at the impact of the pandemic on the FCA’s enforcement action in the last year as indicated by the FCA’s enforcement data as well as at the signposts provided in the FCA’s business plan to what we can expect to see in the enforcement landscape over the next 12 months and beyond.
Looking back: Enforcement data for 2020/21
Looking back at the year ending 31 March 2021, the FCA achieved 147 outcomes using its powers of enforcement and issued fines of £189.8m. Both figures are markedly down on financial years 2019/20 (217 outcomes and fines totalling £224.4m) and 2018/19 (286 outcomes and fines totalling £227.3m). This represents a decrease of 15 per cent in fines imposed in the year to 31 March 2021 compared to the prior financial year and a 32 per cent reduction in outcomes achieved.
This is very likely a product of a shift in the focus and priorities of, and the allocation of resource by, the FCA as a result of the pandemic, a point foreshadowed by the opening sentence of the FCA’s 2020/21 business plan published in April last year – “With finite resources, and nearly 60,000 firms to regulate, we’ve always had to make hard choices”. It was perhaps inevitable that a need to focus on ensuring that markets continued to function well and that the most vulnerable were protected would see enforcement action take more of a back seat over the past year. However, the message delivered by the FCA’s 2021/22 business plan – one of a more proactive, more assertive regulator – certainly suggests that the enforcement data for 2020/21 represents a blip on the enforcement landscape rather than a sign of things to come.
Upcoming enforcement trends
A more assertive regulator
Mr Rathi was clear that the FCA intends to be a more assertive regulator and will “test its powers to the limits”. Even where it does not have the requisite powers to enforce, Mr Rathi states that the regulator will not turn a blind eye to wrongdoing in the markets and will use its insights to help other agencies achieve outcomes. The FCA will also be looking to work with the Government to increase the perimeter of its powers, citing the adaptation of the UK’s framework for financial services regulation following the UK’s withdrawal from the EU and noting that the Future Regulatory Framework will transfer some rule-making responsibilities to the FCA and strengthen transparency, accountability and scrutiny.
The new business plan outlines how the FCA will go about pursuing this more assertive agenda, the tools it will have available to it in doing so and some of the areas that might be the focus of enforcement action going forward – highlighting an intention to detect harm and misconduct faster using data and technology, continue with a targeted litigation strategy to provide legal clarity (for example the business interruption insurance test case), and engage actively with other agencies and regulators to assist them in taking action when the FCA cannot.
Unsurprisingly, data is at the heart of the FCA’s regulatory strategy. The volume of data received by the FCA in support of its supervisory and enforcement work is growing exponentially and the FCA sees the availability of the tools needed to be able to automate data collection and analyse that data to act early in stopping or preventing misconduct as key to its enforcement agenda – focusing over the next 12 months on using advanced analytical techniques to proactively identify and prioritise firms or harms for investigation. The FCA is investing £120m in this data strategy over the next three years.
The business plan also suggests that taking action at an early stage will form a significant part of the modus operandi of the FCA as it looks to fulfil its ambition of being a more proactive and assertive regulator. The FCA “expects to intervene in real-time more often to prevent harm to consumers and market integrity” and intend to achieve quicker outcomes.
As the FCA itself recognises, there will be instances in which there is a tension between the desire to achieve fast results and stop harm or misconduct occurring at the pass, and the procedural steps necessary to arrive at regulatory outcomes – Mr Rathi himself acknowledging that in stepping-in to stop crime or misconduct there is a risk of tipping-off wrongdoers and making regulatory decisions harder to achieve – something that will need to be balanced alongside the FCA’s stated aim of identifying those involved in poor behaviours and ensuring that they are driven out of financial services promptly, whether they are deliberately exploiting customers or well-intentioned but lacking competence.
In order to achieve the latter aim, the FCA proposes two procedural changes in particular:
- Changes to the financial promotions regime to put in place new procedures to fast-track the FCA’s supervisory and enforcement response to breaches, with a focus on proactively monitoring firms that repeatedly breach the FCA’s rules and investigate where breaches indicate more serious issues; and
- A consultation on proposals to streamline decisions on authorisation and specific supervisory and enforcement actions, changing the balance of decisions taken by the FCA Executive and the Regulatory Decisions Committee.
Also consistent with the theme of a more proactive and assertive FCA and a strategy of early intervention are the FCA’s plans for increased oversight of new firms and firms that are growing significantly. The FCA proposes more intensive assessment and scrutiny of firms’ financials and business models at the outset, increased ongoing oversight of new firms through the implementation of a regulatory “nursery” to monitor firms’ compliance as they and their business plans evolve, and a “Regulatory Scalebox” for achieving increased oversight of growing firms with an eye to operational resilience and scaling sustainably.
Areas of focus going forward
The current FCA business plans retains the focus on the four consumer-facing priorities identified in its 2020/21 business plan – (i) enabling effective consumer investment decisions, (ii) ensuring consumer credit markets work well, (iii) making payments safe and accessible, and (iv) delivering fair value in a digital age – and we can expect the FCA to take action where firms do not have the right culture and systems and controls in place to support these outcomes.
Any new rules implemented as a result of the current consultation on proposals for a Consumer Duty and, potentially, the introduction of a private right of action for breach of any consumer duty under s. 138D FSMA, could also be the focus of regulatory intervention in the longer term.
The business plan highlights the increasing prevalence of fraud, exacerbated by the pandemic and a shift to remote working and the growth of digital interaction with consumers, as a key areas of focus for the FCA, described by Mr Rathi as an “epidemic of scams and fraud”. The FCA intends to work with other agencies where misconduct falls outside the perimeter of the FCA’s powers – giving the example of false or misleading adverts for financial products – and taking steps to pursue FCA-supervised fraudsters and improperly unauthorised/unapproved fraudsters where it can.
Market abuse and financial crime
The business plan notes that new products such as cryptoassets have captured public interest. Mr Rathi described an “explosion” in young people investing in cryptoassets and other volatile assets – presenting significant risks to market integrity and consumers given their highly volatile nature as well as the potential for cryptoassets in particular to be used in financial crime. This is likely to continue to be a focus for the FCA over the next year, alongside market abuse.
The year ahead
It is clear from the data that enforcement activity has been less of a focus for the FCA throughout the pandemic – at least in terms of outcomes achieved and fines levied - than it has been in previous years, for entirely understandable reasons. But this business plan appears to set out an intention to refocus on the enforcement agenda over the next 12 months as we begin to move past the worst of the pandemic and see an increasing assertive FCA, looking to test the perimeters of its powers and adapt to the challenges brought about by technology and uncertain markets.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, July 2021