FCA enforcement activity in the 12 months to 31 March 2020

The FCA had 646 open cases at 31 March 2020 – compared to a similar caseload (647) at the same point last year - and 496 the year before. During the 12 months to 31 March 2020, it closed 185 cases - which is pretty consistent with the count for previous years (189 in 2018/2019, and 208 in 2017/18). However, its opening of new cases has decreased: 184 new cases were opened in the 12 months to 31 March 2020, compared with 343 in 2018/2019 and 302 in 2017/2018.

In terms of the number of financial penalties dished out, this has remained pretty stable over the last three years: 15 (2019/20) and 16 (in both 2018/19, and 2017/18). The financial value of the penalties has stayed at just over £200 million for the last two years (£224.4 million in 2019/20, and £227.3 million in 2018/19), jumping up from £69.9 million in 2017/18.

In terms of outcomes, other than financial penalties, in the 12 months to 31 March 2020 the FCA: varied, cancelled or withdrew approvals/permissions from 176 firms, and handed out one public censure and 12 prohibitions. Nine cases had a criminal outcome and four had a civil outcome. There were no instances of redress/restitution. The FCA explains that the majority of cancellation of permissions relate to consumer credit firms failing to pay fees or submit regulatory returns.

Cases are taking longer to resolve, and at a higher cost. In the 12 months to 31 March 2020, the length of time taken for regulatory and civil cases — including those closed with no further action taken — increased by six months, to an average of 23.9 months, up from 17.5 months last year. (It was 19.1 months the year before). At the same time, the average cost of cases more than doubled, to £229,000 from £103,400 last year. (It was £137,800 the year before). The FCA’s explanation for this is that the "resource required for each case varies depending on factors including scale and complexity. The cost of regulatory cases…conducted can range from around £2,000 to over £2 million".

In terms of subject matter, open cases are classified as: retail conduct, pensions advice, pensions scam, investment scam, retail lending, financial crime, wholesale conduct, insider dealing, market manipulation, listing/prospectus rules/DTR breaches, misleading statements and unauthorised business. In terms of volume of open cases in each of these categories, there isn't much significant increase or decrease from last year, apart from investment scams (up to 14 open cases this year from three last year), which is unsurprising given the unfortunate fact that scams are on the rise, particularly as criminals exploit the COVID-19 pandemic. The highest volumes of open cases relate to unauthorised business (142), retail conduct (134), insider dealing (88) and financial crime (71) – and this was also the case last year. A recent Freedom of Information Act request reveals that the FCA continues to investigate 14 financial institutions and six individuals in connection to the cum-ex tax evasion scandal.

As regards deploying its competition powers (which are concurrent with those of the Competition and Markets Authority (CMA)), details of a new investigation by the FCA were added to a list of public Competition Act 1998 cases in the regulated sectors, published on the CMA’s website, in September 2020. It states that the FCA is investigating suspected anti-competitive arrangements in the financial services sector under Chapter I of the Competition Act 1998 and the case was opened in September 2020. The FCA has one other on-going competition investigation, opened in March 2019, as listed on the website, and also as disclosed in its Annual Report.

The 12 months captured by the data disclosed by the FCA Reports catches the start of the UK Government lockdown due to COVID-19, so next year's data will demonstrate the full impact of this on the FCA's enforcement activity. The FCA says it is not stopping its investigations and that it will continue to uphold its standards without leniency, although practitioners’ experience "on the ground"  regarding the pace of investigations may be quite different. Inevitably, there has been some slowing down in the FCA’s investigative work given the additional and unexpected workload brought about by the pandemic, coupled with operational issues caused by lockdown (for example, the remote working of FCA staff will have made it more difficult for some investigative steps, such as interviews, to be conducted). Indeed, at the FCA’s annual public meeting in September 2020, Jonathan Davidson, Director of Retail Supervision and Authorisations at the FCA, acknowledged a "number of challenges to do with dispersed working" . That said, as the FCA continues to adapt to the "new normal", expect the rate and pace of investigations to increase.

What lies ahead for enforcement?

In terms of enforcement approach over the next 12 months, the FCA states that we should expect to see, amongst other things:

• a continued increase in the use of "early intervention" powers through the use of supervisory notices.
• more use made of the partly-contested case procedure.
• cases where both the FCA and PRA are taking action following a joint investigation.
• more contested authorisation cases in relation to claims management firms.

The pandemic has caused the FCA to intensify its focus on key areas which may have been specifically affected by the situation, as explored below. These are areas where we are likely to see more enforcement action:

Treating customers fairly and vulnerable customers

The Annual Report shows that open cases into retail conduct are high. Looking ahead, there is the potential for further retail conduct cases stemming from the way firms handle forbearance relating to consumer finance measures put in place to help consumers with the financial challenges posed by COVID-19. The FCA has been clear of its expectations of firms in this regard. Although it recognises that firms face a lot of hard work in scaling up appropriate forbearance procedures to deal appropriately with the situation and, added to this, operational complexity due to staff working from home, IT issues, etc. it expects firms to take the necessary steps to treat customers fairly. A recent speech by Jonathan Davidson revealed that, over the coming months, how firms have adapted to these challenges and the outcomes consumers receive, will be an area of intense supervision. The FCA says that it is not looking to "catch out firms on minor mistakes"  but that it if does see significant issues, it will intervene.

In its Annual Report the FCA makes particular reference to unsuitable retail lending causing harm to vulnerable customers. The FCA has had the protection of vulnerable customers in its sight for a while. In July 2019, it launched the first of a two stage consultation on guidance for firms on the fair treatment of vulnerable customers. In July 2020, it published the second stage of its guidance consultation which discusses feedback received to the first. This closed on 30 September 2020, with finalised guidance due soon. (See our previous article).

Understandably, COVID-19 has made this an even more pressing topic, not least because the pandemic’s widespread impact on peoples’ health and/or finances means that a far greater number meets the FCA’s definition of vulnerability. The FCA has also stressed that firms must ensure that vulnerable customers are not "digitally disenfranchised" from the development of digital markets, which has been accelerated by COVID-19.

Anti-money laundering

In April 2019 (in a speech by Mark Steward, Director of Enforcement and Market Oversight at the FCA) the FCA confirmed that it would be conducting "dual track" anti-money laundering (AML) investigations: that is, investigations into suspected breaches of the Money Laundering Regulations (MLRs) that might give rise to either criminal or civil proceedings – thereby giving full force to its powers under the MLRs.

However, recent reports claim that the FCA is not living up to its pledge as there have been no convictions to date - and, in fact, it has been reported that the FCA recently shut down seven out of its 14 criminal AML investigations (two of which were "dual track" and five of which were purely criminal). Consequently, out of the seven still ongoing, only one "single track" investigation remains, with the other six "dual track" cases proceeding on civil and criminal tracks.

The decision to close cases has raised questions over the MLRs' practical application. A prosecution by the FCA might have clarified what kind of conduct could lead to criminal action. This decision also likely reflects the rising costs and increasing time required to complete a criminal investigation, and the FCA may be discovering that the criminal threshold for prosecution is harder to meet in this area than originally thought.

The FCA may, however, ramp up dual-track investigations in light of COVID-19. Criminals are taking advantage of the pandemic to carry out fraudulent scams through a variety of methods and those seeking to launder the criminal proceeds are likely to exploit any weaknesses in firms’ AML systems. The maintenance of effective systems and controls to prevent money laundering has therefore become even more important during this present time, and for the foreseeable future. In a press release in May 2020, the FCA reminded firms to ensure that, whilst operating within the legislative framework, they must be satisfied that their policies, procedures and processes continue to reflect their risk-based approach, including any temporary adjustments required for COVID-19. The FCA recognised that lockdown restrictions may have affected firms’ abilities to use traditional methods to verify a customer’s identity but that, during this period, it expects firms to continue to comply with their obligations on client identity verification. The MLRs and Joint Money Laundering Steering Group Guidance already provide for client identity verification to be carried out remotely and give indications of appropriate safeguards and additional checks which firms can use to assist with verification. 

Market abuse

The Annual Report shows a drop in market abuse investigations: the FCA opened 53 investigations into market abuse over the 12 months to 31 March 2020, down from the 91 it launched in the same period last year. However, this downward trend is unlikely to continue as the FCA has been vocal about this being an area of laser focus going forward.

In its Market Watch newsletter in May 2020, the FCA explained that the impact of COVID-19 has led to issuers needing to raise substantial amounts of debt and equity which potentially gives rise to increased primary market activity and inside information. This, coupled with alternative working arrangements, may raise new, additional risks around identifying and handling inside information. (See our previous article). In October 2020, Julia Hoggett, Director of Market Oversight at the FCA, gave a speech on market abuse at the time of COVID-19, in which she stressed that whilst the fundamentals of the market abuse offences are constant, the ways in which the risk may manifest are not and, therefore, the manner of surveilling for them must also change. The FCA’s expectation is that going forward, office and working from home arrangements should be " equivalent" – this is not a market for information that the FCA wishes to see be arbitraged.

Market abuse is another area where the FCA can investigate on a dual-track basis. The new Financial Services Bill, which was recently introduced to Parliament, seeks to increase the maximum prison sentence for market abuse from seven to ten years in line with other sentences for financial crimes.

Individual accountability

In the 12 months to 31 March 2019, a total of eight individuals were fined just over £80 million by the FCA. There has been a huge drop in the value of fines for the same period this year, with three individuals being fined just under total of £300,000, although this can mainly be explained by the £76 million fine imposed on the former CEO of Keydata Investment Services in January 2019 for mis-selling bonds to retail customers. Indeed for the same period the previous year, the total value of fines was just under £900,000 for ten individuals.

Looking ahead, actions against individuals are likely to rise. The FCA itself states in its Annual Report that the impact of the Senior Managers and Certification Regime (SM&CR) will be "felt more widely" , now that it has been extended to almost all firms the FCA regulates. However data reportedly released in response to a FOIA request, so far at least, seems to indicate that the regime is not being been used as widely as first envisaged: from the introduction of SM&CR in March 2016 to September this year, the FCA opened 34 investigations, closed 11 without action and only successfully enforced a fine on one occasion.

In addition to its powers under SM&CR, the FCA may look to its other powers to bring rogue individuals to justice. The regulator recently brought criminal proceedings against an individual for the alleged destruction of documents which may have been relevant to an insider trading investigation it was conducting. This is the first time the FCA has used its powers under s.177(3) of the Financial Services and Markets Act 2002. Although the prosecution failed, the FCA emphasised its commitment to take action whenever evidence it needs is tampered with or destroyed, a message echoed in its September 2020 Market Watch newsletter. (See our previous article). We may therefore see more prosecutions against individuals for destruction of evidence and other offences being brought alongside investigations – or even where the underlying investigation is not pursued by the FCA.

And bearing in mind that the FCA has been clear in recent years that misconduct by an individual need not be financial misconduct for it to take action ("non-financial misconduct is misconduct, plain and simple" , as stressed by Christopher Woolard, the then Executive Director of Strategy and Competition at the FCA, in a speech in December 2018) it is likely that we will see more action in this space. Indeed, last month, the FCA announced that it is banning three individuals for working in the financial services sector for non-financial misconduct.

An era of increased self-supervision?

In the recent Julia Hoggett speech she warned of "a risk of less self-policing among front office staff" and went on to explain that in normal, pre-crisis, circumstances, where a front office employee observes, or overhears, something questionable involving a colleague nearby, the FCA would expect that the activity would be questioned, or reported to compliance, but with people working remotely, that type of first line control may be diminished, or absent.

The situation is likely to result in a decrease in whistleblowing reports over the next year, despite the FCA gearing up – pre-pandemic - for an increase, by upping resources in its dedicated whistleblowing team, rolling out training to staff, and reviewing and refining its practices. The regulator dealt with 1,153 reports in the 12 months to March 2020, consisting of 2,983 separate allegations — up from 1,119 reports containing 1,755 allegations in the same period for the previous year.

A decrease in in-person, on-site supervisory activities by the FCA is another consequence of the pandemic – especially now that it is clear that some form of lockdown measures will be continuing for longer than originally anticipated.

What does this all mean for firms?

Of course it is imperative that firms continue to ensure they meet all FCA rules and requirements despite the multitude of operational challenges brought on by the current situation, and must give particular attention to the areas of focus highlighted above.  The usual means of staff supervision may not be possible – but firms must nevertheless ensure that equivalent"  monitoring measures are in place and issues can be detected.

Firms must also not overlook one of their biggest tools: the eyes and ears of their staff. Although this "first line of control" may be diminished or absent in some cases, employees are still interacting with each other, albeit virtually, and will still be able to pick up on instances of actual or potential misconduct. Firms must tap into this, by stressing the importance of vigilance amongst their employees and ensuring they are aware of reporting and escalation procedures. A firm’s culture must encourage this. Arguably, the current situation requires a level of self-supervision which goes beyond the norm.

Authored by Philip Parish and Daniela Vella