Expect proactive FCA enforcement in coming year

In setting out its ‘direction of travel’ for the coming year, the FCA’s business plan for 2021-22 can leave no one in much doubt as to its intention to become more assertive. In fact, it is highlighted as one of the regulator’s core drivers for change.

This assertive approach is particularly acute in the context of enforcement, which is perhaps unsurprising following parliamentary and media scrutiny of the FCA’s pace and general responsiveness in recent years. The FCA commissioned several independent internal reviews, recommendations from which, such as becoming a more data-enabled regulator, have found their way into the business plan.

Looking ahead, it seems that the FCA’s calculation here is that the cost of passivity is more expensive from a regulatory, reputational and operational viewpoint than the cost of proactivity – even if the latter approach carries its own risks such as judicial review of the FCA in cases where it may be overstepping the limits of its powers. Regulated firms, and issuers that fall under the FCA’s remit due to other regulatory arrangements such as the Market Abuse Regulation (MAR) should be under no illusion that the FCA is prepared to test those limits – particularly in response to its strategic priorities.

Consumer and wholesale markets

The FCA’s strategic and policy responses will, of course, vary depending on the type of business and the markets in which that business operates. For many, this will require a holistic and inter-connected approach – noting the FCA’s acknowledgement that, while there are significant differences between wholesale and retail markets, they cannot be entirely separated. The business plan cites the example of asset management firms: these play an important part in wholesale markets, but retail consumers use many of their products and can benefit from direct access to prices established in wholesale markets.

At the same time, and as we have noted previously in the context of consumer protection, the FCA’s focus has been on the increased interest among retail investors in trading in shares and other regulated financial instruments, as well as unregulated products, such as cryptocurrencies – something which the FCA has characterised as the ‘gamification’ of finance in our increasingly digital lives.

Although the Financial Services and Markets Act (FSMA) provides that consumers are expected to take responsibility for their decisions, the FCA has been very clear in emphasising the substantial responsibilities that firms operating in these markets have. This is likely to be an area of significant attention by the FCA. For example, the business plan states: “Participants in wholesale markets must meet conduct obligations, including rules against manipulating prices or spreading misleading information. An appropriate degree of consumer protection partly relies on firms in wholesale markets meeting the components of market integrity set out in FSMA: orderly operation, resilience, transparency and strong defences against financial crime and market abuse”.

The balance of responsibility between consumer and business is not always an easy one to strike, but when viewed through the FCA’s ‘assertive’ lens, and its recent consultation regarding a consumer duty of care, the balance is clearly being tilted in the consumer’s favour. As a result, businesses may find themselves having to shoulder an increasing number of regulatory responsibilities to ensure that consumers are adequately protected – sometimes from themselves.

This is not always easy, and a business can’t legislate for everything, but a failure to demonstrate that reasonable steps have been taken in this regard could well lead to unwanted regulatory attention.

Proactivity at the boundaries of the regulatory perimeter

Not only is the FCA looking to assert itself within its established remit with respect to wholesale and retail markets, it is also looking to assert itself in and around the perimeter of its powers. In this regard, the FCA has made it clear that it will not stand by where misconduct occurs, even where it is not the principal regulator.

This ties in with the FCA’s emphasis on improved intelligence-gathering and data analysis, where it will look to share its insights with other regulators and prosecuting authorities which may be better placed to act, depending on the circumstances.

This ‘proactivity at the perimeter’ is also evident in the FCA’s positioning on legislative change. For example, in its business plan, it welcomes the government’s proposal to include investment fraud in the Online Safety Bill, but argues that this should also apply to online advertisements – “the biggest source of consumer fraud” in the FCA’s words – and not just user-generated content.

Some corners may question the FCA’s commitment to test the limits of its powers to further its statutory objectives when arguably the regulator has already tried that approach in the past. However, others will say that there is a real need for the regulator to pursue this course to ensure proper protection for consumers and the good operation of the financial markets – promoting justice by sanctioning offenders but also so that such enforcements, if successful, can be used by other firms as indicators of how they should operate in an outcomes-focused regime.

The FCA will no doubt be prepared to engage in lengthy, and potentially complex, judicial reviews as well as face public and government scrutiny. As a public body, it will need to ensure that taxpayer money is being well spent in such pursuits.

Fraud and real-time intervention

Combatting fraud remains a key part of the FCA’s plans, which is not surprising given the increase in fraudulent activity during the pandemic.

The FCA has already been proactive in terms of building its ‘Scam Smart’ initiative and cooperating with enforcement partners. Looking ahead, there is a significant focus on stopping bad actors from coming into the marketplace in the first instance, with the FCA aiming to consult on proposals to streamline decisions about authorisation and specific supervisory and enforcement actions. This will involve a change in the balance of decisions taken by the FCA Executive and the Regulatory Decisions Committee (RDC), with greater and more frequent ‘real-time’ intervention to prevent harm to consumers and market integrity – including, if necessary, turning down more applications for authorisation.

This commitment to streamlining decision-making and preventing consumer and market harm more quickly is, on its face, commendable. Maintaining market integrity and protecting consumers does periodically require timeous interventions by the regulator, with the recent supervisory notice against UAB Finolita Unio a useful illustration. The FCA identified that the firm had inadequate financial crime systems and controls, and moved swiftly to shut down its operations in the UK.

The FCA has also previously talked about adopting a ‘use it or lose it’ approach to regulatory permissions, where firms that have not earned any regulated income over a 12-month period could potentially have their permissions revoked. The idea would be to target firms which simply use their regulated status to add credibility to their unregulated activities. We may well see this as another facet of the FCA’s more assertive approach.

However, it is important to recognise the effect these developments will have on the RDC. Recent reports indicate that the FCA’s emphasis on ‘early interventions’ has contributed to a drop in the number of cases going to the RDC, which is already subject to an internal review of its remit. Historically, the RDC has provided a very important independent check and balance to the FCA Executive, whether in the context of authorisations or the sharp end of enforcement action, and it will be interesting to see how and in what form it will emerge in future.

While one recognises the importance of acting swiftly to remedy time-critical risks, it is also vital for market participants that the FCA’s decision-making processes and outcomes are robustly scrutinised to ensure their fairness, proportionality and, indeed, lawfulness. The RDC plays a key role in that respect, and one hopes it will continue to have an effective voice.

Co-written by Anthony Harrison of Pinsent Masons