UK financial services regulatory investigations soar, but NAO warns of staffing challenges

Out-Law News | 27 Mar 2014 | 10:28 am | 2 min. read

The UK's new financial services watchdog is on track to open at least 50% more enforcement investigations by the end of its first year of operation than its predecessor, according to figures obtained by Pinsent Masons, the law firm behind Out-Law.com.

The Financial Conduct Authority's (FCA's) Division of Enforcement has already opened at least 70 investigations into individuals and firms since its inception in April 2013, and has been opening more than six cases a month on average, according to the figures. This compares to a total of 49 investigations begun by the FCA's predecessor, the Financial Services Authority (FSA), in financial year 2012/13; an average of around four cases per month.

Pinsent Masons' findings emerged as public spending watchdog the National Audit Office (NAO) published a progress report on the value for money of the FCA and its co-regulator, the Prudential Regulation Authority (PRA), compared to the previous single regulator. The NAO noted "encouraging signs" that the regulators' aim of more judgement-based, forward-looking regulation was beginning to work, but warned of possible skills shortages due to high rates of staff turnover.

"The new watchdog is certainly baring its teeth, but we do not yet know whether its bark is worse than its bite," said financial services litigation expert Michael Ruck [link] of Pinsent Masons, the law firm behind Out-Law.com. "The real test will be when we see how many of these investigations result in penalties, sanctions or prosecutions and, in turn, whether any of those lead to convictions."

"The FCA's Business Plan and Risk outlook for 2013/14 highlighted that addressing misconduct and taking action on market abuse would be among its key priorities, so the focus on investigations in this area is perhaps not surprising. What is striking, however, it the sheer volume at which investigations are being launched across all aspects of the regulatory regime. Regulated firms should ensure they fully understand the FCA's current priorities and the enforcement agenda," he said.

The PRA and the FCA took over the regulatory functions of the previous FSA on 1 April 2013. The PRA, a subsidiary of the Bank of England, is responsible for most of the day-to-day regulation and supervision of 1,700 banks, building societies and insurers. The FCA is responsible for conduct and compliance, the prudential supervision of the around 23,000 firms that are not otherwise regulated by the PRA and consumer credit regulation.

The regulators are funded through a levy on the financial services industry, but the NAO's report acknowledges that this could be passed onto consumers. The combined forecast cost of the FCA and PRA for 2013/14 is £664m; 24% higher than the cost of the FSA in its final year, according to the watchdog. The regulators have attributed this increase to additional front-line staff, IT, support and premises costs; and the NAO said that they had to be considered in the context of the potential benefits of more effective reduction of harm to consumers and limiting future taxpayer liabilities from future financial crises.

The regulators' new approach was beginning to encourage earlier and more decisive regulatory action, the NAO said. However, it said that evidence of high staff turnover risked undermining industry confidence in the regulators and risked loss of knowledge within the organisations. More than one third of staff currently employed by the FCA have less than two years' service at either the FCA or FSA, according to the NAO, while 31% of those who resigned last year were classed as 'high performers'. Of those who resigned from the PRA, 26% were classed as 'high performers'.

"These are still early days for the new regulators, and there are encouraging signs that their new approaches are gaining traction," said NAO head Amyas Morse. "Attracting and retaining the right staff are vital to keeping this progress on track, and so both regulators need to tackle this issue."

"In future, we will expect the FCA and PRA to demonstrate that their increased costs are achieving value for consumers and the taxpayer," he said.