The Financial Conduct Authority's (FCA) new mission statement has expressed a renewed intent to focus on financial crime, detecting insider dealing, market manipulation and anti-money laundering (AML). As a result, firms and their senior managers must ensure they have adequate systems and controls in place to prevent financial crime. Using our FCA Enforcement Notice Database we identify important enforcement trends. This client alert analyses the FCA's track record of dealing with financial crime and offers insight for prioritising risk management and compliance resource.
As a direct result of one of its fundamental statutory duties under FSMA, the FCA has consistently been concerned with the reduction of financial crime. Outside clear cases of criminality, regulatory focus has historically been on firms’ conduct and any criticism in enforcement action has been primarily concerned with failings in systems and controls.
The maturity of regulatory focus in this area makes it plain that having effective systems and controls to address financial crime risks is the bare minimum organisational standard expected of any regulated firm. This focus will remain. However, in addition, and given the increased attention to individual accountability and responsibility at firms, we see this area as one for increased scrutiny at an individual level.
In this context, it is critical that responsibility for compliance with financial crime matters is allocated appropriately and that, alongside allocation, there is demonstrable understanding on the part of firms’ senior management in order to reduce the chance of criticism and enforcement action being taken against individuals for regulatory failings in this area.
The recent decisions by the FCA in its Final Notices relating to Sonali Bank (UK) Limited and Steven Smith1 clearly demonstrate what we see as the likely trajectory of enforcement action relating to financial crime matters by the FCA, as it continues its emphasis on the responsibility of individuals.
In this client alert, using data extracted from the Reed Smith FCA Enforcement Notice Database, we examine enforcement action relating to financial crime failings identified by the FCA by reference to rules and guidance comprised in chapter 6 of the FCA’s Senior Management Systems, Arrangements and Controls (SYSC) component of its Handbook. We also briefly consider the impact of the Senior Managers Regime (SMR) and the planned extension to regulated firms from 2018, and consider the personal impact on senior managers at regulated firms.
The FCA’s spotlight on compliance and financial crime
The FCA recognises that the UK financial system can be seen as an attractive playground for financial crime and has taken an active role in ensuring there are appropriate safeguards in place to prevent this.
Last year in its guide on financial crime and compliance, the FCA stated that it views best practice as including senior management taking active steps to prevent financial crime and putting in place clear criteria for escalating financial crime issues.
In its latest 2016/17 Business Plan the FCA restated that financial crime and anti-money laundering was one of its priorities, a sentiment echoed by the FCA’s Executive Director of Supervision, Megan Butler. Speaking at the Financial Crime and Sanctions Conference on 20 September 2016, Butler emphasised that financial crime and anti-money laundering was “[a]n area on which the FCA will always be focused,” and that it was “important that the FCA and other domestic and international agencies work with industry to ensure the UK financial system is a hostile sector for such criminal activity”2.
Butler also called for a more effective approach to combatting financial crime, citing that banks had a key role to play in achieving this.
Mark Steward, the FCA’s Director of Enforcement and Market Oversight, has made the FCA’s position very clear. In respect of the Final Notice for Steven Smith (noted earlier) he said: “There is an abundance of guidance for firms on how to comply with AML and financial crime requirements and no excuse for failing to follow it. The FCA will not hesitate to take action against firms and senior individuals who fall short of our standards.”
Mr Smith was an MLRO and he was criticised for (among others): failing to put in place appropriate AML monitoring arrangements; reassuring his board that AML controls were working well when, in the FCA’s view, they were not; failing to impress upon senior management the need for additional resources; and not recruiting more resources in a timely fashion.
While this pre-dated the introduction of the SMR, it still had a clear, personal impact on Mr Smith: he received a public outcome; was banned from holding SMF 16/CF10 (compliance oversight) and SMF 17/CF11 (money laundering reporting) responsibilities at a regulated firm in the future; and was made to pay a fine.
The context of firm and individual responsibility going forward is likely to be demanding. The FCA has put a particular focus on financial crime issues as it considers that challenging business environments, which, with the spectre of Brexit in the UK looming, may prove to be ever more present and may increase pressure on senior managers to take decisions which directly or indirectly lead to firms reducing investment in systems and controls and/or in ensuring effective oversight and monitoring of existing financial crime-related systems and controls.
Against this backdrop, the FCA is keen to measure the effectiveness of firms’ and individuals’ efforts to manage financial crime-related systems and controls, and from 31 December 2016, many firms will be required to file an annual Financial Crime Return as part of the regular reporting regime. This is designed to provide data to the FCA which it can then use to inform its regulatory expectations and approach to enforcement in this area.
Review of substantial FCA enforcement action for SYSC breaches
The FCA routinely takes action against firms for breaches of SYSC requirements. Our FCA Enforcement Notice Database shows that during 2016, over half (51 per cent) of total fines imposed by the FCA related to breaches of SYSC. In addition, over the past eight years, by far the largest component part (at 43 per cent) of breaches of SYSC has related to breaches of SYSC 6 (as illustrated by figure 1 below), which encompasses breaches of financial crime-related systems and controls.
Compliance with SYSC 6, and particularly SYSC 6.1.1, has been particularly problematic as illustrated by figure 2 below, with 40 per cent of SYSC 6 breaches relating specifically to a breach of the requirements of SYSC 6.1.1. SYSC Chapter 6 requires firms to have procedures in place to ensure compliance, conduct internal audits and prevent financial crime, and it is clear that the FCA places a certain onus on senior management to achieve this.
Enforcement action against individuals likely to rise
As noted earlier, a review of our FCA Enforcement Notice Database confirms that the FCA has not historically prioritised taking action against individuals for breaches of SYSC 6.1.1.
While it has always been part of the regulatory landscape, the mantra of individual accountability has been recently reinforced by the introduction of the SMR, directly impacting some financial services firms. That regime is due to be extended to remaining regulated firms in 2018. While the SMR does not fundamentally change the regulatory landscape, it more clearly defines the scope of individual responsibility, through the creation of individual Statements of Responsibility (SoRs). These SoRs attribute responsibility and, as a matter of practical implementation and consideration, effectively create a rebuttable presumption of culpability being attributed to the relevant responsible individuals.
This concept is reinforced by a recent statement from Andrew Bailey, the Chief Executive of the FCA, who emphasised the need for “senior managers in our financial institutions [to take] responsibility for the actions they take”3.
Given the recent introduction of the SMR, it is too early for enforcement outcomes flowing from it to be available. It is inevitable, however, given the continued and reinforced emphasis on personal responsibility, that the FCA will seek to take action in this area over the next 12 to 18 months.
While not determinative, it is interesting to note that the number of individuals (approved persons) sanctioned by the FCA as at the beginning of October 2016 is already higher than the total number of individuals sanctioned in each of 2014 and 2015. The graph below illustrates a fluctuating trend of action against individuals over time, but the recent trend over the past few years, as stronger messages of senior management personal accountability from the FCA have become the norm, is for an upwards trend of enforcement outcomes against individuals. Given the current focus on individual responsibility, we predict that this trend will continue, and may well increase.
The FCA’s crackdown on financial crime is a trend that will continue, and we expect enforcement action figures to rise, particularly in relation to individuals. The Senior Managers Regime has made it easier for the FCA to identify breaches and hold individuals accountable. With the FCA showing no signs of slowing down its focus on financial crime, firms and their senior managers must ensure they have adequate systems and controls in place to prevent financial crime.