Mandate for change

One of the most vociferous criticisms of the Financial Services Authority was that it was ‘toothless’ in its approach to enforcing the  rules for financial institutions. Its alleged soft touch approach to regulation was cited by some  as being contributory to the eventual extent of such scandals and disasters as the Equitable Life  collapse, the Libor rate fixing revelations and, according to certain sections of the media, the  near collapse of the UK’s banking system.

One of the mandates for the two regulatory bodies that emerged, phoenix-like, from its ashes, was  to ensure the interests of consumers, rather than regulated businesses, were unambiguously at the  centre of its approach to enforcement: the consumer protection objective.

The FCA’s approach to enforcement

The FCA have stated that their approach to enforcement will emphasise five elements:

  • to be more forward looking in its assessment of potential problems, looking at how they can tackle issues before they start to go  wrong - and the recent series of thematic reviews shows that this is some way into being put into  action;
  • to intervene earlier when they see problems, and before any problems cause consumer detriment or  damage to market integrity – using the new ‘tool in their armoury’ discussed below;
  • to tackle underlying causes of problems, not just the symptoms;
  • to secured redress for consumers if failures do occur; and
  • to take meaningful action against firms that fail to meet the FCA’s standards, through levels of fines that have a deterrent effect  (and we have already seen a number  of recent fines levied on regulated firms in the millions, and  even tens of millions of pounds).

Delegation of authority

The core focus of the FCA’s supervisory engagement with London market insurers is where insurers  outsource services to other companies. The regulator has reiterated the message that insurers  remain responsible for the actions of their agents, and where oversight of delegated authority  falls short of expected standards, regulatory action may well follow.

Discussing the FCA’s approach to enforcement in a speech in October 2013, its Director of  Enforcement  and Financial Crime, Tracey McDermott, emphasised that their approach would be “more  pro- active, more interventionist, more creative and more judgment-based” in pursuing ‘credible  deterrence’ with ‘robust’ sanctions. She indicated that they consider that in the financial  services sector there are still serious issues, pointing to a recent review into PPI complaint  handling which concluded that two thirds of complaints were still not being handled correctly, as  well as the number of upheld complaints (across the board) to the Financial Ombudsman Service.

She also indicated that the FCA was concerned about the level of AML compliance, and that we should  expect to see further thematic and enforcement work in this area.

Ms McDermott concluded with a topic we have heard being repeated elsewhere in the industry: the renewed focus which the FCA  intend to place on the responsibilities of senior managers, in particular their intention to hold  them, as individuals, to account for conduct failings in their organisations – through more focus  at the approval stage, increase supervisory attention, and on increased emphasis on individuals at the investigation.

Publication of proposed enforcement action A significant new tool in its enforcement armoury is a new power to publicise warning notices by  publishing information about proposed enforcement action. In October 2013, the FCA published its  policy detailing how it will use this new power. Previously, the FCA was only able to publish  information  about enforcement proceedings  once it had decided to take action against a firm or  individual.

Warning notices about proposed enforcement action will usually name the firm under investigation  and, in some cases, name the individual involved. The FCA recognises that in most cases the  potential harm caused to an individual from early publication may exceed the benefits of early  transparency; however, this is not deemed to normally be the case for firms.

The policy published by the FCA sets out examples about these circumstances and explains how it  will make such assessment. The FCA’s policy is based on the  following views:

  • that consumers, firms and market users will be able to understand the types of behaviour that  the regulator considers unacceptable at an earlier stage, which in turn should encourage more  compliant behaviour;
  • that by showing at an earlier stage that action is being considered, confidence in the FCA and the regulatory system should be  enhanced;
  • that there will be more openness in respect of the enforcement process, which will generally be  in the public interest; and
  • that it aligns the stage at which publicity is given in regulatory cases with the stage at which  publicity is given in civil and criminal cases.

Firms should therefore be mindful, going forward, of their own conduct and be aware of the  potential consequences of a potentially non-compliant approach – the reputation risk may arise much earlier on, i.e. before the conclusion  of typically lengthy enforcement proceedings.

It is to be hoped that the FCA will indeed be very cautious in any decisions to name firms, and in  particular individuals, understanding the damage - reputational, financial and potentially in terms  of litigation risk, that can result from such allegations regardless of whether or not they are  subsequently substantiated.