UK: Notes From The Regulator

Last Updated: 2 November 2015
Article by Laura Cooke

In this article, we look at a number of recent publications of interest, and a few consultations to look out for in the coming months:

1. FCA publishes referral criteria for enforcement Investigations

Experience in recent years has led many to comment on the increasingly "grey area" between the regulator's supervisory and enforcement work. This, in turn, can cause issues for FI insurers when seeking to determine whether and when investigation costs cover has been triggered.

However, we now have some clarity as, on 10 July 2015, the FCA published its new referral criteria for enforcement investigations. This step was taken in response to a report from HM Treasury in December 2014 which recommended a number of improvements to the enforcement process, but focussing particularly on the referral and settlement decision-making stages.

When deciding whether to investigate, the first question the FCA will consider is whether an enforcement investigation is likely to further its aims and statutory objectives (being the protection of consumers, to enhance market integrity and to promote competition in the interest of consumers). To assist in answering this primary question, the FCA will then consider the following:

What is the strength of the evidence and is an enforcement investigation likely to be proportionate?

Under this heading, the FCA will consider: the strength and availability of evidence, whether an enforcement investigation is proportionate in terms of the seriousness of the failings in question, and the amount and availability of resource that will be required to investigate; prioritisation of this case against other cases that could be referred to enforcement; any action already taken, or to be taken, by another authority or agency (in the UK or abroad) in relation to the same firm or individuals; and the impact that opening an investigation might have, particularly where the subject is an individual.

What purpose or goal would be served if the FCA were to take enforcement action in this case?

The FCA takes a strategic and risk-based approach to enforcement and the exercise of discretion is central to this. Reasons why enforcement action could be taken may include: the deterrence effect in respect of not only the wrongdoer ("specific deterrence") but also more widely by serving as a reminder to others and publicly reinforcing the regulatory requirements in priority areas ("general deterrence"). Other factors cited include holding those responsible for very serious breaches to account with proportionate penalties and sanctions ("justice") and removing wrongdoers from the industry or imposing other restrictions where appropriate ("protection"). More detailed factors in relation to each of these four elements are expanded upon in the criteria.

A fifth factor under this heading is securing redress for consumers, which can be a feature of FCA enforcement action. However, if it is possible to secure redress by means other than a formal enforcement investigation and, where redress is the priority, the FCA will consider those other options without referring to enforcement.

Indeed, efficiency is clearly a factor; the FCA recognises that the formal enforcement investigations are expensive and resource intensive for both it and the firms and individuals involved. Therefore, if there is a more efficient and effective way for the regulator to achieve its statutory objective (for example by utilising one of its other powers such as closer supervision, a skilled person report, limits or additional requirements on a firm's regulated activities or requiring a firm to redress customers) this will be considered before enforcement.

2. FCA & HM Treasury launch joint review of UK financial advice industry

On 3 August 2015, the FCA and HM Treasury announced a joint review (the Financial Advice Market Review ("FAMR")) which will examine how financial advice could work better for consumers.

Given the significant regulatory changes made to the provision of financial advice in the UK in recent years (notably by way of the Retail Distribution Review – the final form of which has not been without its detractors) and the increased demand for financial advice consequent upon the new pensions freedoms, it will be interesting to see what further recommendations arise from this new review.

The terms of reference state that the FAMR will consider the current regulatory and legal framework governing the provision of financial advice and guidance to consumers in respect of investments, savings, pensions and other retirement income products, mortgages, consumer credit and general insurance. This will include an examination of:

  • The perceived "advice gap", in terms of availability and affordability
  • Regulatory or other barriers firms may face in giving advice and how these can be addressed
  • How to give firms regulatory clarity
  • Opportunities and challenges presented by new and emerging technologies
  • How to encourage a "healthy demand side" for financial advice, including addressing barriers which put consumers off seeking advice

Somewhat cryptically, the terms of reference state that the FAMR will also consider the interplay between the regulatory framework for advice and the roles of the FOS and the FSCS in redress.

The FAMR consultation paper has not yet been issued but the terms of reference anticipated that a report, containing recommendations for reform, will be produced in advance of the 2016 Budget.

3. FCA to publish consultation on complaints longstop limitation period by the end of the year

When considering whether a complaint has been made "in time" for the purposes of the FCA Dispute Resolution (DISP) Rules, both firms and the FOS can dismiss a complaint without consideration of the merits if the complaint is made more than:

  • Six years after the event complained of
  • Three years from the date on which the complainant became aware (or ought reasonably to have become aware) that he had cause for complaint

These rules are not dissimilar from the provisions in the Limitation Act 1980 applying to claims in negligence. However, it has long been a source of discontent among FCA regulated entities and their insurers that the DISP Rules do not replicate the Limitation Act's 15 year overriding limitation period.

In its 2014/2015 Business Plan (published on 31 March 2014), the FCA announced that it would reconsider the case for a 15-year time limit on complaints to the FOS.

Although there was regulatory silence on the issue for the next 18 months, on 6 August 2015 (and in response to a question posed during the FCA Annual General Meeting in July), the FCA stated that it expects to publish a discussion paper by the end of 2015.

While this review has raised hope among financial services firms that a sensible discussion can be had on the issue, the FCA has specifically stated that it will be considering whether the current arrangements are delivering the best outcomes for consumers overall. As such, one wonders whether the genuine financial and insurance implications for firms as a consequence of the current arrangements will be given due weight by the regulator.

4. FOS complaint statistics for 2014/2015

The FOS annual review for the financial year 2014/2015 (published in May 2015) contained, as always, an interesting overview of retail financial services complaint statistics and themes:

  • The total number of new complaints received by the FOS dropped by over 35% on the past year (2015: 329,509 / 2014: 512,167) due to a significant reduction in the number of payment protection insurance (PPI) complaints received
  • Putting aside PPI (which accounted for 63% of new complaints received), the financial products concerned were (in order of volume) current accounts, mortgages, credit cards, consumer credit products and services, motor insurance, unsecured loans
  • Only 4% (2015: 14,723) of all new complaints received concerned pensions and investments, which is a similar level to last year. Nearly two thirds of these complaints concerned sales and advice, with the balance concerning administration. Amazingly, mortgage endowments are still the most complained about investment product before the FOS, followed by whole-of-life policies and savings endowments, personal pension plans, investment portfolio management, SIPPs and SSASs,investment ISAs, stockbroking services and annuities
  • In respect of pension complaints, the FOS observed that a number involved sums significantly in excess of the GBP 150,000 maximum award. While overall pension complaint numbers were slightly down on the prior year (2014/2015: 4,290; 2013/2014: 4,361), the FOS noted that, during 2014/2015 there was a notable increase in complaints about annuities. We wonder whether this will be a trend going forward in light of the pensions freedoms introduced in April 2015 so that purchasing an annuity is no longer mandatory. Further, the FCA announced in December 2014 that it would be undertaking a thematic review of non-advised sales practices by pension annuity providers. Another common theme was complaints concerning SIPPs, threequarters of which involved advice to invest the pension funds in unregulated collective investment schemes (UCIS)
  • Of the complaints concerning investment-linked products (2014/2015: 3,128; 2013/2014: 3,104) a significant proportion also concern UCIS
  • Complaints about stockbroking and portfolio management remain steady (0214/2015: 2,043; 2013/2014 2,079) and the FOS is still continuing to receive complaints concerning investment in film partnerships, a trend it noted in the previous year
  • In the period since the FOS's establishment to 31 March 2015, it has handled nearly 2.8 million cases, 61% of which have involved just three issues: mortgage endowments, bank and credit card charges and PPI
  • Claims management companies are predominantly active in respect of complaints concerning PPI, packed bank accounts and credits cards, but have also been involved in other types of complaints including investments and mortgages
  • The FOS resolved 448,387 complaints during 2014/2015 (2013/2014: 518,778), approximately 10% of which (43,185) were by way of an Ombudsman final decision. Approximately two-thirds of Ombudsman referrals were at the request of the consumer and, in 92% of final decisions, the Ombudsman didn't recommend anything different to the adjudicator. Unsurprisingly pension and investment complaints (which can be relatively complex) were more likely to be require an Ombudsman's decision
  • Complaint uphold rates still vary significantly from firm to firm and product to product
  • In terms of redress, around 20% of complaints resolved did not involve any monetary redress; rather, the FOS required the firm to take corrective action. A further 27% of complaints resolved involved the payment of redress up to GBP 25,000, 1.5% involved redress payments of between GBP 25,000 and GBP 75,000 and 0.5% concerned redress payments between GBP 75,000 and GBP 150,000. The FOS said that approximately 0.5% concerned redress in excess of GBP 150,000, but such awards are only enforceable up to GBP 150,000 albeit a firm may elect to pay more if it wishes. However, a further 50% of complaints resolved involved the FOS giving directions as to the basis or formula on which redress must be paid, and it does not appear that these redress sums are captured in the FOS's statistics

5. Highlights from FCA's Annual Report & Accounts 2014/2015

On 2 July 2015 the FCA published its Annual Report & Accounts for year end 31 March 2015.

Section 166 skilled person reports

The cost of the skilled persons report falls to the firm and, depending on the focus of the report, they have the potential to be very expensive. While data as to their use is now published by the FCA and PRA on a quarterly basis, the FCA's Annual Report confirmed that, during 2014/2015, 53 skilled person reports were commissioned. The total estimated cost to regulated firms for these 53 reviews was GBP 38.3million with the median cost of reviews being GBP 119,208, and the average cost being GBP 722,229. Compare to 2013/2014, 50 reports and total costs GBP 146.8 million. The skilled persons reports commissions during the past year addressed a variety of regulatory concerns, including: past business and quality of advice (29), adequacy of systems and controls, corporate governance and senior management arrangements (10), client money and client asset arrangements (8), financial crime (5) and data and IT infrastructure (1).

Enforcement activity

During 2014/2015, the FCA took action against 28 firms and 27 individuals, imposing 43 fines totalling approximately GBP 1.4 billion (2013/2014: 46 fines totalling GBP 425 million), issued 55 final notices and secured 95 outcomes using its enforcement powers. The fines in large part relate to LIBOR and FOREX related enforcement activity. The number of prohibition orders issued against individuals during 2014/2015 was 26, the same as last year.

Assisting international financial services regulators

Evidencing the increasingly joined-up nature of international financial services regulation, the FCA Annual Report disclosed that, during 2014/2015, it received 1,047 formal requests for assistance from international counterparts in relation to their investigations. The FCA's response to these requests included conducting interviews on behalf of overseas investigators, requiring information to be produced and providing assistance to many overseas enforcement investigations. One specific example of international investigatory cooperation cited in the Annual Report was "Operation Dovercourt", the FCA's investigation into FOREX manipulation which, it said, has involved close cooperation with US, Swiss and Australian authorities, amongst others.

Redress schemes

The FCA states that over GBP 20 billion in redress has now been paid across the three significant consumer redress schemes currently on foot (PPI, Interest Rate Hedging Products and Card Protection Plan Limited). The vast majority of this (GBP 19.1 billion) relates to PPI.


The FCA reported a 28% increase in whistleblowing cases during 2014/2015 (1,340) and stated that the vast majority related to conduct issues within regulated firms (including fitness and propriety of individuals, organisation culture, consumer detriment, systems and controls issues and pressures on sales targets). Financial crime was also the subject of a significant number of whistleblowing cases. The FCA states that information from whistleblowers has contributed to firms and individuals being fined, permissions being varied or withdrawn, warning letters being issued and other forms of early regulatory intervention.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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