UK: FCA Promises Closer Supervisory And Enforcement Collaboration

Last Updated: 26 March 2018
Article by Michael Ruck

The Financial Conduct Authority (FCA) has set out its intention to take a more aggressive approach to enforcement, while developing closer links between its supervisory and enforcement functions.

It has set out its thinking in two new papers; one on its approach to supervision and one on its approach to enforcement. These papers are part of a series planned by the FCA following on from its broad 'Mission' document of November 2016, through which the FCA intends to explain its approach to different aspects of regulation in more depth.

As the "most visible" parts of the FCA's work, supervision and enforcement are "critical to helping us fulfil our objectives", FCA chief executive Andrew Bailey said.

"For supervision, this means overseeing regulated firms to identify, prevent or reduce harm to consumers and markets," he said. "And for enforcement, our overriding principle is to provide substantive justice, aiming to achieve fair and just outcomes in response to misconduct and to ensure our rules and requirements are followed."

"We hope [the] documents outline clearly and in a transparent way exactly how we fulfil our objectives through supervision and enforcement activity and why we make the decisions in the manner that we do. We are committed to continually improving our models and driving progress," he said.

The papers set out how the FCA will use its supervision and enforcement powers, alongside and in combination with its other powers and functions, to further its objectives. This could be through informal guidance, investigation or early intervention, as well as using its powers and functions to take civil, criminal or disciplinary action, or a combination of all three.

The regulator's overriding principle, in relation to enforcement, is to achieve fair and just outcomes in response to misconduct, according to the paper. Its intention is to identify and deal with misconduct quickly and fairly, in order to maintain public confidence in the regulatory process and to act as a deterrent to potential offenders by sending a message that misconduct "will be uncovered and dealt with".

The FCA bases the use of its deterrent and remedial powers, including financial penalties, on the severity of any misconduct and the extent to which the offender addresses any harm caused. For example, it intends to impose lower sanctions on firms which voluntarily account for misconduct and propose restorative measures, where it is reasonable for them to do so.

"The FCA notes that the penalties and sanctions from enforcement actions are not by themselves a sufficient deterrent to reducing misconduct," said financial services contentious regulatory expert Jonathan Cavill of Pinsent Masons, the law firm behind Out-Law.com. "Therefore, the FCA is moving to a more forward-looking and pre-emptive system by increasing detection in tandem with more efficient investigations. The FCA will consider which issues are most likely to give risk to the greatest harm to consumers and the markets when prioritising its supervision efforts."

"In doing so, there will be a particular focus on strategy and culture as the root cause of major failings. We have seen the FCA adopting more rigorous approaches to firms' strategy and culture in enforcement actions and now, with the greater alignment of supervision and enforcement moving forwards, these factors will also play into the FCA's supervision methods," he said.

'Risk of harm' is also at the centre of the FCA's approach to supervision, with the regulator stating that it will prioritise its activities "according to the greatest risk". It intends to engage proactively with firms, focusing on business models and drivers of behaviour, to reflect the fact that firms' strategies and cultures are the root cause of most major failings.

The FCA supervises around 58,000 retail and wholesale firms, which vary greatly in size, complexity and risk of potential harm to consumers and market integrity. It adopts a proportionate approach to supervising these firms, to ensure the best use of its resources and deliver the greatest public value.

Feedback on both documents is sought until 21 June 2018. In particular, the FCA is seeking views on whether the documents set out its approaches clearly, and whether there are other issues on either topic that could benefit from further clarification.

Financial services regulatory enforcement expert Michael Ruck of Pinsent Masons said that the documents "reflect much of what FCA enforcement director Mark Steward has been saying publicly in relation to opening investigations, focussing on senior management responsibility, gaps in the FCA's guidance on the enforcement process and a more aggressive approach from the FCA".

"We are certainly seeing supervision and enforcement working more closely together, including supporting greater supervisory intervention in the form of the imposition of requirements and supervisory notices. Only time will tell if the new approach provides for greater transparency for those under investigation and more efficient investigations, given the current delays we are seeing from the FCA enforcement teams," he said.

"A focus on appropriate strategies and culture is clearly important and should very much be at the heart of all regulated firms," said financial services disputes expert Jonathan Cavill. "Whilst the senior managers' regimes have gone some way to assisting in evolving accountability and culture in the sector, the progress firms have made should not be short-lived will and firms will be expected to show continued positive developments."

"The increased alignment between supervision and enforcement will no doubt cause the FCA's enforcement team to be more efficient and have a greater understanding of the firm and the issues in question than it did previously. Furthermore, a more pre-emptive supervision strategy will seek to ensure firms without the correct approach to culture – or which are struggling to implement the correct culture effectively – are put on the right track before serious harm arises," he said.

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