FCA annual Sector Views

The Financial Conduct Authority (FCA) has published its Sector Views. These provide the FCA's annual analysis of the changing financial environment and the resulting impact on consumers and market effectiveness. They represent the FCA's views as at mid-2019.

Read more in our bulletin, UK FCA publishes annual Sector Views report.

Penalties, remediation and Principles for Businesses: FCA speech

The FCA has published a speech given by Mark Steward, FCA Executive Director of Enforcement and Market Oversight, on penalties, remediation and the FCA's Principles for Businesses.

Among other things, Mr Steward emphasises the importance of a firm's remediation when failures are discovered, noting that there have been several cases in which the FCA has materially reduced its financial penalties on firms in excess of the automatic 30% discount for cases that are fully resolved at stage one. The FCA encourages firms to respond to this incentive by going beyond what it expects and taking immediate, unprompted steps, in consultation with the FCA, to thoroughly and quickly ameliorate harm caused by their conduct failures.

In addition, Mr Steward comments that most of the enforcement cases that the FCA has completed recently have involved serious breaches of the FCA's Principles for Businesses which, it appears, are not being used to test or measure conduct, to measure systems and controls that were being put in place or to identify or address the inadequacies of the misconduct that occurred.

Mr Stewards states that the Principles are the foundations of good conduct and should be an integral part of the operational process of planning or decision-making at all levels and as a way of overseeing and assessing whether the firm's conduct remains appropriate. "In short, what we need is less hindsight and more foresight."

AI: FCA article and ICO consultation on draft auditing framework guidance

The FCA has published an Insight article on artificial intelligence (AI) in financial services in which the author:

  • explains the motivation behind the FCA and The Alan Turing Institute currently working on a year-long collaboration on AI transparency;
  • presents an initial framework for thinking about transparency needs in relation to machine learning in financial markets, resonating with recent work by the OECD, the European Commission's High-Level Expert Group on AI and the Information Commissioner's Office; and
  • considers the questions:
    • Why is transparency important?
    • What types of information are relevant?
    • Who should have access to these types of information?
    • When does it matter?

Separately, the Information Commissioner's Office has launched a consultation on draft guidance on how to audit risk, governance and accountability in AI applications. The draft guidance contains advice on how to understand data protection law in relation to AI and recommendations for organisational and technical measures to mitigate the risks AI poses to individuals. It also provides a solid methodology to audit AI applications and ensure they process personal data fairly.

Aimed at both technology specialists developing AI systems and risk specialists whose organisations use AI systems, the ICO says this guidance will help in assessing the risks to rights and freedoms that AI can cause; and the appropriate measures businesses can implement to mitigate them.

The consultation closes on Wednesday 1 April 2020. The ICO is running a webinar on 26 February 2020 to discuss the consultation and its next steps.

FCA appoints new Interim Executive Director of Strategy and Competition

The FCA has appointed Sheldon Mills as Interim Executive Director of Strategy and Competition.

Mr Mills is currently FCA Director of Competition. He will start his new role on 16 March 2020, replacing Christopher Woolard, who was appointed Interim Chief Executive of the FCA in January 2020.

DB pension schemes: Complaints Commissioner urges FCA to complete review

The Office of the Complaints Commissioner has published a final report of the Financial Regulators Complaints Commissioner (FRCC) relating to a complaint against the FCA by a firm unable to cancel its authorisation as it was part of the FCA's general review of firms involved in advising on defined benefit (DB) pension scheme transfers.

While the firm's complaint was not upheld, the FRCC commented that it considers that the FCA's blanket policy of deferring an authorisation cancellation application pending the completion of the review becomes less defensible the longer deferral lasts. The Commissioner urges the FCA to complete the review as soon as possible, to enable it to consider the firm's application.

Disclosure of privileged documents to FRC not required: Court of Appeal case

In Sports Direct International plc v Financial Reporting Council [2020] EWCA Civ 177 (18 February 2020), the Court of Appeal (Rose and Lewison LJJ and Sir Terence Etherton MR) has allowed, in part, the appellant's appeal, holding that the appellant was not required to disclose privileged documents to the regulator (the Financial Reporting Council (FRC)) investigating its auditors.

The Court of Appeal held that the judge at first instance had erred in ordering disclosure of privileged documents to the FRC, finding that the FRC's statutory powers did not override the privileged status of the documents. However, it agreed with the judge at first instance that the fact that an email was privileged did not confer privilege on an otherwise non-privileged attachment to that email, and therefore, such attachments were disclosable.

Systemic cyber-attacks: ESRB report

The European Systemic Risk Board (ESRB) has published a report on systemic cyber-attacks. The ESRB identifies that cyber risk is a source of systemic risk to the financial system, which may have the potential for serious negative consequences for the real economy. From a macroprudential perspective, the ESRB considers the main shocks to be the destruction, encryption or alteration of data related to value. Such shocks could cause a cyber incident to develop into a systemic event, impairing the provision of key economic functions, generating significant financial losses and undermining confidence in the financial system.

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