FCA enforcement update and future targets

The FCA’s annual report and enforcement performance report look back at the regulator’s activity for the 2017/18 financial year, and give an interesting insight into enforcement activity and what we can expect going forward.

What do the figures show?

During 2017/18, the FCA published 269 final notices. But of the 248 final notices against firms, only 16 imposed financial penalties, which amounted to £69.9 million – not a huge amount considering the bumper penalties of recent years. The number of fines and the division of fines between firms and individuals was consistent with the previous year but total fines have dropped from £181 million in 2016/17 and from £884 million in 2015/2016 when there were 34 penalties including the fines for benchmark manipulation.

The figures for investigations are also interesting. The FCA opened most investigations in the areas of insider dealing (56), financial crime (46) and culture & governance (48), whilst new investigations on mis-selling and client assets are low, reflecting a tail-end in investigations for previous focus areas. The FCA has closed investigations where it determined enforcement is not justified, for example the FCA closed more investigations than it opened in wholesale misconduct and insider dealing (but not market manipulation).

There have been a higher number of investigations closed recently but, even so, there is a significant increase in the length of time it takes to settle a case from 23 months in 2016/17 to 32 months in 2017/18.

And what can we say about the future focus of enforcement activity?

The report emphasises again that the resources available for investigations and enforcement are under pressure due to the resource commitment required for Brexit planning. Nevertheless, the FCA remains highly active in enforcement.

Culture & governance

: The FCA is encouraging whistleblowing as part of its work on culture. It received 1106 whistleblower reports and has treated 649 as qualifying disclosures (with others yet to be considered), and the FCA has taken action on 121 of these following investigation so far. The FCA views this as showing success in its efforts to encourage industry whistleblowers.

The FCA opened 48 new investigations into culture and governance of firms and this will remain a focus area. Following its discussion paper on culture, the FCA wants to:

• ensure firms create environments of ‘psychological safety’, where speaking up becomes the norm;
• ensure diversity and inclusion;
• provide better support, capability-building and empowerment to ‘squeezed’ middle managers
• challenge firms to shape healthy cultures; and
• look at a broad range of incentives to shape behaviours, including those that go beyond remuneration and other financial incentives.

Financial crime & AML

: AML and tackling investor scams/fraud form a large part of the FCA’s work. The FCA is encouraged by recent findings in its ongoing review of AML systems at banks, and the greater senior management attention given to AML at smaller firms too. As flagged in the business plan, AML in capital market transactions will fall under the spotlight as part of the ongoing supervisory work.

Technology & resilience

: In line with its business plan objectives, the FCA has reviewed technology and cyber self-assessments from 296 high impact firms and given feedback to those firms and the wider market. It will use this information as a baseline for further supervisory work. Particular weaknesses were identified at large firms including in the design, management and IT infrastructure and an overreliance on complex legacy systems, which increases the risk of IT outages and cyber incidents. Further enforcement action in this area looks likely.

Promoting competition & innovation

: The FCA has conducted market studies of competition in the asset management, wholesale insurance and credit card markets. It claims success in measures to reduce barriers to entry and promote innovation – the new bank start-up unit has helped 10 banks to set up during the year; the asset management authorisation unit has helped 12 firms through pre-authorisation meetings, and the regulatory sandbox team has helped 18 firms test new products in 2017/18.

Consumer protection

: The FCA describes its work in the areas of insurance, retirement products, retail banking and interest-only mortgages but states that there is still work to be done in ensuring that existing long term customers are not disadvantaged and that they are well-informed about charges and performance, and encouraged to engage with their product choices.

The FCA also wants to focus on protecting classes of vulnerable consumers. This could be a much larger proportion of consumers than expected if the FCA takes its research at face value, showing that 47% of men and 53% of women exhibit at least one characteristic of vulnerability.

Other potential enforcement targets…

In the wholesale sector, the FCA is increasingly targeting primary market disclosures, and opened only 87 market abuse investigations in 2017/18 compared with 120 in the previous year despite the wealth of data it received under the new MAR reporting regime. However, this does not rule out further enforcement activity in the areas of market abuse, conflicts of interest and technology resilience, which were previously identified as targets.

The FCA used its competition enforcement powers for the first time against 4 asset managers. The FCA will continue to look at price clustering, charging structures and other characteristics of the investment management market with the aim of improving competition.

In terms of enforcement in the retail space, the FCA highlights the affordability of second charges and consumer credit, the number of consumer complaints upheld by the FOS for a particular insurance firm or product and investment advice as potential targets.