FCA Enforcement Policy – Consultation Unveiled
Hot on the heels of the Discussion Paper and collection of essays entitled ‘Transforming Culture in Financial Services, on 21st March 2018, the Financial Conduct Authority published two documents entitled Approach to Supervision and Approach to Enforcement,
The documents do not signal a wholesale review and revision of FCA’s activity, rather they constitute the opening of a Consultation, the purposes of which are:
- the clarification of the FCA’s ‘Mission’; and,
- a renewed emphasis on the culture within organisations.
Today, the FT reported that the review arises, at least in part, from a (mis)perception that the FCA has become soft on enforcement and penalties:
The FCA levied £22.2m in fines in 2016 — the lowest on record since the “light-touch” days of the Financial Services Authority, which was criticised for its approach in the run-up to the financial crisis and split up in 2013 to form the FCA and the Bank of England’s Prudential Regulation Authority. Last year, the FCA registered a tenfold year-on-year increase in fines, to £229.4m, but it was still some way off the billion-pound highs seen in 2014 and 2015. Those years were skewed by the benchmark-rigging probes and a newly introduced regime allowing higher fines for wrongdoing found since 2010. The regime, which is still in effect, gives the FCA discretion to bump up fines to act as a deterrent.
Insofar as the FCA’s Approach to Enforcement is concerned, the overriding principle remains:
a commitment to achieve fair and just outcomes in response to misconduct. Wrongdoers must be held to account and our rules and requirements must be obeyed. Increasingly, severe penalties and sanctions alone are not enough to reduce and prevent serious misconduct. We must increase the likelihood of detection in tandem with efficient investigations.
Insofar as Identifying a broad spectrum of misconduct is concerned:
It is important that we are able to identify the full spectrum of serious misconduct spanning retail and wholesale markets, including:
- misconduct resulting from a lack of integrity
- serious failings in firm systems and controls, including governance and senior managers’ failings
- mis-selling of unsuitable products to consumers
- anti-competitive behaviour
- financial crime, including insider dealing, market manipulation, false information in our markets and money laundering offences
- failure to make proper disclosure in primary markets
- unauthorised persons or firms carrying on regulated activity without appropriate authorisation from us, including investment scams
Under the heading How We Assess Misconduct:
Not all breaches of our rules or requirements constitute serious misconduct. Many breaches can be addressed and remedied elsewhere (and we expect them to be) without the need for enforcement action, especially where the breach is technical or minor.
Where we suspect serious misconduct, we will start an enforcement investigation. Suspected serious misconduct is not easy to identify, especially as we aim to detect it as early as possible. We use our experience and judgement to assess:
- the nature and severity of the actual and potential harm involved
- the extent to which the suspected misconduct has or may affect consumers, markets or firms if we do not take action
- whether the suspected misconduct has potentially wider or broader implications
- whether the suspected misconduct may have involved any lack of fitness or integrity
- whether evidence, including witnesses and documents, is likely to be available
- the public interest in investigating the matter
Under the heading Deciding to take action:
We will only make a decision about the outcome, including whether the case merits criminal, civil, regulatory action once there is sufficient evidence to justify such a decision at the end of an investigation. If there is, we will take into account the evidential merits of the case, whether there is a proper foundation for bringing the case and the public interest in deciding to start proceedings to obtain the appropriate remedy or sanction.
Under the heading Sanctions, Remediation, Redress and Restitution:
We aim to make sure the sanction is sufficient to deter the firm or individual from re-offending and deter others from offending. Where we take disciplinary action against a firm or an individual, we will consider all our sanctioning powers, including public censure, financial penalty, prohibition, suspension or restriction orders, as they may apply. We will also apply our penalties policy (DEPP).
When we assess the nature of the sanction, we take into account all relevant circumstances. This includes what steps the firm or individual has taken to address the harm and to cooperate with us, including, where relevant, in cooperating with any variation of permission or with the imposition of a requirement under Part 4A of FSMA. If firms and individuals fully account for any harm caused, including putting it right where there are reasonable grounds to do so, we will consider this when applying sanctions. In extraordinary cases, it may determine whether a sanction is required at all.
If a firm or individual fails to take steps to address harm or refuses to cooperate fully with us, this will be taken into account and may justify heavier sanctions.
If appropriate steps have not been taken or more work is required to address the harm we will seek restitution orders or redress schemes. Redress is important for a number of reasons. Fines do not benefit the victims of wrongdoing, whereas redress directly compensates them. Redress can also deter misconduct by making the consequences of misconduct clear.
It may be that such changes as are presaged above amount to little more than a restatement of principle and a statement of renewed vigour in enforcement – an attempt to galvanise positive public and industry opinion in the face of assertions of indifference. Views are sought by 21st June 2018 and final versions are expected in Winter 2018.
Gavin advises corporates, as external counsel, in investigations relating to sanctions and the licensing of exports in relation to: dual-use goods and services in the manufacturing sector and goods where end-user concerns and WMD proliferation risks have been identified by the Export Control Organisation and/or the Security Service; and, the sale of cryptographic software to designated jurisdictions. In addition, he advises on the impact of anti-money laundering provisions in the context of high value dealers and intellectual property portfolios.