Becca Hogan and Abdulali Jiwaji of Signature Litigation consider what we're likely to see from the FCA's enforcement function under the leadership of chief executive Tracey McDermott and director of enforcement Mark Steward.
The Financial Conduct Authority (FCA) is now over two and a half years into its tenure, having taken the baton from the Financial Services Authority (FSA) in April 2013. There is a more intrusive approach to supervision and enforcement, which is evident from the increasing level of fines, and the elevation of regulation and enforcement to the top of the agenda for regulated businesses.
When Martin Wheatley, who until recently was the chief executive officer of the FCA, was first appointed to his position in 2013, he was quoted as saying that the new approach of the FCA would be to ‘shoot first, ask questions later’. This raised eyebrows at the time, and set the scene for the intense enforcement activity which followed. But did things go too far? There does seem to be a shift in dynamics with Martin Wheatley leaving the FCA and Tracey McDermott being appointed as acting chief executive. Taking over from Ms McDermott as director of enforcement is Mark Steward, who was previously the head of enforcement at the Hong Kong Securities and Futures Commission. He will no doubt be keen to establish himself in this role and build on the work of the FCA's enforcement division over the past few years. What are we likely to see from the enforcement function going forward?
Round up of enforcement action
Naturally there tends to be a great deal of focus on the level of fines levied. By way of a general overview of the fines imposed so far this year, the total amount currently stands at £826,910,767. That compares to £1,471,431,800 in 2014 and £474,263,738 in 2013. The 2014 peak is attributable to LIBOR and other benchmark rigging breaches.
For a comparison to the old days, under the FSA regime, the highest fine ever imposed by the FSA was £160 million, against UBS in December 2012 for LIBOR rigging. That compares to the £284 million fine against Barclays in May 2015 in respect of FX trading. With five of the top 10 fines this year being against banks, the FCA's focus has been on the banking sector in recent years (as opposed to the insurance sector).
Aside from enforcement actions and fines, there are other weapons in the FCA's arsenal of a more supervisory nature. We are seeing regular use of the Skilled Person Review under Section 166 of the Financial Services and Markets Act 2000 (FSMA) to obtain an independent view on aspects of a firm's activities. Another impactful mechanism is attestation, which is used to ensure clear accountability of and a focus from senior management on addressing issues. This involves someone making a personal commitment to take action.
The edition of the FCA Data Bulletin published on 2 October 2015 shows that between April 2014 and March 2015, a total of 61 attestations were given. FCA guidance on the subject states that the usual scenarios in which it will require an attestation are:
Notification – where a firm is asked to attest that they will notify the FCA of any future change in risk.
Undertaking – where the FCA wants a firm to take specific action within a particular time scale, but the risk is unlikely to result in material harm to consumers.
Self-certification – for more significant issues where the FCA is confident that the firm can resolve the issues themselves, the FCA may ask for the firm (via its senior managers) to attest that the risks have been mitigated or resolved.
Verification – where the FCA wants a firm to resolve issues or mitigate risks, and they also want verification that certain actions have been carried out.
For senior managers, being asked to sign an attestation to the effect that action has been or will be carried out can be a terrifying prospect. If an attestation turns out to be wrong, further regulatory action may follow. Faced with the choice of giving the attestation or risking a prolonged regulatory investigation, senior managers can be placed in a difficult position.
This adds to the growing pressure on senior managers. The FCA has been working towards a tighter regulatory framework to hold senior managers accountable for failings in firms. This will be achieved through the implementation of the Senior Managers Regime (the SMR), the rules of which have now been finalised and which will come into effect in March 2016. Under the new regime, senior managers will be subject to a different approvals regime, with firms being required to certify that senior managers are fit and proper for their roles on an ongoing basis, formally confirming this annually. It will apply to senior managers who are currently performing a significant influence function under the existing regime. For now the SMR applies to banks only, but there are plans afoot to extend it to all FSMA authorised persons.
Under the SMR regime, it had previously been proposed that the burden of proof would be reversed. This meant that if a firm was deemed to have breached regulations, the senior managers in place during the time of those breaches would be deemed personally culpable, unless they could demonstrate that they had taken reasonable steps to avoid the contravention occurring or continuing. Thankfully, senior managers can breathe a (small) sigh of relief, as that provision was changed following an announcement by the Government in October. Instead, there will be a statutory duty on senior managers to take reasonable steps to prevent regulatory breaches in their areas of responsibility. This may be interpreted as being consistent with a move to ease the regulatory burden on firms, after a period of relentless pressure.
What next for enforcement?
The challenge for the regulator is clearly in finding the right balance. In a speech by Tracey McDermott in October, she noted that:
‘...the intensity and volume of regulatory activity over recent years is not sustainable – for regulators or for the industry … We are often told that boards are now spending the majority of their time on regulatory matters. This cannot be in anyone’s interests. If that continues indefinitely we will crowd out the creativity, innovation and competition which should present the opportunities for growth in the future.’ She added that the regulator should be ‘at the centre of the action without being the centre of attention.’ Not an easy thing to accomplish.
The new Director of Enforcement will have a point to prove and enough to work with in terms of a revamped framework, with significant changes in the enforcement regime still to come through. Mr Steward has a track record of making imaginative and groundbreaking use of enforcement weapons. From the enforcement function, we expect it to be business as usual – no holds barred.
Abdulali Jiwaji is a partner and Becca Hogan a solicitor at commercial litigation specialist Signature Litigation.