An inspector calls – FCA enforcement and discipline in a post Covid-19 world

Throughout the Covid era, the FCA has continued to launch investigations and enforcement action against those regulated financial services’ firms and senior individuals that it suspects have broken its rules. The “credible deterrence” mantra, taking tough, targeted, and effective public disciplinary action as way of changing market behaviour, continues to lie at the very heart of the FCA’s enforcement policy.

And whilst the FCA has encountered similar challenges to everybody else in its operations in 2020 and 2021, Covid has done nothing to affect its enforcement resolve and protect the UK financial system and its customers.

So, the reality is that the enforcement environment will continue to be challenging for the regulated community in the UK (now totalling some 60,000 firms), especially as the FCA moves to focus on how firms and senior managers responded to the pandemic.  If anyone was in any doubt, the fact that the FCA levied fines totalling over £192m in 2020 is clear evidence of the regulator’s continued resolve and “get tough” approach.

So, what are likely to be the priorities for FCA enforcement action against regulated firms and individuals as we emerge into a post pandemic world?

We think this will be made up of a combination of pre-existing priorities and new issues arising out of Covid-19.

In the first place, the FCA will want to ask questions about how firms (especially banks and general insurers) and their senior managers responded to the crisis – and the regulator will act where it detects failings.

Did firms listen to, and act upon, the key messages that the FCA sent out during 2020 about treating customers fairly and then conduct themselves accordingly? How prepared and resilient were they in the face of the crisis and the associated volatility in the financial markets? How effectively and securely did they carry out day to day operations, with so many of their staff working from home, and how did they manage the increased risk of cyber-attack?

Market abuse will remain a key priority for the FCA, especially as the pandemic will have inevitably upped the risk ante. There are likely to be more FCA investigations into listed plcs who may have delayed in publishing price sensitive information or potentially published misleading information, especially against a backdrop of fast-moving market movements during the crisis. 2021 may also see more FCA investigations into – and criminal prosecutions of – insider trading. This is against the background of the market volatility but also the increased risks of unlawful disclosure of inside information by people working remotely.

2020 saw a record number of unauthorised business cases for the FCA. It started investigations and acted against many firms that are not FCA authorised, but which still carry out financial services activities in the UK which require authorisation.  Scammers and fraudsters took advantage of Covid to try to cheat people, especially the vulnerable, out of their money and the FCA will continue to take civil and criminal actions in 2021 against wrongdoers. Indeed, the FCA regards such actions as being in the “frontline” of enforcement, despite the challenges that it faces with some gaps in its powers in this area.

Holding individuals to account by way of enforcement action has been a priority for the FCA since the financial crisis. Covid-19 will only have enhanced that. So, we can expect the FCA to continue to focus in 2021 on enforcement of the senior managers and certification regime (SMCR) which now extends to all FCA authorised firms. SMCR encourages greater individual accountability and sets standards for senior managers in the industry with specific conduct rules and by requiring firms to certify staff as fit and proper. The FCA can take disciplinary actions against those individuals who break the SMCR and an employee or director of a firm for being ‘knowingly concerned’ in a firm’s breach of a regulatory requirement. As the FCA investigates firms’ responses to Covid, and how they conducted their businesses, inevitably the regulator will scrutinise senior managers’ conduct.

Firms’ compliance with anti-money laundering rules and the adequacy of their systems and controls to detect and prevent AML activity, will continue to be a priority for the FCA in 2021 and beyond.

The FCA has already imposed some hefty fines in this area (for example, just under £38m on Commerzbank AG in June 2020) and on 16 March 2021 the FCA announced that it had launched criminal proceedings against NatWest for failing to comply with AML rules. And it is highly likely that we will see more criminal prosecution by the FCA under the Money Laundering Regulations (MLR) in the more severe cases, as well as an uptick in the number of enforcement and civil court cases as the distinction between what is civil and what is criminal conduct becomes increasingly blurred.

Many other areas may fall under FCA scrutiny in 2021- crypto asset business, treatment of employees and whistle blowing, and pensions transfers to name but a few. But whatever the case, when a firm or individual is subject to FCA investigation or enforcement action the process can be stressful, disruptive, and costly. Hard won commercial reputations and livelihoods can also be on the line.

Proper management of, and response to, the process is therefore vital to minimise the possible damage. We would strongly encourage anyone whoever receives a knock on the door from the FCA enforcement division to, as a matter of priority, take legal advice to help them to navigate a passage through what can be a minefield for the unwary.