Financial Services: Contentious Regulatory in UK-wide
FINANCIAL SERVICES: An Introduction by Fox Williams LLP
Whatever the political and economic landscape, the Financial Conduct Authority (FCA) will continue to pursue new and innovative approaches to regulation in 2019/2020, be it within its supervisory or enforcement approaches.
This overview sets out the key issues that are likely to be facing clients and professional advisers in the coming year.
Firms’ culture and governance
A focus on culture and governance is one of the FCA’s stated ‘cross-sector priorities’ for the coming year. The FCA and Prudential Regulation Authority (PRA) will continue to prioritise individual accountability for those in positions of responsibility. One of the most important developments is that on 9 December 2019 the Senior Managers Regime will be rolled out to all firms authorised by the Financial Services and Markets Act 2000 (FSMA), with the Certification Regime following a year later. A vast range and type of businesses will be affected, from one-person Independent Financial Advisers (IFAs) to asset managers with billions under management.
The FCA is also planning to develop a new directory of financial services workers, to include more information about individuals working in financial services than is currently available in one, user-friendly place. This is expected to go live in March 2020 for banks and insurers, and for all other FSMA firms in December 2020.
Another aspect of the FCA’s focus on culture is the increased attention it is paying to firms’ remuneration and recognition practices. The FCA has committed to reviewing these practices, to ensure that approaches to rewarding and incentivising all staff reinforce healthy cultures and do not drive behaviours that would lead to harm to consumers or markets. If firms are currently re-visiting their own practices, it is well worth bearing this in mind.
The deterrence, detection, investigation, and prosecution of financial crime will remain a key priority for the regulator in 2019/2020. In its Business Plan, the FCA plans to do this by improving its anti-money laundering capabilities, using technology to be more intrusive in assessing the effectiveness of firms’ own systems and controls. The FCA will continue working with the National Economic Crime Centre (NECC), a cross-Government agency within the National Crime Agency (NCA). The FCA worked with the NECC in relation to the London Capital & Finance Plc case that was subsequently referred to the Serious Fraud Office.
The FCA will continue to focus on its traditional market abuse areas. It has been bolstered by the successful prosecution in June 2019 of Fabiana Abdel-Malek (a compliance officer at UBS AG) and Walid Choucair (a day trader) for sophisticated and organised insider dealing. This long-running investigation and prosecution was carried out with publicly acknowledged ‘significant assistance’ from the NCA. Following the verdicts, the FCA, through its regular Market Watch newsletter, has clarified that it expects firms to take reasonable steps to ensure that the risks of handling inside information are identified and appropriately mitigated. The FCA has stated that it views an inability to respond to a regulatory request with accurate records of who had access to inside information, as an indication of underlying weaknesses in systems, procedures and policies. There therefore remains the likelihood that action will be taken against both firms and individuals in this area in 2019/2020.
April 2019 saw Standard Chartered Bank being fined £102.2 million by the FCA for poor anti-money laundering controls. This was the second largest ever penalty for such a failing imposed by the FCA. However, it has been well publicised that the FCA has a number of ‘dual-track’ (regulatory and criminal) investigations into alleged breaches of the Money Laundering Regulations. 2019/2020 may see one of these investigations mature to the prosecution stage (either against the corporate, against individuals, or both). The regulator’s assertive approach to enforcing the Money Laundering Regulations is likely to continue, and therefore firms would be well-advised to ensure that their systems and controls are fit for purpose.
In March 2019, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), housed within the FCA, published its first report. This review of 22 Professional Body Supervisors (PBSs) (such as the Solicitors Regulatory Authority) made for damning reading. For example, the report found that 91% of relevant PBSs were not fully applying a risk-based approach to supervising members with the highest inherent profile of being exposed to money laundering and terrorist financing risks through their services, delivery channels, client base or jurisdictional reach. There is no indication that OPBAS’ pressure on PBSs will subside.
We can expect the FCA and the PRA to continue their reformation and enforcement of the UK’s regulatory framework. Emphasis is set to remain on the culture and governance of firms, with continued importance placed on the values and norms set by boards and senior managers, in an effort to embed the right culture in firms.
Financial services firms will need to review data security, cyber resilience and anti-money laundering systems and controls and to prepare for the implementation of the Senior Managers Regime in 2020. These measures aim to ensure that the best interests of clients are central to the affected business, in a concerted effort to improve the UK’s reputation as a financial centre and support the FCA’s objective of increasing market integrity.
It is likely that the FCA’s output of enforcement actions and outcomes will increase, once the Senior Managers and Certification Regime (SMCR) applies to all firms. Furthermore, an increased use of the partly-contested case procedure may lead to the conclusion of a number of other investigations.
However, resources will remain a key challenge for the Enforcement division of the FCA throughout the year. Whilst there is no expected increase in resource, the number of investigations seems to be ever increasing. Quite whether this approach to enforcement achieves the results it promised arguably remains to be seen.
Finally, the impact of political and economic uncertainty (including Brexit) on the financial services sector remains uncertain at this stage. Notwithstanding this the PRA and FCA remain enthusiastic about their proactive approach to market supervision. Regulated firms should expect this outlook to continue through 2020 and prepare accordingly.