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FINANCIAL SERVICES: An Introduction

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Contributed by Saima Hanif of 3VB 

TRENDS IN FINANCIAL SERVICES 

Just when the financial services sector is recovering from the impact of the credit crunch, it faces a trio of further hazards and tribulations. Wealth is increasingly concentrated, as the economist Piketty pointed out in his “Capital in the Twenty-First Century”, in fewer hands and with greater proportionate returns for participants with capital. This is starting to have significant ramifications for financial crime regulation. The seemingly never-ending litany of financial mis-selling scandals, has caused regulators to question whether new legal duties need to be imposed on the sector, to protect retail investors. And finally, while no Brexit other than the softest version would preserve ‘passporting’ and the favourable status quo for UK financial institutions, the possibility of a cliff-edge Brexit is particularly alarming.

(1) Financial crime 

The past year has seen an increase in activity by regulators across the board: the SFO-Barclays Bank Qatar trial is back for a ‘round 2’, the FCA’s most complex insider dealing prosecution (Operation Tabernula) culminated in 28 successful prosecutions and related confiscation orders and the NCA successfully obtained two high profile unexplained wealth orders. Money flows are now global and given the increased political focus on uncovering sources of wealth, partly driven by a desire to increase tax revenues, such regulatory scrutiny will continue.

In respect of AML/KYC controls, at a domestic level the FCA has already taken a harsh line on such failings (see for example the £102.2 million fine imposed on Standard Chartered Bank for AML breaches in two higher risk areas of its business.) A similar pattern is seen in respect of overseas bodies (ING Groep was fined USD915 million by the Dutch Prosecutor for failing to detect money laundering and for defects in its CDD processes.)

However, regulatory review will extend beyond AML/KYC processes. Given the wider political climate, and in particular the stance taken by the US in imposing stricter sanctions on countries such as Iran, Russia and China, there will a greater focus on PEPs and transaction screening. With the risk of enforcement action being very real (in 2018, the US regulators imposed a USD1.3 billion fine on Société Générale for conducting financial transactions with entities in countries subject to US sanctions and embargoes, including Cuba, Iran, Libya and Sudan) this will lead to an increased compliance burden on organisations to ensure that they do not fall foul of any such regulations.

(2) Conduct Regulation 

(i) New Duty Of Care 

Prompted no doubt by the IRHP/PPI mis-selling scandals and as part of the ongoing agenda to effect cultural change within the industry, in late 2018 the FCA launched a consultation paper on whether to introduce a new statutory duty of care. The FCA confirmed this year that, following responses from the industry, it would not be pursuing this but would instead review how it applied the existing regulatory framework (especially in respect of the Principles) and it would consider new/revised Principles to strengthen and clarify firms’ duties to consumers, including consideration of a potential private right of action for Principles breaches. It will be interesting to see what the regulator decides.

(ii) FCA Enforcement Approach 

The industry has had longstanding concerns that the FCA was taking far too long to conclude enforcement investigations, and the figures bear this out: the FCA’s statistics for 2018/2019 show that the average length of cases referred to the RDC was 50.8 months (approximately four years) and the average length of cases referred to the Upper Tribunal was 74.1 months (over six years.) On any view, these timescales are unacceptable. This may explain why, as part of its recent Enforcement Guide review, the FCA is specifically considering whether it could/should provide information on its website about investigations; any specific proposed changes to the FCA’s publicity policy will be set out in a separate consultation.

In 2019, following a period of consultation, the FCA published the 'Approach to Enforcement'. It is a fairly predictable document but there is a welcome recognition that firms who voluntarily account for and redress misconduct will be given “substantial credit” by the FCA (BrightHouse being once such example where a redress programme was set up, but no enforcement action was taken against the firm).

In respect of senior managers, the success of the FCA’s drive to ensure accountability is questionable. The high-profile Upper Tribunal decision in Tinney v FCA has not been the great victory that the regulator may have been hoping for: after a regulatory process which took over four years to conclude, the Tribunal declined to impose a ban or a fine on Mr Tinney and concluded that the prohibition imposed by the RDC was not in the range of reasonable responses. This is a rare decision of the Upper Tribunal effectively overturning the RDC.

(iii) Misconduct outside the professional sphere 

As with other industries, the conduct of professionals outside the strict purview of their professional domain is coming under increasing scrutiny. The SRA (which regulates solicitors) has already taken action in respect of such conduct; despite the absence of any high-profile cases in the public domain, at some stage there will be similar cases in the financial services industry which will test the limits of the regulator’s jurisdiction, as well as seeking to define the boundary between the private and personal lives of regulated individuals.

(3) Brexit 

At a time when existing Supreme Court justices have declared that the conduct of a serving prime minister had the effect of "frustrating or preventing the constitutional role of Parliament" and a former Supreme Court justice described the conduct as "constitutional vandalism" no article would be complete without commenting on the current political climate. In this vein, the uncertainty around Brexit continues to dominate discussions. That there is still a lack of clarity around equivalence (which is possibly the only realistic substitute for a loss of passporting) is lamentable; coupled with the increasing likelihood of a no-deal Brexit this does not augur well for what lies ahead.