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SMR shows we are not going soft, says head of FCA Enforcement

Posted on 31 January 2017

SMR shows we are not going soft, says head of FCA Enforcement

In a speech he delivered on 19 January 2017, Mark Steward (Director of Enforcement and Market Oversight at the FCA) explained that the fall in recent fines did not mean that the FCA had gone soft, nor that light touch had returned. 

The backdrop was the bumper fines of recent years. Steward pointed out that these were the product of early agreed settlements by corporates. The fact that we were not seeing such fines was not to the point, he argued. All other things being equal, he did not believe that the size of fine demonstrated anything significant about the FCA's enforcement effort because the size fitted the crime. Instead, the relevant focus of his speech so far as this piece is concerned was the SMR and its likely impact on enforcement.

The simple proposition of the SMR according to Steward was that a senior manager ought to be responsible for what happens on his or her watch. This notion ran through his comments. Of note, Steward talked of a different dynamic created by the SMR:

  • The FCA did not expect senior managers to agree so readily to pay high fines to resolve cases.  It expected more cases to be contested;
  • Firms may well be reluctant to pay such high sums to resolve investigations in circumstances where senior managers remained in the FCA's sights;
  • There are latent tensions in a firm self-reporting or co-operating where its senior managers may be subjects of investigation for the same matters.

In addition, he touched on internal investigations, a topic the FCA has previously been vocal on (from Enforcement Watch 18Internal Investigations: the FCA makes its position clear). On that topic, he pointed to an inherent conflict of interest as the reports will have been commissioned by and prepared for senior management who may well be part of the problem.  He referred to the public interest requiring a full and thorough investigation by the regulator - investigations would need to be more thorough with stronger disciplines and, where there was evidence of misconduct, there was more likely to be a dispute.

So, what is of interest in this speech?

  • It is of moderate interest that the FCA felt the need to comment publicly on the perception that it had in some way gone soft, or that light touch had returned, as a result of the fall in fines following the conclusion of blockbuster investigations.
  • It is also of some interest, but no great surprise, that Steward should do so by reference to the SMR, the very regime the regulators have championed in order to promote greater individual accountability.
  • What is perhaps more interesting is the recognition, as a result of the SMR, that there will be a shifting dynamic at play where enforcement is concerned. We have seen very many cases over the years where both firms and individuals are concerned. The stance taken by firms in those situations has varied widely. Sometimes, it is obvious what position firms will adopt. In others, the position is more difficult for them. If those in the firing line in future are in senior management positions, it is not difficult to see how firms may face some difficult decisions about the stance they should adopt with the regulators, and the extent to which they might cut the individual loose.
  • The FCA continues to harbour concerns about internal investigations. Steward's comments will feed into firms' thinking into whether, but more likely how, they conduct internal investigations in future.

The nod in the speech is plainly to more actions concerning individuals. Our experience is that such actions, particularly at a senior level with proper funding, are much more likely to be contested than those for firms. We are certainly entering a period in which individuals will be held even more to account. However, it is not only individuals that will be held to account. In an era in which keenly contested actions are more likely to take place, the regulators' enforcement steps will be carefully scrutinised and the regulators will find themselves held very much to account by those they enforce against.  We live in interesting times.

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