The FCA published in July its Annual Report to 31 March 2016. As ever, it offers an interesting summary of the FCA's year as well as its views on certain key issues. This article covers only those matters that may be of interest from an Enforcement perspective.
2015/16 Focus Areas for Consumer Protection
In its Report, the FCA sets out how it has sought to discharge its consumer protection objective in the last year. This includes varied work, from market analysis through to enforcement, in the following areas:
- Consumer credit. The FCA notes that (having taken over regulation from the OFT in 2014), it completed 30,000 applications in the past year and that it has used the application process to vet firms. The FCA reports that 35 firms had their applications rejected and 100 firms left the consumer credit industry entirely. The FCA has also undertaken market wide thematic work and market studies to assess risks to consumers. The Report mentions in particular work in relation to debt management advice and credit broking fees and these may well be areas to watch in relation to future enforcement activity.
- Consumer redress. This includes Interest Rate Hedging Products and PPI. The FCA says that it has and will take Enforcement action to protect consumers, mentioning in particular action in relation to unauthorised activities, investment and insurance fraud, deposit taking and boiler room scams. Again, these will be areas to watch for future enforcement activity.
- Wholesale consumer protection. The FCA has continued its work on MiFID II which is due to come into force in January 2018. The FCA also conducted a thematic review in December 2015 in relation to the flow of confidential and inside information in small and medium-sized investment banks. Finally, arrangements whereby brokers seek payments from market makers for placing client orders with them (so called "payments for order flow") are also specifically mentioned in the Report. The FCA considers that such payments may operate as an inducement, cause brokers to be in breach of best execution and generate conflicts. The FCA says it has already secured undertakings from certain brokers to ensure better management of this issue. This may be an area for future enforcement activity.
2015/16 Focus Areas for Market Integrity
The FCA says that it has sought to ensure the integrity of UK markets through work in the following areas:
- Benchmark manipulation. The FCA continues its work on benchmarks. It reports that in the last year it visited some 20 LIBOR submitting banks and has, since that time, been liaising with the relevant banks in order to improve their systems and controls in relation to benchmarks. More generally, a thematic review in relation to the oversight and control of benchmarks was published in July 2015. The FCA says that significant further work is needed at some firms to manage risks associated with benchmarks. On the enforcement side, the FCA fined Deutsche Bank £227m (April 2015) and has secured the prohibition of two individuals.
- Senior management regime. On 6 March 2016, the FCA and PRA implemented the Senior Management and Certification Regime. Much ink has already been spilled on this subject, including in this publication. However, in summary, the intention is to improve standards of conduct and culture through clear lines of accountability and responsibility. It is intended that all regulated firms will be subject to the regime in 2018. It is interesting to note the RDC's comments on the new regime (see below).
- Conduct standards. The FCA says that during 2015 it adopted a new "5 question" approach to supervising standards of conduct risk management in wholesale banking. These questions seek to probe whether banks are taking steps to actively identify and have oversight of conduct risks through a properly informed and resourced board and compliance function. They also ask whether employees are appropriately incentivised.
- Financial Crime. The FCA says that financial crime was a "strategic priority" in 2015/16 and that it will also be in 2016/17. The focus is on Anti-Money Laundering controls, and the FCA is part of the Government task force looking into the Mossack Fonseca disclosures. The FCA is looking for evidence of economic crime or regulatory breaches.
- Whistleblowing. In September 2016, it said rules would come into force requiring certain deposit takers to (amongst other matters) appoint "whistle-blowing champions" and to put in place systems to handle whistle-blowers. (They have now done so, see elsewhere in this edition "New rules on whistleblowing come into force"). In 2015/16 the FCA says that it "managed 1014 intelligence cases containing information from whistle-blowers". In 13 cases intelligence directly contributed to enforcement activity or "other intervention".
Summary of Enforcement Activity and RDC report
The FCA report trumpets in particular its fines against Deutsche Bank (LIBOR and EURIBOR) and Barclays (management of financial crime risks). It also reports that it issued 105 Final Notices, with 34 financial penalties totalling £884.6m. This data is not so substantially different from the previous years and can be easily distorted by one or two larger fines.
For the first time, the FCA Annual Report contains a report from its Regulatory Decisions Committee (RDC). It is noteworthy that the RDC appears to consider that its workload will increase in the future. This is as a result in part of a combination of the Senior Management and Certification Regime and the FCA's increased remit (for example in relation to consumer credit).