[co-author: Katy O’Connor]
In the build-up to his appointment as chief executive of the Financial Conduct Authority (FCA) in 2020, Nikhil Rathi stated that his vision for the regulator involved “a stronger, prompter approach to enforcement”. This intention has been echoed over the three years since, with Rathi referring to the goal of “fewer, faster Enforcement investigations” during his speech to a room of senior financiers at the annual City Dinner as recently as October 2023. His comments were welcomed by regulated firms and individuals, some of which have been under the FCA’s investigation for as many as five years.
Evidence of the FCA’s commitment to bolstering its enforcement team was seen earlier this year when Therese Chambers and Steve Smart joined forces as co-executive directors of the FCA’s Enforcement and Market Oversight Division (EMO). What was once considered a one-person job is now occupied by the combined expertise of Chambers, who brings two decades of internal FCA experience, and Smart, former director of intelligence at the National Crime Agency (NCA).
Chambers’s first speech in her new role, “Do the right thing”, contained several clues as to which direction she intends to co-steer the division and indicated a clear alignment with Rathi’s objective of assertive and efficient enforcement. She issued a stern warning that firms ought to “get their ducks in a row now” as “[t]here really is nowhere to hide”.
Chambers also made a series of pointed remarks about the conduct of legal professionals who caused delays and obstructions in FCA investigations. She suggested that defence lawyers have resorted to “aggressive diversionary tactics” to block enquiries, thus prolonging the timeline of cases. She cautioned that such tactics could adversely affect both the reputations of those being investigated and the regulatory outcomes of their cases.
If reducing the quantity of enforcement cases is high on the FCA’s agenda, then a rigorous and preemptive supervisory practice is key to achieving this. With nearly 50,000 firms under its regulation, supervision accounts for a significant portion of the FCA’s day-to-day activities. However, while supervisory powers have always been in the FCA’s toolkit, the regulator previously faced accusations of passivity in this department, most notably in the 2020 Gloster report.
Since then, the FCA has adopted a more assertive approach to supervision, as exemplified by the 613 financial-crime supervision cases the regulator opened in the financial year (FY) 2022-23, an increase of more than 65 percent from the year before. The FCA’s most recent annual report also announced the development of its new fraud team, whose initial tasks include delivering a fraud framework intended to be internal to the FCA and developing a data dashboard to be used by the FCA when assessing firms’ internal anti-fraud systems and controls.
The FCA’s approach to supervision is guided by its ambition to become a data-led regulator. This is evident in the ever-expanding field of sanctions supervision, in which the FCA is collaborating with the Office of Financial Sanctions Implementation (OFSI) to gather data that can be used to evaluate firms’ sanctions-screening systems and undertake a “deep dive” into their controls. In the past year, the FCA has used these data capabilities to review nearly 100 suspected sanctions breaches and conduct 38 proactive assessments of firms’ sanctions controls.
The recently passed Financial Services and Markets Act (FSMA) 2023 also contains provisions that will empower the FCA to expand its supervisory activities further. Among the duties allocated to the FCA by FSMA is the supervision of third parties providing services to financial-services firms, a role to be coordinated between the FCA and the Bank of England (BoE). A consultation is planned to be held before the end of the year, during which stakeholders can contribute to shaping the supervision’s operation.
Judicial criticism of the regulator
Despite the stated aims of increased efficiency and prowess in the fields of supervision and enforcement, several recent judgments from the Upper Tribunal (UT) have contained unprecedented and scathing criticisms of the FCA, outlining a myriad of issues with disclosures, delays, strategies and legal reasonings.
Under Section 133A (5) of the Financial Services and Markets Act 2000, the UT is empowered to make formal recommendations in its judgments regarding the FCA’s “regulating provisions or its procedures”. In the Thomas Seiler, Louise Whitestone and Gustavo Raitzin v. the Financial Conduct Authority (FCA) case, the UT took advantage of this power and made a formal recommendation regarding the FCA’s disclosure failings.
The judgment stated that it “is of considerable concern that it is a recurring theme in Tribunal decisions that the [FCA] is castigated for failings in its disclosure obligations”, continuing: “There are only so many times that the [FCA] can apologise for its failings, insist that lessons have been learned and then expect that those affected should simply move on.”
The UT further lambasted the FCA via several informal recommendations, particularly related to delays. It stated that the FCA ought to give “serious consideration as to whether it is appropriate to continue with an investigation which it does not have the resources to complete within a reasonable period and where it has decided that its priorities for its limited resource lie elsewhere”.
While Chambers’s speech indicated that the FCA itself was frustrated by delays, the UT’s comments have suggested that a timelier resolution of cases would be welcomed by all involved. Statistics from the FCA’s “Annual Report and Accounts 2022/23” demonstrated that for cases open at the end of the financial year 2022-23, the average duration of the investigation stage—from the FCA’s decision to investigate until the initial findings of the investigations team—was 30 months. The average duration of the resolution/litigation stage—the time between the decision to take enforcement action and case closure—was 34 months. The average total duration of an FCA enforcement case, therefore, was approximately five years and four months—a frustratingly long time to be subject to the stress of an investigation.
The Seiler judgment also detailed the UT’s view on failures in the FCA’s decision-making. In a damning indictment of the FCA’s omission to call key witnesses and failure to bring regulatory action against a key individual, the UT contended that the regulator had “swallowed hook, line and sinker” the story it had been fed and that it had become “anchored in its initial impression of what happened”, giving rise to “a mindset of confirmation bias”.
Similar sentiments on the FCA’s legal reasoning were delivered in another UT judgment later in the same month. When delivering its decision in the Blue Crest Capital Management (UK) LLP (BCMUK) v. the Financial Conduct Authority (FCA) case, the UT took aim at a Decision Notice issued by the FCA, describing it as “not an impressive document” containing “a considerable amount of muddled thinking”. The UT proceeded to note that a “lack of clarity” made it “difficult to identify the essence of the [FCA’s] reasoning”.
Forewarned is forearmed.
While the FCA may be facing its own difficulties with the timely resolution of cases, a proactive and prompt but considered response if the FCA approaches a firm or individual will not only be well received but may be the deciding factor in whether a matter is referred to the enforcement team.
It is also worth bearing in mind that “harder-edged” engagement with the FCA is not limited to enforcement; supervision can be equally robust, with enhanced powers to restrict a firm’s activities and veto the appointment(s) of its senior management.
Many firms and their senior management may never experience assertive supervision, let alone a referral to enforcement, but for those that do, it is usually unexpected and acutely felt by management, with a mixture of frustration at the length of the process and the demands made on individuals combined with uncertainty as to the regulatory outcome.
Forewarned is forearmed: Firms, particularly their senior managers, should know how to prepare and respond to regulatory enquiries.