Enforcement - change from the top?

As any person working in financial services will know from their required reading, they have certain obligations to their customer, their firm, the regulator, and law enforcement.

Most will follow the rules and guidance, some will make errors and will need putting back on the correct path, and others will deliberately break the rules for gain.

Unlike most statistics available in the industry, it can often be difficult to identify trends in these types of wrongdoing- A large, single event can make the overall fines appear high for one year, or a public outcry over an issue increase the number of events in another. Timescales for an investigation can lead to delays, also skewing the data.

This may have been a factor in a plan to change the level of information available publicly towards a near real time solution.

A new broom

When the joint Executive Directors of Enforcement and Market Oversight were appointed in 2023, the role of the unit was clearly stated. Therese Chambers and Steve Smart were expected to prioritise work in three main areas[1]identifying the best way to reduce financial crime, meet the standards of the Consumer Duty, and protect fair competition.

In this article, we hope to look to the recent plans they’ve published to achieve these aims and how they are progressing.

Why do we need enforcement?

Enforcement is a scary word in the financial sector. There are plenty of stories of huge FCA fines on multinationals and the risks to individuals from the Senior Managers and Certification Regime. Perhaps we should take a step back and consider why enforcement is necessary.

If a firm accepts that the industry should provide a fair level of service for a fair level of profitability, the FCA Handbook becomes superfluous. In reality, our world is so complex we rely on rules to make challenging decisions easier. Can a telephone number for complaints be used as a source of revenue? No, because it would not be fair.

DISP 1.3 takes over 1000 words to say that because the FCA, in consultation with its regulated firms, has tried to think of the different products, customer types and businesses affected, if something has been missed out, there are still the FCA Principles for Business that give the basic standards we are all held to.

Enforcement of the rules and being clear on the consequences of not following them, gives the ‘carrot’ of a stable sector trusted by our customers and a ‘stick’ where an example of wrongdoing is found.

Whistleblowing transparency and accountability

Often, Enforcement action arises when information comes to the attention of the regulator through whistleblowers. For that to be effective, potential witnesses and whistleblowers need to be convinced that they are not only doing the right thing, but that they will be protected from personal repercussions when coming forward.

Shortly after her appointment as one of the two Executive Directors, Therese Chambers said:

‘We need the intelligence whistleblowers provide to identify and act on problems in the firms we regulate. We want to make sure we’re capturing and using the information provided by whistleblowers as effectively as possible, and to give them as much information as the law allows on how we have acted on their concerns.’

This approach emphasises the Enforcement units’ reliance on whistleblowers at present and their plan for the future. It should be obvious that the FCA are looking to better leverage the information provided by the 1000 or so people that approach the FCA each year with concerns.

The powers of the Enforcement Unit are wide ranging and hold an influential position in the financial sector. They police our activities, investigate when they think something is wrong and mete out punishment when they think it is necessary. Having more witnesses coming forward will aid them in these objectives.

However…

Judge, jury and executioner is a potent position, and transparency throughout the process should be key- or should it?

The FCA now believes that the best way to have an open and transparent investigation process is to carry it out in the public eye, and by doing so, encourage others to come forward with additional information.

In February 2024, the Executive Directors of Enforcement and Market Oversight gave their backing to Consultation Paper CP24/2, a plan to introduce this novel approach. It is proposed by them that the FCA publish information about their investigations whilst they are underway, not only where there has been a negative finding. By doing so the FCA hope to highlight what areas of potential misconduct are important to them and to deter firms from going down the same route.

By encouraging others to come forward during an investigation with potentially relevant information, one would hope that there will be enhanced protections for whistleblowers, although that is not detailed in the consultation paper.

Where someone has a piece of data that relates to the investigation, they will be encouraged to come forward, helping build the overall picture at the most crucial time. In doing so, publicly, the FCA believe it will give others the confidence to do the same.

NASA Investigating 800 UFO incidents

This heading probably got your attention. It got mine in May 2023, and was picked up by newsfeeds round the world. The news that NASA, an internationally respected body, was investigating such a large number of cases was staggering and a good indication that there must be something out there.

What didn’t get my attention, until I went looking for it today, was the report issued four months later stating there was no evidence. That made fewer newsfeeds.

If the FCA say they are investigating Joe Bloggs Investment Managers for misuse of client funds, that will make headlines. It is not such an interesting story when the investigation is concluded, and it has found nothing.

Finding evidence of alien life would be fascinating, but unlikely to affect most of our daily lives. Even the suspicion that your investment manager is using your money to buy himself a Ferrari will probably lead you to take more immediate action.

‘Innocent until proven guilty’ is a phase we hold in high regard. The FCA have said it is planning on making clear an investigation is not proof something is wrong. Unfortunately, there’s another equally valid trope. ‘Mud sticks’.

Parliamentary involvement

The Financial Services Regulatory Committee, chaired by Lord Forsyth, has expressed concern that the Consultation paper has been published without an assessment of the impact of the changes. It has also requested a postponement to any implementation until the Committee has had a chance to look at the whole issue in depth.

To do so, it requested that the Chief Executive of the FCA personally respond to a list of eleven points it wished clarification on.

Next Steps

All we can say is ‘Watch this space’. Officially, the FCA Consultation period is now over. This is certainly not the view of the Financial Services Regulatory Committee, and one may expect that there will be changes to the proposals before too long. In the meantime, its best if you just follow the Handbook Rules and try to be nice to your customers.

It makes things easier for everyone.

Source: Article “Enforcement – change from the top?” was written by The ZISHI experts, and published in the Advice Matters Magazine | October 2024 |

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