The FCA Consultation Paper CP24/2: Our Enforcement Guide and publicising enforcement investigations – a new approach continues to be a key market focus. The latest developments include:

(i) correspondence between the Treasury Sub-Committee on Financial Services Regulations and the FCA (preceding the FCA giving evidence to the Sub-Committee on 8 May 2024 in one its regular accountability hearings); and

(ii) a call for evidence on the proposals from the House of Lords Financial Services Regulation Committee, announced on 9 May 2024 with a closing date of 4 June.

We summarise below the key points for firms.

Correspondence between the Treasury Sub-Committee on Financial Services Regulations and the FCA

On 1 May 2024, the Treasury Sub-Committee on Financial Services Regulations wrote to Nikhil Rathi, the Chief Executive of the FCA, asking a number of questions in connection with CP24/2. The FCA responded to this letter with two letters, one from Mr Rathi and one from Therese Chambers and Steve Smart, Joint Executive Directors of Enforcement and Market Oversight, which were published on 8 May 2024.

Particular points of note from the FCA letters are:

  • Consultation feedback: The FCA has not yet completed a detailed assessment of the range of responses received, but at a high level the industry view as represented by trade bodies and law firms records generally strong opposition to what the FCA is proposing. Industry concern has particularly focused on the implications of an increase in transparency on international competitiveness and growth in the financial services industry and reputational impacts. The FCA notes that consumer groups have tended to view the proposals significantly more positively, with some calling for the FCA to go further, and that there have been supportive responses from those with experience of dealing with whistleblowers. Certain law enforcement partners also submitted supportive feedback.
  • Length and number of investigations: The FCA agrees that the average time to close cases is too long. Over the past financial year, the FCA has reduced its operations portfolio by around 15%. This is a conscious choice as it looks to open enforcement into serious misconduct if an investigation will drive “impactful deterrence” and it’s the right regulatory response considering all of the FCA’s available tools. The FCA states that reducing the portfolio size will enable it to investigate faster – it is taking a hard-headed approach to opening cases which are likely to end with no further action and is making decisions to take no further action more quickly than in the past. However, it expects to achieve as many (if not more) impactful outcomes. In addition, it states that it will continue to increase the number of interventions and preventions by acting earlier before a case becomes an enforcement operation.
  • Use of non-enforcement regulatory tools: As we have seen in our work, there has been a sharp increase in the FCA’s work on prevention in recent years. For example, it is exercising greater scrutiny when determining applications to keep non-compliant actors out of the regulatory system. That has been particularly important with respect to new responsibilities, such as anti-money laundering registration for crypto firms. The FCA has also: (i) stepped up its activities in relation to appointed representatives and their principal firms, and problematic financial promotions; (ii) strengthened supervisory processes and now collects data differently, supporting firms with reporting requirements; and (iii) increased use of Section 166 inquiries (77% more in 2023/24 over the previous year), and other supervisory interventions. The FCA states that these changes help explain why it has been able to reduce incoming enforcement cases, and why only 11 regulated firms faced new enforcement investigations in 2023/24.
  • Timing of announcements: The FCA reiterates that there would be no presumption in favour of disclosure: in some cases the FCA considers that the public interest would support naming a firm at the appropriate point in the FCA’s investigative process, in others it would not. In the correspondence, the FCA clarifies that the appropriate point “may not always be at the outset”.
  • Examples when announcements would be made: The correspondence lists some examples of when the FCA considers it would be in the public interest to name firms in a “factual and measured way”. These include where the FCA: is concerned about potential ongoing and significant consumer detriment; needs to reassure consumers that it is investigating a particular firm; and/ or needs to do more to provide confidence to whistleblowers.
  • Alternatives to announcements: The FCA notes that some respondents to the consultation suggested an ‘Enforcement Watch’ publication, which sets out an overview of enforcement activity. The FCA thinks that this could be of value in bringing together important themes from its work. The FCA states that it is carefully considering all alternative proposals and would want to understand how stakeholders think this provides the same impact as disclosure of individual investigations when doing so is in the public interest.
  • Data on investigations: The cases opened include: (i) an investigation into a dual-regulated financial institution where some of the failings relate to oversight and controls, including in relation to anti-money laundering and related financial sanction controls; (ii) an investigation into a wholesale market participant concerning potential failures in transaction reporting and market abuse monitoring; and (iii) an ESG related case.
  • Data on use of supervision powers:  The FCA opened 83 Section 166 reviews in 2023/24 – as noted above a marked increase from 2021/22 and 2022/23, where 38 and 47 reviews were opened respectively.

In addition:

  • Voluntary outcomes: These increased by nearly a quarter during 2023/24 from the previous year. In 2023/24, there were 100 voluntary requirements/ written undertakings, one Variation of Permission (VVOP) and one Direction under the Money Laundering Regulations (VDIR).
  • Own initiative outcomes: During 2023/24, there were 25 own initiative outcomes (up from 22 in 2022/23). This comprised 17 own initiative requirements (OIREQ), five own initiative variation of a firm’s permission (OIVOP), one own initiative directions under the Money Laundering Regulations (OIDIR) and two own initiative variation of a Senior Management Function holder’s approval (OIVAP).

Call for evidence from the House of Lords Financial Services Regulation Committee

Separately to the above, following on from earlier correspondence with the FCA (see our blog here and subsequent letter from the Committee), on 9 May 2024 the House of Lords Financial Services Regulation Committee announced that it is seeking views on the proposals contained in CP24/2  ahead of taking evidence from the FCA on these proposals. It has requested written submissions to its inquiry by the end of Tuesday 4 June 2024.

Next steps for the FCA

In the Treasury Sub-Committee correspondence noted above, the FCA states that it is clear that change and a degree of greater transparency is necessary. However, it remains open minded on ideas as to how to address the issues that it has identified. It aims to build a broad consensus so that all parties can have confidence in the FCA’s approach to enforcement. Given the issues raised in the consultation are sensitive and can be emotive, as we anticipated in our last blog, the FCA has said that it will take “several months” to consider the feedback carefully and engage further with stakeholders, including the Treasury, to explore the concerns.