Trends in financial services enforcement

18 Jan 2017 | 29 min read

Peter Bibby, Partner, and Chloe Pawson-Pounds, Associate, both at Brown Rudnick, consider the areas where the FCA is likely to exercise its enforcement powers in the near future.

This News Analysis considers the areas where the Financial Conduct Authority (FCA) is likely to exercise its enforcement powers in the near future. The two main sources of guidance for firms are: (i) the FCA's new Enforcement Referral Criteria, which set out the thought process that the FCA will apply when considering whether a suspected breach of its rules and principles (as set out in the FCA Handbook) should be the subject of investigation; and (ii) the FCA Business Plan 2016/17 (FCA Business Plan), which sets out the forthcoming areas of priority for the regulator. As explained below, the priorities set out in its Business Plan are one of the factors that the FCA considers in applying the Enforcement Referral Criteria.

As made clear throughout this analysis, the FCA is likely to focus on the conduct of senior individuals more in the future. This is a natural result of the introduction of the new senior managers regime introduced for banks and Prudential Regulation Authority (PRA)-regulated investment firms in March 2016 (which will be extended to all regulated firms in March 2018); the recommendations of Andrew Green QC in his report into the Financial Service Authority's (FSA) decision-making in relation to HBOS; and the views of the Parliamentary Commission on Banking Standards that increased fines and penalties against firms have not effected the necessary changes in culture required to protect consumers and the integrity of the UK’s financial markets.

The Enforcement Referral Criteria

Background

The Enforcement Referral Criteria set out the range of factors that the FCA takes into account when deciding whether to appoint investigators. The new referral criteria were issued by the FCA on 22 April 2016 and are used when the regulator considers that the potential outcome of an investigation might be:

  • to take disciplinary action to fine, publicly censure, suspend and/or restrict firms/individuals who have breached the requirements, and/or
  • to make a prohibition order

It should be noted that certain cases are not assessed using these referral criteria. These are:

  • cases involving civil litigation (eg applying to the courts for injunctions and restitution orders for unauthorised business)
  • cases involving bringing criminal prosecutions to tackle financial crime (such as insider dealing or unauthorised business)
  • supervisory activity leading to Own Initiative Variations of Permissions (OIVOPs) and Voluntary Applications for Imposition of Requirements (VREQs), and
  • enforcement investigations in relation to threshold conditions, unauthorised business, the Competition Act 1998 (CA 1998), the Listing Rules and market abuse cases

The Enforcement Guide (EG) provides commentary on the factors the FCA considers when deciding whether to investigate and/or take action in these specific types of cases.

Application of the Enforcement Referral Criteria

The starting point for the referral of a case for potential investigation is consideration by the FCA of whether an investigation (and possible enforcement action) will be the 'most efficient and effective way of achieving our statutory objectives (protecting consumers, enhancing market integrity and promoting competition)'. The FCA will consider whether other tools, either alongside or instead of an investigation, are the more appropriate response. Enforcement action is an expensive and resource-intensive option for the subject of the investigation as well as for the FCA, so the regulator needs to exercise its discretion to ensure that in all the circumstances it is the appropriate course of action to take and the best use of its resources. Alternative tools available to the regulator include dealing with the matter through supervisory correspondence; appointing a skilled person to gain a better understanding of aspects of a firm’s activities that cause the regulator concern or where the regulator requires further analysis; limiting or placing restrictions or requirements on how a firm conducts its activities (either voluntarily or through formal action, which in itself would require some investigation although the focus would be on protection going forwards rather than discipline for past breaches); requiring or agreeing with firms that they will pay redress to customers who have lost out (again if redress is required as opposed to being offered voluntarily then an investigation is likely to be necessary); and/or banning or restricting by agreement particular promotions or products.

The FCA's decision on whether to investigate with a view to potential disciplinary action will take account of the impact of the action on the firm or individual in question, but will also take into account the wider effect on the market and on other firms and individuals. This is because 'effective, proportionate, robust and public enforcement action is a key part of changing behaviour by acting as both a specific and general deterrent'. It is intended that individuals operating in the sector know that in the event of wrongdoing they will be held to account and subject to meaningful sanctions—hence it is a credible deterrent.

The FCA has wide ranging powers at its disposal to enable it to investigate potential breaches, including the power to require firms or individuals to deliver up documentation/information and/or to attend interviews and answer questions. In order to make use of those powers the regulator must satisfy the relevant statutory test (which will differ depending upon the nature of the investigation being proposed) as set out in the Financial Services and Market Act 2000 (FSMA 2000). This test has a relatively low threshold (ie whether it appears to the regulator that there are circumstances suggesting there has been a breach of a rule of requirement). Accordingly, the referral criteria are the means of ensuring that a policy analysis is undertaken in order to differentiate between cases that should be subject to investigation and cases that should be dealt with through an alternative approach.

The Enforcement Referral Criteria are not exhaustive but they provide the framework for all decisions to investigate. It should be borne in mind that this means that they are not only relevant at the outset of an investigation process but will also be considered further down the line, for example, if new failings are identified within the context of an investigation different to those suspected at the outset.

At any point, the regulator’s analysis starts with the overarching question of whether an enforcement investigation is likely to further the FCA's its aims and statutory objectives. This involves consideration of three different issues:

  • first, the strength of the evidence and the proportionality and impact of carrying out an investigation
  • second, what goal or purpose would be served if enforcement action were ultimately to be taken, and
  • third, the factors that determine whether the purposes of enforcement action are likely to be met

These are considered in turn below.

The strength of the evidence

The FCA will consider the strength of the evidence to support the suspicion of misconduct and the extent to which further evidence may be available. Therefore, if there is little evidence available to support an allegation of misconduct and it appears to the FCA that there are no likely sources of further evidence then there would be no point in the FCA pursuing the matter. However, it is unlikely that strength of evidence will often be a determining factor at the outset of an investigation, given the wide and intrusive powers that the FCA has to gather information and require witnesses to attend and give evidence.

At the outset of an investigation a view on the seriousness of any likely breach that can be proved is far more likely to be an important factor. The FCA's approach to assessing seriousness is set out in the DEPP part of the FCA Handbook, which identifies a number of criteria that the FCA takes into account when deciding whether to impose a fine and the size of a fine if the decision is taken to impose one. These include factors such as the extent of loss to consumers, the extent to which there were widespread failings in systems and controls and the extent to which any breaches were deliberate or reckless. These are the same sort of factors that the FCA will consider at the point of referral when deciding whether to launch an investigation and it is far more likely that a case will be referred for investigation if those types of factor are present.

The FCA only has a finite amount of resource, is required to operate within a budget and is expected to use its resources in an efficient and economic way. The need to operate in an efficient and effective way does not prevent the FCA from investigating matters where it is appropriate that they should be investigated. Examples of where the FCA has launched industry-wide, highly resourced and intensive investigations include LIBOR and FOREX. These examples show that the FCA will not shy away from taking on lengthy and expensive investigations. However, it does mean that the FCA will prioritise cases against others that could be referred to enforcement. The natural result of this is that certain cases that may have been investigated in the normal course of events may have alternative tools employed at times when the FCA is engaged in wide-ranging resource intensive investigations and vice versa.

A further factor that the FCA will take into account is the extent to which action has been taken or will be taken by another agency in the UK or abroad against the firm or its individuals. The FCA will, therefore, consider whether there is a benefit to be gained by it taking action if another agency is investigating. This factor is not, however, determinative. For instance, in a number of cases the FCA has investigated the behaviour of traders even though their behaviour has also been the subject of criminal investigations in the UK and overseas.

The FCA will take into account the impact of an investigation on the target, especially where the target is an individual. However, given that the FCA is engaged in a balancing exercise, it will simply be one factor to be taken into account and weighed up along with the others, including in particular the seriousness of the suspected breach and the possible general deterrent effect of any action.

The purpose or goal that would be served by taking enforcement action

Enforcement is seen as a strategic tool by the FCA. As such, when deciding whether to use its resources to investigate a particular case the FCA will consider what the possible return to it would be in terms of achieving its aims and goals (ie in furthering its objectives).

The FCA will consider whether 'specific deterrence' will be achieved through an investigation, ie whether the firm or individual in question will be deterred from repeating their behaviour. It is rare that this alone would be a determining factor. The FCA will expect firms to learn from their mistakes and, therefore, even in the absence of an investigation it will expect firms and individuals to change their behaviour for the future where there is evidence of a past breach. If the FCA concludes that an investigation is required to effect necessary behavioural change then it is likely that the FCA will have wider and more deep-seated concerns about the management of the firm and the culture in place, and it may be that more urgent forward looking and protective action would be warranted.

The FCA will also take into account the extent to which action against a firm or individual would have a wider ‘general’ deterrent effect; in that it will impact on the behaviour of others in a particular market or industry or across the financial services sector more generally (and so raise standards across the board). The FCA will want to ensure that it takes action against a range of firms from different areas of the regulated community so that no one area feels that it is immune from the possibility of enforcement. In reality, this focus on the wider deterrent effect of enforcement means that the FCA is more likely to take action against higher profile firms. There will be far more press coverage and interest in action against a high profile firm. This will result in a higher degree of public awareness about the action that the FCA is taking and will help to ensure that other firms take notice of the lessons to be learned from the enforcement case.

In certain cases, the potential failings may be so serious that, notwithstanding the other usual factors that the FCA considers, there is no alternative other than to investigate with a view to taking enforcement action and imposing a penalty together with taking action to remove the firm or individual from the industry. The referral criteria refer to these goals as 'justice' and 'protection'.

In view of the new Senior Managers and Certification Regime (SM&CR) introduced for banks and PRA-regulated investment firms in March 2016 (which is to be extended to all regulated firms in March 2018) there will be a greater focus by the FCA on holding individuals to account. This is consistent with the FCA and the Parliamentary Commission on Banking Standards’ view that in order to change culture it is necessary to make the threat of enforcement real for those who manage and direct a firm’s operations. The prevailing view is that ever increasing fines against firms has not had the desired effect of changing behaviour and that a real risk of sanction for those individuals at the top of an organisation may be more effective in delivering FCA’s statutory objectives.

The factors that determine whether the purposes of enforcement action are likely to be met

The regulator will take into account a range of factors in deciding whether in any given case one or more of the above referenced purposes or goals, being ‘specific deterrence’, ‘general deterrence’, ‘justice’ and ‘protection’, are likely to be met by any enforcement action.

Specific deterrence

In assessing whether specific deterrence can be achieved the FCA will consider how the firm or individual involved responded to the breach, how the FCA’s objectives for the firm or individual can be most efficiently and effectively achieved and how any enforcement investigation or action might impact on other steps being taken by the FCA and/or the firm or individual to improve compliance.

General deterrence

As to whether general deterrence is likely to be an outcome, there are many factors which will come into play, including:

  • whether the issue to be referred for investigation is relevant to an FCA strategic priority, such as a specific area of focus as set out in the FCA's business plan. Firms may, therefore, be able to assess whether their activities are such that they may be more likely to be investigated if a potential rule or principle breach is identified. The FCA's strategic priorities as identified in its 2016/2017 Business Plan are discussed further below
  • the extent to which the suspected misconduct may be widespread in the market and the extent to which such misconduct has already been the subject of action. Good examples of this are LIBOR and FOREX where the FCA took the view that misconduct was widespread and that a strong message needed to be given that misconduct in the wholesale markets was not to be tolerated. This approach was needed because, unlike with retail misconduct, there had been very few historical cases where action had been taken for failures in the wholesale markets and, as was shown by the enforcement cases in relation to both LIBOR and FOREX, firms and individuals did not appreciate that their behaviour in relation to the submission of data for the purpose of the compilation of benchmarks was unacceptable or that the FCA would view it as such. The FCA launched extensive, time consuming and expensive investigations in order to ensure that the market was left in no doubt that historical practices were unacceptable. In future, whilst it is likely that action would be taken against firms and individuals for similar behaviour following the publication of the fines levied in 2015, it is unlikely that behaviour that pre-dated those fines would now be the subject of investigation unless it was particularly egregious. Even in such cases, the FCA would take into account the question of whether further action would be appropriate given the fact that (given the action already taken) the returns to it in terms of general deterrence would be likely to be limited
  • whether the misconduct is indicative of poor culture and governance at the firm. In this regard, the FCA will take into account:
    • whether there has been misconduct by senior individuals (and/or whether senior management is setting the right tone). This is a similar consideration to 'specific deterrence' (see above), and it is likely to be a factor where the firm is a large one and therefore poor culture could have a serious impact on the financial markets and on consumers
    • whether there has been repeat offending by the firm or whether the firm has failed to address the root cause of problems by doing the bare minimum required to address them, and
    • whether the firm has failed to cooperate with the FCA or with other regulators
  • if it is a situation in which a number of firms could be subject to an enforcement investigation (for example, following a 'thematic review' of a particular area of business or set of activities by the FCA in the course of which it has reviewed the performance of a number of different firms operating in that sector or in relation to the particular product), the FCA will rank the firms and will refer for investigation those firms whose conduct failure appears to be the most serious. This assessment will, however, also take account of other relevant factors including which cases are likely to have the most impact and to send the strongest deterrent message. Therefore it is possible that a small, less high-profile firm whose conduct is similar to a larger, more high-profile firm may be dealt with through supervision whilst the large, high-profile firm is investigated with a view to enforcement. Whilst this may appear unfair to the target of the investigation, it is a reality of the strategic deterrent aspect of enforcement
  • in cases involving senior individuals, whether enforcement action would send a strong message to other senior individuals in the broader industry about the importance of setting the right culture at the top and, crucially, the fact that senior managers themselves will face personal consequences of misconduct, and
  • finally, the FCA will consider whether the suspected misconduct involves any overseas jurisdiction and, if so, whether enforcement action in this jurisdiction might materially further market confidence or investor protection in that overseas jurisdiction

Justice

In assessing how serious the potential breaches are, and so whether the goal of ‘justice’ requires enforcement action, the FCA will also try to determine the extent to which confidence in the financial markets has been undermined or could have been undermined by the behaviour in question. Central to the question of the severity of the breach will be the question of consumer detriment and the extent to which customers have suffered loss as a result of. The suspected breaches. The FCA will also consider the degree to which a firm or individual may have benefitted and the extent to which the firm reported the matter to the FCA. Principle 11 of the FCA's Principles for Businesses (PRIN 2.1.1R in the FCA Handbook) requires firms to be open and cooperative with the FCA. The FCA will, therefore, pay particular heed to the extent to which a firm self-reported a problem, took steps to address the issues identified, and compensated any customers for any loss that they may have suffered. However, dependent on the other factors listed in the referral criteria, it may be that proactivity by the firm after the breach will still not be enough to enable it to avoid an investigation. A lack of proactivity after a breach is, however, likely to be a strong indicator that an investigation and potential enforcement action is the appropriate course for the FCA.

Protection

The final purpose to be considered by FCA is that of protection—essentially, the goal is to remove wrongdoers from the industry and (where appropriate) impose restrictions on their ability to work in the industry in the future. That goal can be achieved either by imposing restrictions on a firm’s permission, withdrawing an individual’s approval and/or by making a prohibition order.

In considering the question of protection at a firm-level the FCA will consider whether the firm is in breach of the Threshold Conditions (the minimum standards for permission to carry on a regulated activity). When considering protection at an individual level the FCA will take into account whether there are circumstances to suggest that an individual is not ‘fit and proper’. The main assessment criteria for determining whether an individual is fit and proper are set out in the FCA Handbook, FIT 2. The FCA will also look at whether the individual is or was an approved person who is or was in the UK and whether he or she is still working in the industry (and, if so, at what level of seniority).

The FCA has the power to make a range of prohibition orders depending on the circumstances of each case and the range of regulated activities to which the conduct in question is relevant. It should be noted that whilst the FCA may limit a prohibition order to specific functions in relation to specific regulated activities; it may also seek to prohibit individuals from performing any class of function in relation to any class of regulated activity. The latter is likely to be used where concerns relate to an individual’s honesty and integrity, the former where concerns relate to an individual’s competence to carry out a particular role. The FCA may also make an order prohibiting an individual from being employed by a particular firm, type of firm or any firm (EG FCA Handbook Chapter 9.2.2).

It is of particular note that the FCA has stated in its latest Referral Criteria that it considers a prohibition order to have both protective and punitive purposes and to hold individuals to account publicly. As such, the FCA will consider whether enforcement action would be appropriate to achieve either one of those aims. Formerly, it was understood that the purpose of a prohibition order was protective (and that other less draconian methods (such as a fine) would more typically be employed where a punitive measure was considered necessary and appropriate).

The FCA's strategic priorities

The FCA Business Plan sets out seven priority themes identified as a result of its assessment of the current risks to the market and consumers. Those priorities will form the primary focus of the FCA’s discretionary work, which obviously includes enforcement, over the course of the year ahead and are as follows:

  • pensions
  • financial crime and anti-money laundering
  • wholesale financial markets
  • advice
  • innovation and technology
  • firms’ culture and governance, and
  • treatment of existing customers

Whilst those seven strategic priorities will not comprise the totality of the FCA’s work, they will drive the regulator’s decisions and so will be a central factor in the FCA’s decision-making process as to initiating enforcement action in respect of any matter which comes to its attention. Of the seven priority themes, two are new; these being wholesale markets and advice. The remaining five are considered by the FCA to continue to merit their priority status.

Culture remains a key theme for the FCA, as does individual accountability (particularly at the most senior levels) and consumer protection (particularly in the areas of pensions, advice and firms’ management of existing customers).

Pensions

In light of the fundamental changes to the market, this remains a priority sector for the FCA which will devote a substantial amount of resource to ensuring that practices and procedures are operating to the correct standards, supporting fair treatment of customers and encouraging competition. The FCA wants to see increased competition and innovation coupled with greater consumer protection (in terms of the value for money of products on offer, the appropriateness of advice being given and the reduction of investment scams). The FCA’s work will include a review on Retirement Outcomes (which will consider the impact of the pension reforms on competition and switching in the market), a consultation on the imposition of early exit charges, publication of the final changes to its pension rules and guidance, continuation of its review into annuities sales practices, working with HM Treasury to create a consumer protection model for the secondary annuities market, reviewing the effectiveness of the Independent Governance Committees (in helping pension providers deliver value for money) and cracking down on scams.

Financial crime and anti-money laundering

The FCA will continue to focus on anti-money laundering (AML) and will be continuing its due diligence on firms and individuals applying for authorisation alongside its proactive supervisory assessment of those firms whose business models present an inherently higher risk of money laundering. The FCA’s stated objectives are to prevent money laundering, stop AML processes from unfairly excluding access to financial services, ensure that AML requirements are proportionate and stamp out investment scams. Those are to be achieved through the Financial Crime Annual Data Return, the use of early intelligence (including a drive to encourage whistleblowing), the implementation of the EU’s Fourth Money Laundering Directive by mid-2017, a review of the UK system in the context of the Financial Action Task Force’s activities, coordination with other enforcement agencies where appropriate to prevent scams and a proportionate and effective response to de-risking. The FCA will use its enforcement powers to send a deterrent message to the industry and/or to impose business restrictions to limit the level of risk and there will be a particular focus on action against firms and individuals who perpetrate scams (particularly those targeted at consumers’ pensions) including, in the most serious cases, criminal prosecution. An example of the FCA’s use of business restrictions alongside financial penalties can be seen from the Sonali Bank case (Final Notice October 2016) in which the bank was fined £3.25m and was restricted from accepting deposits from new customers for 168 days. The fine and restrictions were imposed because Sonali Bank failed to maintain adequate Anti Money Laundering systems and controls for a four-year period (August 2010 to July 2014). The firm’s money laundering reporting officer (MLRO) was also fined and was prohibited from performing compliance oversight and money laundering reporting functions in the future.

Wholesale markets

The FCA will proactively regulate wholesale markets to improve integrity and increase confidence. The regulator is intending to increase monitoring and surveillance and to focus on accountability in its efforts to detect and disrupt misconduct.

The Market Abuse Regulation (MAR) is intended to 'strengthen the existing UK market abuse framework', however, whether or not it will actually increase the FCA’s number of successful market abuse outcomes remains to be seen. The new Markets in Financial Instruments Regulation (MiFiR) will require firms to report across a wider range of fields and asset classes from January 2018. Alongside MAR the FCA considers that this will significantly contribute to the effectiveness of its market abuse efforts.

In the context of the Fair and Effective Markets Review (FEMR), conducted by the FCA alongside the Bank of England (BoE) and HM Treasury, the extension of the SM&CR to all authorised firms in FICC markets was put before parliament. Over the course of the next year or so, the FCA will undertake further work in this context to ensure that the regulatory reference rules as part of the new SM&CR are properly enhanced with a view to helping firms avoid 'recycling' of individuals with poor conduct records (this will be particularly important given that the FCA will no longer be approving the same number of individuals and the responsibility for ensuring they are fit and proper at the point of recruitment will fall more heavily on the firms themselves).

The new Markets in Financial Instruments Directive (MiFID II) is due to apply from January 2018 and is intended to ensure that firms have the best interests of their clients at the centre of their business across retail and wholesale markets.

The FCA’s final report in relation to its study into asset management (to assess if competition is working effectively and whether investors get value for money) is set to be published in early 2017.

The regulator will also be focusing on the effectiveness of the primary markets in supporting prosperity and providing investment opportunities.

Advice

The FCA will be looking to implement the recommendations which came out of the Financial Advice Market Review (FAMR) launched in August 2015 and concluded with the final report in March 2016. The outcomes that the FCA is seeking are clear and concise: advice must be affordable, accessible and meeting consumers’ needs. It must be of an appropriate quality and suitable, delivered in an innovative and accessible manner, regardless of its cost. The cost of advice, and so firms’ charging structures, needs to be clear and transparent.

It is likely that the FCA will take a robust stance, through enforcement action, towards firms and (where failures are identified) individuals responsible. There is to be greater supervision of the quality of advice being given by firms and success is to be measured through improved consumer satisfaction scores and complaints data.

Innovation and technology

The FCA appears to approach the 'transformation' of the financial services sector as brought about by technological advances with some caution. Whilst the many upsides of technological advances are well recognised within the business Plan, and the increase in innovation for consumers’ benefit a stated objective, the FCA is clearly alive to the associated risks and the increased burden (in terms of additional systems, procedures and controls) that this will place on firms. As such, the area is undoubtedly on its radar from a consumer protection perspective. The Business Plan specifically recognises the increase in cyber-attacks whilst noting that some firms may not have adequate defences in place to identify and respond to those attacks. The way in which firms respond to cyber-attacks is likely to be an important factor taken into account by the FCA when deciding whether to investigate. With a view to helping firms bring innovative solutions to the market (which will meet consumers’ needs), the FCA will be launching a ‘safe space’ so that new products and services can be tested prior to all regulatory requirements having to be met. To ensure that risks are adequately monitored and appropriate action taken, the FCA will be working collaboratively with HM Treasury, the BoE and other authorities to detect and deal with misconduct.

Culture and governance

Despite its decision to drop its thematic review into the culture programmes at retail and wholesale banks, the issues of ‘culture’ and the ‘tone from the top’ message are important ones for the Regulator and feature heavily in the Business Plan. It is made clear that the FCA considers that the time has come for individuals, particularly senior managers, to take responsibility for their firm’s culture by ensuring that values and good conduct are aligned with strategies, business models and governance arrangements. Firms should develop a 'culture of accountability' at all levels. Those messages lie at the heart of the SM&CR, the scope of which is to be extended from deposit takers and PRA-designated investment firms to all FSMA firms, with a view to enhancing individual accountability across the board. Firms are expected to apply the spirit as well as the letter of the regime and responsibility maps and individual senior managers’ statement of responsibilities will be used throughout the regulatory lifecycle, including when the FCA is considering enforcement action. The FCA will rely on these to identify the responsible senior manager(s) when something goes wrong and will test the steps taken by senior managers against the guidance in the Code of Conduct sourcebook (COCON) and the Decision Procedure and Penalties Manual (DEPP) when deciding whether those steps were reasonable and whether enforcement action is justified. Given the recommendations of Andrew Green QC in his report into the FSA decision-making in relation to HBOS, the FCA will methodically consider the role of each senior manager who may be responsible for a material regulatory failure and will record by reference to the referral criteria the reason why it is appropriate to commence or not commence an investigation into that individual’s conduct. This will be done at an early stage before evidence is gathered. This methodical approach is likely to result in more individuals being investigated. Likewise it is possible that it will result in more investigations concluding with no further action once evidence is obtained. Andrew Green QC criticised the FSA for deciding that there was unlikely to be evidence to show misconduct prior to carrying out an investigation, the purpose of which is itself to establish the facts and thereby determine the strength of evidence of misconduct by a particular individual. The new approach is recognised in the FCA’s consultation on its 'Mission' where it notes that historically it has talked about referrals to enforcement when an investigation has been launched, thus suggesting a disciplinary outcome. The FCA has suggested that in future a more neutral phrase such as referral for investigation is likely to be appropriate given the greater focus on using investigation powers to establish facts and the lower threshold that will apply when deciding whether to launch investigations into individuals.

Incentives and remuneration structures within firms is considered by the FCA to be one of the most significant drivers of ‘good’ or ‘poor’ mindsets, and the regulatory framework governing remuneration will continue to grow.

High standards will be demanded and that demand will be backed by enforcement action as well as supervisory tools. It will not only be initial conduct that will come under the scrutiny of the regulator but also the way that the firm reacts and how its senior management addresses issues. The key question will be whether those in senior management strike the right balance between the interests of the firm, the fair treatment of customers and the integrity of markets.

Treatment of existing customers

The FCA is looking to ensure that treatment of existing consumers improves, essentially through transparent information on pricing, increased competition (removing barriers to exiting or switching), product innovation and availability and active management by firms (with a particular focus on retail banks) of their existing/long-term consumers.

Conclusion

Whilst it is not possible to predict with certainty what cases the FCA will investigate, analysing the FCA Business Plan and bearing in mind the seven priority areas outlined above will help firms to identify the activity most likely to grab the attention of the FCA. Analysing the Enforcement Referral Criteria will help firms to assess on an issue-by-issue basis the likelihood of an investigation. It should also help firms to design their response to an issue and interaction with the FCA so as to give them the best chance of avoiding an investigation when a problem does occur.

Area of Interest