An increasingly robust approach

None of these points is entirely new or unexpected.  There is also no doubt in our view that they are part of the FCA's response to the considerable criticisms made of it in recent years, in Parliament, the media and elsewhere (particularly in the 2020 Gloster Report concerning the FCA's handling of a collapsed firm that issued mini-bonds).  There is already evidence of the FCA making changes in some of these areas – for example by testing little-used criminal law provisions in its approach to enforcement of anti-money laundering systems and controls requirements, and through its stated approach of using AI tools to review information provided by firms in their financial crime returns, to identify firms of higher and lower risk.

Taken together, however, we believe these three points go further. They foreshadow an approach in which the FCA will not only be more inclined to litigate, but will press for procedural reforms that will (at least in some areas) make the organisation harder to challenge.  The result will (necessarily, in our view) be an increased risk of regulatory investigation and litigation for FCA-regulated firms.  How this will play out remains to be seen.  The FCA, and its predecessor the FSA, have used aggressive enforcement action as part of their strategy in the recent past, particularly in the aftermath of the global financial crisis of 2008 to 2010.  This approach was welcomed by some at the time, but was certainly not without controversy.

Impact on firms and individuals

We believe any proposal to curtail the rights of parties affected by FCA decisions to be heard will need very careful scrutiny indeed.  Firms and individuals subject to robust regulatory action, with significant consequences, must be able to get a fair and timely hearing.

Further, to be credible, the robustness of the FCA's approach will need to be matched by appropriate resourcing and experience in its Enforcement and Markets Oversight division.  Whilst the FCA's desire to test its legal powers is to some degree understandable, we believe in many areas those powers are already well established.  Many of the core FSMA 2000 provisions that enable the FCA to investigate and impose sanctions on firms and individuals have been in force for around twenty years.  A more testing approach to some legally novel cases must not come at the expense of the vast majority of other – perhaps less novel – investigations.  As practitioners we have too often in recent years seen these proceed far too slowly, with numerous changes within the Enforcement team leading to insufficient continuity, and attendant uncertainty for firms and individuals affected by the FCA's work.

Key risk areas for the coming year

There are indications in the 2021-22 Business Plan that the FCA currently perceives a number of specific areas of business to be particularly high risk.  Enforcement activity (or in some cases continued enforcement activity) in these areas seems to us very likely over the coming year:

• business just outside, or across, the FCA's regulatory perimeter.  Here, the law can be extremely complex, FCA may or may not have legal powers to take action, and the consequences of getting it wrong can be criminal (p15);
• investment advice, where the FCA notes that it wishes to see less consumer harm from unsuitable advice and "a higher portion of redress paid by the firms that cause this harm" (p25);
• pension advice, including defined benefit pension transfer advice, where the FCA indicates that it will continue to "take assertive enforcement action where there is serious misconduct" (p26);
• consumer debt advice, where the FCA states "recent supervision work has found significant problems with advice given by a sample of firms that package debt, creating risk of serious consumer harm" (p27);
• asset management, where the FCA has recently carried out a review of some asset management firms and found weaknesses in their governance structures, management of conflicts of interest, oversight of third party managers, and operational controls (p36).  There are indications that these firms will be the subject of progress reviews in the next 12 to 18 months; and
• firms' operational resilience, where the FCA sets out a clear expectation that over time there will be a reduction in the number, type and duration of incidents and the level of harm they cause (p41).

Again, none of these areas is new, but it is in our view significant that the FCA chose to reference them in its 2021-22 Business Plan (in some cases, having referenced them in previous years).  Firms that are not already taking steps to ensure their compliance with the regulatory regime in these areas – particularly those that take the view that some or all of their business does not require authorisation – would be well advised to do so.

Appointed representatives

A final area of potential enforcement risk we would highlight for the coming year concerns the use of Appointed Representatives (AR).  The AR mechanism – which allows authorised firms to use and take responsibility for representatives who are not separately authorised – is widely used across the market.  The FCA notes in the 2021-22 Business Plan that it has increased "supervisory expectations of Appointed Representatives and their principal firms to reduce the risks that the use of ARs in wholesale markets weakens conduct standards" (p33 and 38).

There has already been at least one final notice on oversight of ARs in 2021 and we expect that theme to continue.  Authorised firms making use of the AR mechanism would therefore be well advised to review the systems and controls they have in place over their ARs, as the regulatory spotlight is cast across this area.  Enforcement action that FCA takes in this area can also result in parallel or consequential civil litigation, raising complexities of its own. 

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