Regulatory Enforcement
In 2021 the FCA announced its commitment to become a regulator that is ‘tough, assertive, confident, decisive, agile’.[1] It has since become noticeably more aggressive in its approach to supervising firms with several high-profile cases (and eye-watering fines) hitting mainstream headlines.
The FCA has a broad range of powers conferred to it under the Financial Services and Markets Act (‘FMSA’) which includes the ability to take tough action against firms for misconduct. This process will be led by the FCA’s Enforcement division. In this article, we explore the enforcement process and several of the main types of action taken against firms.
Referral
A referral to Enforcement for an investigation will be made if the FCA considers it is the right course of action, given all the circumstances. To assist in making the decision, the FCA has developed referral criteria that set out a range of factors it may consider:[2]
1. any available supporting evidence and the proportionality and impact of opening an investigation;
2. what purpose or goal would be served if the FCA were to end up taking enforcement action in the case; and
3. relevant factors to assess whether the purposes of enforcement action are likely to be met.
The FCA often takes a different approach to that described above where firms no longer meet the threshold conditions. The threshold conditions are fundamental requirements for authorisation and the FCA will generally take action in all such cases which come to its attention.
In these cases, the FCA generally does not appoint investigators, instead allowing firms to correct the failure. If the firm does not take the necessary remedial action, the FCA will consider whether its permission to carry out regulated business should be varied and/or cancelled.
FCA Powers
The FCA has a broad range of enforcement powers under FSMA at its disposal. Some of these include:
Information requests (section 165)
The FCA may use its section 165 power to require information and documents from firms to support both its supervisory and its enforcement functions.
Reports by skilled persons (section 166)
If the FCA has concerns about aspects of a firm's activities or wants further analysis, it can get a view from a third party (known as a 'skilled person').
There are two approaches to appointing a skilled person firm:
The firm puts forward its preferred choice of skilled person firm for the FCA’s approval. Once approved, the firm contracts with the skilled person firm.
The FCA contracts directly with a skilled person firm.
The FCA’s rules mean that they may get the firm to pay the costs of a skilled person review.
Search and seizure powers
The FCA has the power to apply for a warrant to enter premises where documents or information is held. The circumstances under which they may do this include:
where a firm on whom an information requirement has been imposed fails (wholly or in part) to comply with it; or
where there are reasonable grounds for believing that if an information requirement were to be imposed, it would not be complied with, or that the documents or information to which the information requirement relates, would be removed, tampered with or destroyed.
Variation or cancellation of permissions
Where the FCA suspects serious misconduct and harm needs to be prevented immediately, it will use its powers under section 55 FSMA to ask firms to voluntarily accept a variation of permission or the imposition of a requirement (VREQ). If firms refuse, the FCA may impose the variation or requirement anyway using its own-initiative powers (OIREQ).
Examples of circumstances in which the FCA will consider varying a firm's permissions because it has serious or very serious concerns about a firm include where:
the firm appears to be failing, or appears likely to fail, to satisfy the threshold conditions relating to one or more, or all, of its regulated activities, because, for instance, the firm's resources appear inappropriate for the scale or type of activity it is carrying on, or;
the firm appears not to be fit and proper to carry on regulated activities because it has not been managed soundly and prudently, the business model is not suited to its regulated activities, or the firm is not capable of effective supervision by the FCA.
Compelled interviews
The FCA has the power to compel individuals to attend an interview and answer questions if they believe that the individual has information that is relevant to an investigation.
During the interview, the interviewee will be asked questions related to the investigation. The questions may cover a range of topics, including the individual’s background, their relationship with the company or financial institution under investigation, and their knowledge of the relevant events or transactions.
The interviewee is required to answer truthfully and to the best of their knowledge. Failure to provide accurate information can result in legal consequences, including criminal charges.
Compulsory winding up
The FCA can petition for an administration order or compulsory winding up order on the grounds that the company or partnership is unable (or, in the case of administration orders, is likely to become unable) to pay its debts. The FCA does not have to be a creditor to petition on these grounds.
Senior management
The FCA expects a firm’s senior management to take responsibility for ensuring that risks are identified, appropriate systems and controls are developed to manage those risks, and that those systems and controls are effective in practice. Where senior managers have failed to meet these standards, the FCA will, where appropriate, bring cases against individuals themselves as well as, or instead of, firms.
We can help
Regulatory enforcement action is distressing for a firm and its members of staff. We draw on our first-hand experiences to support firms navigate these challenging times.
[1] FCA commits to being a more innovative, assertive and adaptive regulator | FCA
