FCA Enforcement Director highlights impact of SMR and importance of early detection of misconduct and prompt regulatory response.

On 20 January 2017, the FCA published a speech (dated 19 January 2017) by Mark Steward, FCA Director of Enforcement and Market Oversight, on the practical implications of US law on EU practice.

Points of interest in Mr Steward’s speech include:

1. The FCA (and the FSA before it) has imposed more than £3 billion in fines over the past five years.
   1. The majority of these fines were imposed before 1 April 2016, since when the aggregate level of fines has reduced.
   2. The fines were imposed by agreement as part of the early settlement process.
   3. The leverage applied to firms by regulators and the preparedness of firms to resolve cases in this way has been “unprecedented and remarkable”.
2. The senior managers regime (SMR) is creating a different dynamic.
   1. The FCA does not expect senior managers to agree so readily to pay high fines to resolve cases; it is expecting more will be contested and litigated.
   2. In addition, firms may be reluctant to spend high sums to resolve investigations where resolutions do not also resolve cases against senior managers.
   3. There are also tensions in the way firms may self-report misconduct or co-operate with the FCA where senior managers may be, or become, subjects of investigation for the same matters.
3. Internal investigation reports produced by firms are “often helpful starting points”, but have “limited determinative value” from an enforcement perspective.
   1. The FCA has concerns about the forensic rigour of these reports and also believes there is inherent conflict of interest since they have been commissioned by, and prepared for, senior management, “who may well be part of the problem”. The public interest requires a full and thorough investigation by the regulator.
4. resolution of enforcement cases,
   1. The FCA has received a number of supportive submissions in response to its proposals on agreed resolution of enforcement cases, which were set out in
      1. a joint FCA and PRA consultation paper on implementing the recommendations arising out of HM Treasury’s review of enforcement decision-making at the financial services regulators and
      2. Andrew Green QC’s report into the FSA’s enforcement actions following the failure of HBOS plc.
   2. The FCA intends to announce the final decision on its proposals “very soon” (it had originally been expected to publish a policy statement in the fourth quarter of 2016).
5. early detection, rather than early settlement, its primary focus
   1. The perception that detection of misconduct and responsive action are both inevitable and timely is more important than the size of the outcome that follows FCA enforcement action.
   2. The FCA is seeking to make early detection, rather than early settlement, its primary focus. In practical terms, this means investing in better systems, better intelligence and better co-ordination, not only within the FCA, but also with other agencies.
   3. The Joint Financial Analysis Centre (a cross-agency initiative involving the FCA, the National Crime Agency (NCA), HMRC and the Serious Fraud Office (SFO)) is a good example of this.
   4. International collaboration and co-ordination are also important, although there remain legal hurdles with some gateways, and logistical challenges with cross-border enforcement work.

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