The FCA's 'Future Mission'
23 Jan 2017 8:03 am by Mark Dunn
In October 2016, the UK Financial Conduct Authority (FCA) released its proposed "Future Mission" document outlining the regulator's responsibilities and its tools for investigation, supervision and enforcement to ensure market integrity. The FCA solicited feedback to help refine its mission, which will inform its strategy and day-to-day work over the coming years. With the 90-day consultation period ending on 26 January, the FCA recently introduced some of the key themes arising from briefings, regional visits, discussion forums and online feedback.
New mission will impact financial sector
The FCA is the conduct regulator for 56,000 financial services firms and financial markets in the UK, and these firms could be affected by the review of its mission. In the mission document's introduction, FCA Chief Executive Andrew Baily acknowledged the fact, saying, "Establishing and embedding a clear mission is critical to our success, both as a regulator and to UK financial services as a whole". The updated mission is expected to establish how the FCA's strategy has changed since Andrew Bailey became chief executive in July 2016.
The fall in fines issued by the FCA in 2016 led to speculation that the regulator is becoming more reluctant to take enforcement action against financial crime. In 2016, the FCA issued 23 fines worth £22.2m, compared to 40 fines worth £905m in 2015. But the regulator has recently put pressure on firms in a number of areas, including clampdowns on the spread-betting industry and an extension of the deadline for claims against banks relating to of mis-sold PPI policies. Peter Snowdon of law firm Norton Rose Fulbright argues, "Maybe they are shifting their emphasis to intervene earlier in the process rather than just fining people." However, firms should not assume that the FCA lacks intent under its new management.
Firms want more engagement from the regulator
The FCA says that respondents to the consultation have asked for more communication from the regulator. They want the FCA to engage directly with firms to give them "tailored communications that illustrate risks for their particular market." This includes the sharing of lessons learned and good practice. Firms also want "a clearer rationale for our decisions" and "more clarity on existing rules as they feel these are often too vague." The FCA appears to acknowledge these issues, noting in the Mission statement that "We need to be clearer about the terms we use. For example the term 'referred to enforcement' is often misunderstood. We will also review our use of 'private warnings'.
The FCA also asked for input on its Intervention Framework. The framework outlines four components:
1. Issue identification through three channels: intelligence, complaints and supervision
2. Cause and impact diagnosis in the form of a market study, thematic review, enforcement investigation or supervisory activity depending on the severity of the issue. For example, serious misconduct would warrant immediate investigation.
3. Enforcement through a variety of tools, not the least of which is criminal, civil or administrative discipline.
4. FCA intervention, in a nod to the regulator's mission for greater transparency, the final piece of the framework includes publishing analysis where possible.
Furthermore, the Future Mission document states that any consideration of intervention will be prioritised against numerous factors, including "the severity of the misconduct, regardless of the scale of harm." It goes on to indicate intervention and enforcement will also consider "the risk of significant harmful side-effects on wider markets, the UK economy and wider society e.g., crime/terrorism." This suggests that enforcement actions will certainly continue and possibly accelerate once the Future Mission is finalized.
Risk-based due diligence as alternative to 'de-risking'
The FCA also values the importance of a risk-based due diligence process, according to comments it made last year. In February 2016, it called for banks not to engage in 'de-risking', i.e. withdrawing their services for individuals or companies in a particular sector which carries a high risk of money laundering or financial crime. The regulator announced that a risk-based approach "does not mean that banks should deal generically with whole categories of customers or potential customers. Instead, we expect banks to recognise that the risk associated with different business relationships in a single broad category varies, and to manage that risk appropriately." To do this, it said banks should "put in place and maintain policies and procedures to identify, assess and manage money-laundering risk."
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