23 November 2017 - Post by:Sarah Hitchins
Attempts made by the UK Financial Conduct Authority (the FCA) to reassure the industry that the UK Senior Managers and Certification Regime (the SMCR) is not ‘all about enforcement’ have been met with some scepticism. However, that scepticism may have been misplaced, in light of the latest figures from the FCA regarding the number of Senior Managers and Certified Persons who are currently the subject of FCA enforcement investigations.
No ‘new’ enforcement powers
Under the SMCR, neither the FCA nor the PRA have any ‘new’ enforcement powers which make it easier from a legal perspective for them to take enforcement action against individuals. Many of the same challenges faced by the FCA and the PRA in this area before the SMCR came into force will remain.
However, the SMCR did bring with it greater clarity in terms of who is responsible for what, especially among Senior Managers. Statements of Responsibilities and Management Responsibilities Maps are being used effectively by both the FCA and the PRA to pin-point who was responsible for what within a financial institution at any given time, including when things have gone wrong.
Some of the fear about levels of enforcement activity under the SMCR may be left over from the regulators’ original proposal to introduce the ‘Presumption of Responsibility’ which would have reversed the burden of proof in enforcement cases against Senior Managers. However, the Presumption of Responsibility was dropped in favour of the ‘Duty of Responsibility’ (which leaves the burden of proof with the FCA) before the SMCR came into force in March 2016.
A measured approach to enforcement activity
The FCA has confirmed to us (through a response to a Freedom of Information Act request) the number of open enforcement investigations it has into Senior Managers and Certified Persons:
The number of open enforcement investigations into Senior Managers and Certified Persons was lower than many people in the industry were expecting. This level of enforcement activity suggests a relatively modest approach to enforcement activity under the SMCR, with the FCA clearly taking time to select which cases involving Senior Managers and Certified Persons it wishes to pursue.
The bigger picture
The FCA’s open enforcement investigations into Senior Managers and Certified Persons represent only a small fraction of the FCA’s overall caseload. The modest number of open enforcement investigations into Senior Managers and Certified Persons may, in part, reflect a ‘lag effect’ as cases involving conduct that post-dates the introduction of the SMCR may take time to work their way through the FCA’s enforcement referral process.
In addition to its investigations into Senior Managers and Certified Persons, the FCA also has open:
- 129 enforcement investigations into approved persons (representing 28% of all open FCA enforcement investigations); and
- 157 enforcement investigations into other individuals who are not Senior Managers, Certified Persons or approved persons (representing 35% of all open FCA investigations). These investigations may represent individuals who are subject only to the FCA’s Code of Conduct, as well as investigations into individuals relating to unauthorised regulated activities, insider dealing, market abuse and breaches of the Listing Rules and Disclosure and Transparency Rules.
Overall, enforcement investigations into individuals account for 66% of the FCA’s total enforcement caseload.
Clearly the FCA is dedicating a significant amount of time and resource to investigating individuals. However, what it will be interesting to see is the proportion of the FCA’s open investigations into individuals that actually result in enforcement action being taken.
Enforcement investigations involving individuals tend to be hard-fought and therefore time-consuming and costly for the FCA to pursue. As a result, it would not be surprising if a number of the FCA’s current enforcement investigations involving individuals were discontinued, with no public action being taken. This approach would also be consistent with the approach advocated by Mark Steward, the FCA’s Director of Enforcement and Market Oversight, to use enforcement investigations as diagnostic tools with a view to discontinuing a higher proportion of FCA enforcement investigations than has been the case in prior years.