29 July 2016 - Post by:
The other week the UK Financial Conduct Authority (the FCA) published its Annual Report for 2015/16. The Annual Report provides us with a snapshot of what the FCA did in 2015/16, including its enforcement activity during this period. At the same time, the FCA also published its Enforcement Annual Performance Account, Anti-money Laundering Annual Report and – for the first time – its Competition Report for 2013-16.
Five key points to note in relation to the Annual Report from an enforcement perspective are as follows:
John Griffith-Jones, Chairman of the FCA, stated in his foreword that he has ‘no doubt that our most effective approach [as a regulator] is one of constructive deterrence, highlighting issues and problems and so ideally preventing things going wrong in the first place’. However, his statement does not necessarily mean that big financial penalties and publicity around enforcement action will be the FCA’s first tool of choice going forwards. Mr Griffith-Jones’ statement sound more like the UK Prudential Regulation Authority’s (the PRA) approach to enforcement action – i.e. identifying and resolving potential issues before things go wrong and formal enforcement action becomes necessary.
In its Competition Report, the FCA notes that it has opened its first investigation using its powers under the Competition Act 1998.
During 2015/16, the FCA imposed £884.6 million in financial penalties (£4.2 million on individuals, the rest on firms). This represents a significant drop from the £1.4 billion in financial penalties that the FCA imposed in 2014/15. The average fine imposed by the FCA in 2015/16 was around £26 million, down from an average of just over £32 million during 2014/15.
The total amount of fines imposed by the FCA in 2015/16 was particularly high, due to the fines it imposed on a number of banks in connection with its FX investigation. Although the FCA did impose one fine on a firm in relation to FX in 2015/16, the majority (68%) of financial penalties imposed by the FCA in 2015/16 related to non-FX and non-LIBOR conduct. So although we have seen a dip in the total amount of fines imposed last year, the FCA appears to have imposed substantial fines for other (non-benchmark related) types of conduct, such as complaints handling, market abuse, conflicts of interest and financial crime.
The FCA has been keen to promote the fact that people can ‘blow the whistle’ directly to it. In September, new rules will come into force for UK banks and building societies which requires them to proactively inform their staff of this fact.
In 2014/15 the FCA received a record number of whistleblowing disclosures (1,340). However, the number of disclosures it received in 2015/16 dropped to 1,014 (a drop of 24%). As was noted in the FCA’s latest board minutes, the FCA is taking steps to enhance its processes for handling whistleblowers in light of criticisms made by the Treasury Select Committee and Complaints Commissioner.
The ‘value’ of the whistleblower disclosures received by the FCA in 2015/16 also seems to have dipped. In 2014/15, 24% of the disclosures received by the FCA contributed to enforcement activity, consumer protection or were otherwise of significant value to the FCA. In 2015/16, only 10% of disclosures received by the FCA fell into this category.
#4: Increased levels of enforcement private warnings and cases being discontinued
- Private warnings: In 2014/15, FCA Enforcement issued nine private warnings to firms and individuals. This figure increased by 60% in 2016/16 to 15 private warnings. However, the overall number of private warnings issued by the FCA (Enforcement, Markets Monitoring, Supervision and the UKLA combined) decreased quite significantly, from 52 in 2014/15 to 22 in 2015/16.
- Discontinued cases: The FCA rarely publishes detailed information about the number of enforcement cases it discontinues without taking any formal action. However, in this year’s Annual Report, the FCA included the quite surprising figure that in 2015/16 24% of enforcement cases were dropped without any action being taken. In addition, the FCA revealed that 14% of the retail enforcement cases it worked in in 2015/16 were dropped without any action being taken.
#5: The cost of enforcement cases and length of cases have increased
- Timing: In 2014/15, enforcement investigations that settled during Stage 1 took on average 16.1 months from start to finish. In 2015/16, this type of enforcement investigation took on average 25.2 months to complete. The FCA provides no explanation for this increase in the average amount of time taken to conclude an investigation. However, it may be that the FCA is taking on more complex and time-consuming cases. In addition, it is worth noting that the FCA concluded its FX investigation in quite a short space of time given its size (in just over one year) which may have artificially lowered the average length of time an enforcement investigation took in 2014/15.
- Costs (to the FCA): The average cost of an enforcement case in 2015/16 rose to £565,800 from an average of £241,000 2014/15. Again the FCA provides no explanation for this significant increase in costs. It may be that the FCA has been making more use of external counsel and technical experts on cases, which have incurred additional costs.