Is the FCA softening, or just shifting its approach?

Published 30 marzo 2017

Last year the amount of fines issued by the FCA dropped dramatically. Only £23m was issued in fines against companies and individuals in the financial services sector, compared with nearly £1bn handed down in 2015. In fact, 2016 saw among the lowest amount of fines issued by the regulator in a calendar year for nearly a decade.

So what is responsible for this significant reduction? Is the FCA softening in its approach? Or could it be a reflection of the fact that firms have now reacted to the regulatory focus they found themselves under following the financial crisis, and boosted their spending on compliance as a result?

Mark Steward, the FCA's director of enforcement, challenged the suggestion that the regulator was weakening at the start of this year, by stating in a speech "we have not gone soft". This, and similar statements issued by the FCA, as well as its approach to recent investigations and pursuit of a broader range of targets suggests quite the opposite – that the regulator continues to act with vigour and should not be underestimated.

The reduction in levels of fines may instead be attributable, among other factors, to:

• The FCA pursuing alternative methods of sanctions. For example, and as reported in our October newsletter last year, the FCA for the first time placed restrictions on a bank's continuing business for breach of anti-money laundering requirements.
  
  This sanction was introduced in conjunction with a fine, alongside a statement issued by the FRC which said that "fighting money laundering is an issue of extreme international importance and ensuring that AML controls are effective and viewed as important throughout the business are fundamental obligations of all regulated firms". Therefore we can expect the FCA's focus on AML to continue into this year.

• The FCA has a broader range of targets including smaller firms and individuals, who will not attract the headline grabbing fines.
  
  There is no doubt that the FCA is focusing increasingly on individual accountability. Indeed, the number of fines issued against individuals overtook the number handed down to companies for the first time in a number of years. In addition, the Senior Managers and Certification Regime, which is intended to increase individual accountability of senior managers in the banking sector and make it easier the regulator to hold individuals to account, has now been in force for just over a year and is set to be extended to all authorised firms in 2018 (with a consultation to take place in the second quarter of this year). As this regime continues to be embedded and expands in scope we can expect more scrutiny and enforcement action against individuals.

• Some commentators have suggested that the FCA may be changing its focus as a result of the appointment of its new FCA Chief Executive, Andrew Bailey. But, again, there is no suggestion of a softening in approach, but perhaps more of a different focus. In a speech given earlier this month Mr Bailey focused on the culture of financial institutions, or more particularly, what he describes as "cultural outcomes".
  
  Mr Bailey identifies cultural outcomes as a product of structure and effectiveness of management and governance, incentives created by them, quality and effectiveness of risk management, and the willingness of those within the organisation to adopt and adhere to these measures and the tone set by those at the top. This message is consistent with the character of the Senior Managers Regime, and Mr Bailey also referred to bankers' remuneration as another influence on culture – another focus of the regulator. We can expect this focus on cultural outcomes to continue.

It seems that the lower levels of fines issued by the FCA reflect only a more targeted approach by the FCA – on culture and individual accountability in particular. Recent actions undertaken by the regulator show a willingness to embrace new weapons and approaches to pursuing these new targets, and existing ones, with the same ferociousness as before.