Reforming and strengthening the UK enforcement process, and recent developments in applying the conduct regulation toolkit | Wolters Kluwer Financial Services
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  • Reforming and strengthening the UK enforcement process, and recent developments in applying the conduct regulation toolkit

    By Steve Blackbourn

    Published March 22, 2017

    Following consultation during 2016 on responding to and implementing the ‘Enforcement Review and the Green Report’ both the UK’s financial-services regulators (PRA & FCA) have issued a combined policy publication setting-out their resulting views and intended implementation aims and plans (see FCA PS17/1& PRA PS2/17).

    In addition, the UK conduct regulator has over recent months appeared to particularly utilise some of its wider supervisory and enforcement tools in advancing its findings, concerns and objectives. These emerging events and measures reflect the broad range of tools and powers by which regulators seems capable and willing to pursue their roles in addressing risks and unacceptable outcomes involving firms and/or individuals across the UK regulated environment.

    From proposal to rules and guidance

    The UK regulators have formulated a response to the consultation process around the ‘Enforcement Review and the Green Report’ during 2016, and are now looking to readjust their policies and build-in the new rules and amended approaches into the relevant areas of their respective Handbooks. This development has arisen in an attempt to address perceived issues surrounding the effectiveness and efficiency of the enforcement referral, investigation and decision processes, in order to promote and achieve a fairer and more transparent industry environment. Therefore, the Policy Statement(s) outlines changes being made to applicable sourcebooks and specific manuals, such as those regarding ‘enforcement’ guidance (EG) and also ‘decision procedures and penalties’ (DEPP) covering business conduct (FCA Handbook) matters.

    Within the regulators’ combined output, the respective bodies set-out responses to the initial consultation process, before moving ahead to outline how their respective enforcement policies and processes will now be adapted and revised going forward.  

    Practical change and impacts

    The policy publications set-out and update the approach and mechanisms UK regulators can be expected to adopt and apply going forward, and how these could in future be brought to bear on both regulated firms and/or individuals. This relates not only to the probable extent of the likely regulatory responses, interventions and investigations, but also the application and circumstances where those powers or tools may be deemed necessary or appropriate.

    In particular, the judicial exercise of enforcement powers, typically resulting from some firm-specific or wider thematic supervision or monitoring activity, is intended to operate so that it identifies and delivers the right and appropriate results by achieving a reasoned and balanced outcome and response.

    Firms and individuals are likely to want to understand and react themselves to this new policy direction on how their judgements, behaviours and responsibilities are likely to be challenged and assessed in light of ongoing risks and events. It therefore deliberately builds on the previously existing approach and statements covering how the UK regulators might use their enforcement powers when handling both firms and individuals across UK financial-services.

    Accordingly, this may even require some firms and/or individuals to even adjust or amend their own arrangements accordingly to ensure they can confidently mitigate or simply fulfil/evidence and required standards or expectations going forward. But also, regulated persons might need to also reflect on other relevant technical aspects and scenarios, such as the likely treatment and management of contested decision-making.

    Responding to events and needs in a joined-up manner 

    The PRA and FCA have taken the important step of producing correlated outputs on this matter, in order to provide both some consistency and clarity for regulated persons on how UK regulators will be making and applying changes to enforcement policies and processes.

    In addition to covering the respective regulators’ own approaches, the policy statements also cover areas of likely combined or joint activity, and levels of working co-operation between the regulators involving common issues, topics and concerns. Overall, the changes are expected to enhance existing processes whilst improving transparency around enforcement activities and around/between core stages of decision-making. But the UK regulators are also aiming to provide more information around early intervention activities and working decisions. On this matter, the early months of 2017 has seen the FCA issuing a small number of Warning Notice Statements (WNS’s) detailing specific concerns as to the conduct and behaviours of individuals felt to have acted in breach of regulatory requirements. 

    The widening use of the regulatory toolkit

    UK regulators have sought to develop and employ various tools to optimise transparency on activity and interventions, but perhaps most notably to date the most visible lead on this has been with the conduct regulator (FCA).

    For some time now the FCA has worked on a significant ‘cleansing’ of the UK Public Register, taking and communicating steps (for example) against a large number of smaller consumer-credit firms to effectively remove or deny authorised permissions on grounds of concern as to them following or meeting specific requirements e.g. citing ‘Threshold Condition’ or other specific Systems and Controls (SYSC) or Principle (PRIN) failures.

    In a recent case in January 2017, the FCA also imposed a variation of permission on a small investment management firm which it deemed had fallen short of continuing to satisfy the required ‘Threshold Conditions’. This step was deployed to effectively restrict and curtail the firm’s business activities to mitigate and ring-fence exposures in addressing concerns and issues of ‘effective supervision’ and ‘suitability’ covering pension switches, inadequate information being provided, and close links with an unauthorised third party firm providing ‘advice’ which had all been identified during a prior short supervisory inspection visit.

    Additional Warning Notice Statements (WNS’s) were issued by the FCA in February 2017, whereby the regulator has sought to provide initial visibility on ongoing concerns as to the specific behaviour and conduct of undisclosed individuals. This step pre-empts the conclusion of any underlying formal investigations and consequent disciplinary decision-making and outcomes, and is intended to promote and encourage an awareness of industry, peer firms and market participants as to areas of concern under active focus. One such statement related to an incumbent individual holding a specific ‘Controlled Function’ role (and in this case CF10 – Compliance oversight), who the FCA felt might have failed to competently perform this oversight role, in breach of Principle 6 (PRIN 6) by not applying the required/expected due skill, care and diligence. Other cases have related to individuals whose conduct were also felt to possibly be in breach of the standards expected of such ‘Approved Persons’ but might have also been associated with breaches of specific UK market-abuse rules and regulations.

    Another important development was also exemplified recently by the FCA in its publication towards the end-February of details of terms agreed with a major UK banking firm concerning a regulated covered bond (RCB) programme, whereby the senior-management have been expressly required to formally attest to the FCA on certain prescribed factual statements and conditions. Again this type of regulatory tool is deployed to provide not just visibility on the subject, but also some potential evidence on matters which the UK regulator might find it wants to hold those accountable, and even act, if future circumstances warrant it.

    The above recent examples help show the widening and emerging use of a range of supervisory and enforcement tools and powers by UK financial-services regulators when seeking to carry-out its duties, which goes beyond (or alongside) simple permission and/or financial penalties levied against firms and individuals concerned.

    Looking ahead to shaping the future regulatory approach in the UK

    All the intended policy changes are expected to now (already) be adopted and in active practice by early March 2017. But later during 2017 the PRA is expected to establish and operate its new Enforcement Decision Making Committee, as well as producing some further formal guidance around its own enforcement process.

    On the wider front and other future horizon scenarios, then the impacts and needs for a financial-services industry to operate and succeed in a post-Brexit environment remain to be seen or established. But also, there is the ongoing review of the UK FCA’s future ‘Mission’ which looks set to clarify and make more transparent the purpose, value and vision for business conduct regulation going forward. Indeed, a recent speech by the FCA Chair highlighted some of the expected building blocks for good conduct regulation in future, and in particular this included issues such as culture, and collective responsibility etc. This all again underlines the importance that all participants and not just regulators will need to play a part in ensuring the future UK regulatory environment and toolkit remain effective and resilient for the challenges and demands lying ahead.

    About the author: Over a 25-year career Steve Blackbourn has undertaken various operational and regulatory roles at senior-management level in a range of international financial services organisations before becoming established as a U.K.-based compliance and financial crime consultant in 2008. Steve has held key positions within a global bank assurance group, an Advanced Risk-Responsive Operating FrameWork (ARROW) supervisory inspection team at the UK FSA and an international life/pensions and investment organisation. Steve has worked and continues to work alongside Wolters Kluwer in delivering project-specific as well as rolling consultancy support services with mutual clients. He is also a regular monthly contributor to Wolters Kluwer Financial's Compliance Resource Network. In addition, he also works with a range of direct clients applying his broad scope regulatory-compliance and financial-crime background and skills to deliver a reliable and quality service with an emphasis on practical approach and commercial orientated solutions.





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