Frantic February: Should compliance teams be worried after a mega month for the FCA?
Does increased action from the U.K. regulator suggest that new hires and new strategies are taking effect? And what does this mean for your compliance team?
As the sun set on 2023, the National Audit Office (NAO) published a report entitled ‘Financial services regulation: Adapting to change’. The report focused on how well-placed the Financial Conduct Authority (FCA) is to respond to the changes that the U.K. financial services sector is currently undergoing. It found that “it can take years for the FCA to implement any enforcement action”, and criticized the regulator’s lack of staff, insufficient reporting practices, and continued data risks.
While the NAO’s report was broadly considered to be damning, it did not come as a surprise to those who have watched the FCA’s movements over the last few years. In February 2022, the FCA updated its website to acknowledge delays in case allocation and resolution. Authorization processes were criticized at industry events as being slow and disruptive to the running of business. In May 2022, the FCA narrowly avoided historic strike action when FCA workers threatened 48 hours of continuous strikes after “months of refusals by FCA management to listen to the concerns of their workforce”.
In June 2023, the FCA appointed two new Directors of Enforcement and Market Oversight. In her first speech in the role, newly-appointed Therese Chambers told firms that “there’s nowhere to hide”, advising “everyone to get their ducks in a row now, particularly given the extensive improvements we have made and continue to make in relation to data, technology, and digital tools”. The speech was ominous, and marked a shift in tone from a regulator that had seemingly lay dormant for a number of months.
This was soon followed by a second speech in October 2023, in which FCA Chief Executive, Nikhil Rathi, said that it had made “far-reaching changes”. Rathi hinted at a new, transparent approach, adding “let us keep having an honest conversation about risk and priorities. Let us not be so afraid of failure that we stifle innovation”.
With strong words, but little action – and an election on the cards for 2024 – some in the industry were asking whether the FCA continued to be fit for purpose, and whether a governmental shake-up might inspire a reimagining of what U.K. financial regulators would look like.
However, after a mega-month in February, it looks as though the regulator could be turning things around for the better. More than this, it looks like firms might have to quack on with getting their ducks in a row after all.
February 7, 2024: FCA requests non-financial misconduct data
On February 7, Jamie Bell, Head of Secondary Market Oversight at the FCA, joined us in our London offices for a fireside chat with Global Relay’s Director of Regulatory Intelligence, Rob Mason, neatly fitting Rathi’s October commitment to “having an honest conversation”. Bell spoke at length about the regulator’s priorities and current focus areas, as well as offering hints to “tantalize” of enforcement action to come.
On the same day Jamie Bell appeared in the Global Relay offices, a letter was sent out to regulated insurance firms requesting that they disclose data related to incidents of non-financial misconduct. This letter, Bell said, was the first in a long list being sent out to the industry. The letters cemented messaging from the FCA in October 2023 that it was “taking a clear stance that non-financial misconduct, such as sexual harassment, is misconduct for regulatory purposes.”
February 14, 2024: arrests for insider dealing and fraud
During the Global Relay event, Bell further hinted at big news to come in the days preceding the event – and big news we saw.
On February 14, 2024, the FCA announced that, working in coordination with the National Crime Agency (NCA), it had arrested three London-based individuals on suspicion of insider dealing, conspiracy to insider deal, and money laundering linked to organized crime. A fourth man was being interviewed under caution.
Unsurprisingly, the FCA also published Market Watch 77 on the same day (mere weeks after publishing Market Watch 76), which shared the FCA’s observations on trade by organized crime groups (OCGs).
The regulator noted that trading by OCGs forms a significant proportion of suspicious trading that it sees, and set out key characteristics that may be indicative of criminal activity. The FCA also made it clear that firms should make clear their “zero tolerance approach to market abuse” and watch out, in particular, for junior members of staff and advising staff who may be at risk of recruitment.
Also on February 14, the FCA announced that it had published 2,285 alerts to help consumers from losing money to scams, up from 1,800 in 2022. Illegal cryptoassets, it said, had played a pivotal role in the increased number of alerts issued.
February 15, 2024: prison sentence for insider dealing
The FCA’s rush of regulatory announcements continued on February 15 when an individual – Mohammed Zina – was found guilty of insider dealing and fraud, following a 12-week trial brought by the regulator. Over the course of the year, Zina had traded on inside information that he gleaned while performing his job at Goldman Sachs. He received a 22-month prison sentence. Speaking at the time, Joint Executive Director of Enforcement and Market Oversight, Steve Smart, said “economic crime is on our radar, and we will take action to uphold the integrity of UK markets”.
February 27, 2024: FCA outlines new enforcement approach
Hot on the heels of a spate of enforcement and legal action, as well as a number of heavy-hitting speeches from key FCA figures, the regulator closed out the month of February with an announcement that it will “name and shame” firms under investigation, in a bid to “improve pace and transparency” around enforcement cases.
Looking to the future, the FCA said not only that it is looking at a “streamlined portfolio of cases”, but that it is consulting on “plans to be more transparent when an enforcement investigation is opened up”. The first rule of enforcement club, according to Therese Chambers, is that “you do in fact talk about enforcement club”. Under these plans, the FCA has said it will publish updates on investigations “as appropriate”. The consultation closes on April 30, 2024 – after which it is likely we will see further reforms to the FCA’s approach.
Has the FCA turned a corner, and what does this mean for compliance?
It has been suggested that, over the last few years, the FCA has failed to show its teeth. This is especially true when compared to its U.S. counterparts, who are amassing billions in fines across the broad spectrum of financial services and misconduct.
The latest action from the FCA shows not only that it has teeth, but that it’s sharpening them. U.K.- based compliance teams who, until now, have adopted a laissez-faire approach to compliance may want to reconsider their strategies. While in the Global Relay offices, Jamie Bell alluded to a new and more structured approach to supervision and enforcement, particularly within fixed income currency and commodity markets. It is clear that the FCA is now taking action to prove itself as an effective, proactive regulator – beginning to walk the walk after talking the talk.
In particular, it looks as though the FCA is honing its focus on a number of key areas:
1. Artificial intelligence, and compliance technology more generally
The FCA is keen to show that it is an innovative regulator or, as Rathi noted in the FCA’s 2024-25 Business Plan “a world-class data-led regulator”. The FCA is automating its own tools to “detect and respond to consumer harms faster” and wants to work with firms to ensure the safe deployment of artificial intelligence.
What does this mean?
Firms that have so far been technology averse with regard to compliance solutions should create a clear strategy to ensure they’re utilizing modern systems to deliver best-in-class outcomes. If the regulators are looking to technology as a solution, you probably should too.
2. Non-financial misconduct
The FCA hinted that it would be prioritizing non-financial misconduct in 2024, and February’s actions prove it.
What does this mean?
Firms should be looking to ensure they are mandating a compliance-first culture by creating clear policies of what is expected of staff, and training staff in a way that is engaging and effective. Firms should also be implementing tools that can help detect and monitor instances of non-compliance, which will aid them in meeting new regulatory reporting requirements in the long term.
3. Insider trading
While perennial, insider trading persists as an area of focus for the FCA, chiefly for the risk it poses to market integrity.
What does this mean?
As with non-financial misconduct, firms should have employed monitoring systems to monitor and flag events or actions that could indicate insider trading or criminal activity. Communication surveillance tools should be reassessed to ensure that they are fine-tuned to understand and detect what insider trading may look like.
4. Consumer protection
Marketing materials and the way firms interact with consumers are being closely watched by regulators in 2024. The FCA has said it is also prioritizing Consumer Duty requirements this year.
What does this mean?
Firms should ensure their compliance tools are capturing data from all channels and applications that interact with customers and prospects, in order to provide clear and complete audit trails in the event that the regulator comes knocking.
