Mitigating Regulatory Risk: Strategic Resourcing and Compliance Approaches
Daniel Bloom
Client Services Manager @ Hydrogen Group | Wealth, Investment, Fund & Asset Management (Compliance, Financial Crime, Risk, Business Transformation & Technology specialist)
In the first eight months of 2024, the Financial Conduct Authority (FCA) has imposed an unprecedented ￡577 million in fines on UK financial services firms, marking a dramatic 984% increase from the ￡53.2 million levied in 2023 (FT Adviser SteelEye Compliance). This significant escalation in regulatory penalties underscores the rapidly evolving compliance landscape within the financial sector.
The current regulatory environment is characterised by frequent and substantial modifications to FCA requirements. These changes represent more than incremental adjustments; they constitute comprehensive reforms designed to reinforce market integrity and augment consumer protection measures. The magnitude and frequency of these regulatory shifts necessitate a proactive and strategic approach from financial institutions.
Key Regulatory Requirements and Recent Enforcement Actions
The FCA's Consumer Duty signifies a major shift in regulatory expectations, pushing firms to exceed traditional standards and deliver meaningful, positive outcomes for consumers. Charles Randell, former FCA Chair, highlighted this shift: “The Consumer Duty mandates that firms proactively ensure good consumer outcomes, beyond merely meeting regulatory standards” (Randell, 2022).
Case Study: In January 2024, Lloyds Banking Group was fined ￡8 million for failing to comply with Consumer Duty standards. The FCA’s investigation revealed inadequate handling of customer feedback, resulting in poor consumer experiences and financial harm (Financial Times, 2024).
2. Senior Managers and Certification Regime (SM&CR): Strengthening Accountability
The expanded SM&CR framework is designed to enhance individual accountability within firms. Nikhil Rathi, FCA Chief Executive, stated, “SM&CR requires clear definitions of roles and responsibilities, ensuring that senior individuals are accountable for their actions” (Rathi, 2023).
Case Study: Barclays Bank faced a ￡12 million fine in February 2024 due to deficiencies in its SM&CR implementation. The FCA found that Barclays had not adequately defined senior management roles, leading to oversight failures and compliance issues Financial
3. Financial Crime and Anti-Money Laundering (AML): Reinforcing Controls
The FCA’s intensified focus on AML practices highlights the need for robust systems to detect and prevent financial crime. Jonathan Davidson, FCA Executive Director for Supervision, noted, “Effective AML controls are crucial for preventing financial crime; firms must have robust systems in place” (Davidson, 2023).
Case Study: HSBC was fined ￡18 million in March 2024 for AML control failures. The FCA identified significant gaps in HSBC’s due diligence and monitoring, which allowed substantial financial crime activities to go undetected (BBC News, 2024).
4. Market Conduct and Transparency: Ensuring Fair Practices
FCA regulations on market conduct and transparency aim to prevent market abuse and ensure fair trading practices. Sarah Pritchard, FCA Director of Markets, emphasised, “Our rules are designed to uphold market integrity and protect investors from manipulation and abuse” (Pritchard, 2023).
Case Study: Deutsche Bank was fined ￡22 million in April 2024 for breaches related to market abuse. The FCA’s investigation revealed inadequate controls, leading to market manipulation and significant investor losses (Reuters, 2024).
5. Money Mules: Addressing Financial Crime Risks
The FCA has increased its scrutiny on money mule schemes, where individuals allow their bank accounts to be used for laundering illicit funds. This issue is becoming more prevalent, requiring firms to enhance their AML controls to prevent abuse.
Case Study: In July 2024, NatWest was fined ￡20 million for failing to adequately address risks related to money mule activities. The FCA found that NatWest’s systems did not effectively identify and prevent the use of customer accounts for money laundering, allowing substantial funds to be moved through the bank, raising significant concerns about its anti-financial crime measures (Financial Times, 2024c).
Enhancing Compliance: Strategies for Firms
Integrating specialist talent can significantly enhance compliance and operational effectiveness:
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Example: Lloyds Banking Group has onboarded AML specialists to address regulatory scrutiny and strengthen their compliance framework (Financial Times, 2024a).
2. Leverage Bolt-On Team Solutions
Mitigate the burden on your business-as-usual (BAU) teams by employing bolt-on solutions:
Example: Barclays has successfully integrated RegTech solutions to enhance compliance processes, resulting in improved adherence to regulatory standards (The Guardian, 2024a).
3. Enhance Training and Development
Continuous training is essential to keep teams abreast of regulatory changes:
Example: HSBC has implemented a comprehensive training programme for their compliance team, focusing on current regulatory changes and emerging risks (BBC News, 2024a).
4. Strategic Resourcing and Employee Value Proposition (EVP)
With a potential market uptick on the horizon, now is a pivotal time to ensure your resourcing strategy supports a candidate-led market in financial services. Firms must focus on retaining top talent and clearly articulating their Employee Value Proposition (EVP) and Contract Value Proposition (CVP):
Example: St. James's Place recently refined its EVP and CVP, leading to improved staff retention and better alignment with regulatory expectations. The firm also introduced targeted training and development initiatives to support compliance and attract high-calibre talent (Financial Times, 2024b).
Strategic Compliance Solutions with Hydrogen Group
As the regulatory landscape evolves and a long awaited upturn approaches, ensuring your firm meets FCA requirements and is prepared for a candidate-led market is critical. Hydrogen Group provides advanced solutions to enhance your Compliance and Risk functions while alleviating pressure on your business-as-usual (BAU) teams. Our offerings include:
To explore how we can support your organisation in navigating these regulatory changes and preparing for market opportunities, contact :
Daniel Bloom, Client Services Manager at Hydrogen Group
Contact Information:
Sources:
Group Director of Compliance, Risk & MLRO and interim Chief Risk Officer, Published author.
3 个月Excellent article, it would good to debate the next things that could be implemented and get ahead of the game. I think the FCA's drive towards the consumer has more to give and I expect stronger regulation from the FCA around this. Also we talk about the use of AI to help customers but not enough around defensive AI to protect customers and banks where AI is used for nefarious means. I feel that this will become a hot topic in the near future.
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3 个月Very good review Daniel, good summaries of enforcement action already taken.
Head of Internal Audit at Julius Baer
3 个月Top work, Dan. Insightful as always and great industry context. Huge increase in fines, will be interested to see who they make an example out of next
Delivering risk management solutions from simple assessment tools through to a full suite of policies and reports, I make risk work for the business, not the business work for risk.
3 个月Good review, Daniel. For many years we in financial services have been exhorted to think about our consumers and to pretext them (would that other services and industries had the same standards demanded of them!) This demands effective robust and independent internal review and challenge from the second line of defence, who must think like the regulator and more importantly be listened to when raising concerns. This requires firms to resource the second line properly, viewing it as a full function in its own right and not as a stage in career development (see,for example, “An accident waiting to happen”, https://publications.parliament.uk/pa/jt201213/jtselect/jtpcbs/144/144.pdf - should be required reading for anyone in financial services). It is obvious from the increase in levies that the regulators are basically saying, “There has been enough time to get these processes in place: we are now getting very serious about this.”
CCAS, LLB Hons, MCSI, ACII, CertPFS, MSTI
3 个月I love this article Daniel Bloom! Only addition I would make is how compliance professionals are now needing to also become "product" people to support automations of repeated tasks. ??