Regulation Redux (June 2023)

At the end of my last round up, I suggested that there's an argument looming over the purpose and effectiveness of regulatory enforcement, and this month's change of leadership at the top of FCA Enforcement seems a good opportunity to take a look at where we are and some of the contentious areas.

ENFORCEMENT & FCA STRATEGY

Therese Chambers' first speech as co-Enforcement Director promised "a strong alignment between our enforcement work and the FCA strategy". This sounds an obvious statement, but it has always been hard to deliver and it's not evident that the recent structural changes to FCA enforcement - having co-directors and moving the enforcement Legal Department into the General Counsel/Legal Division - will help.

Problems aligning enforcement with overall strategy have typically fallen into three categories:

(i) Timing: It's not easy to link FCA strategy to an enforcement decision that emerges more than 3 years later.

(ii) Messaging: The detail of enforcement actions sometimes look quite detached from any headline strategy theme, making it hard to communicate their broader relevance.

(iii) Case choice: It's often proved difficult to align case choice with FCA/Supervision priorities. Enforcement Directors, quite reasonably, prefer to select the most important cases as they present themselves (rather than against a pre-set strategic agenda), and to choose only those they are confident of winning, while always looking to balance their overall case portfolio.

A need for stronger coordination runs through all of these and, n the face of it, having two Enforcement Directors seems likely to make this harder rather than easier to achieve.

The same applies to the shifting of Enforcement's legal function into a central legal division, a move that also seems likely to slow decision making. In addition, it makes the new General Counsel a potential arbiter of which enforcement cases are taken forward etc., which could quickly become uncomfortable for everyone concerned.

PRA ENFORCEMENT & THE DISCOUNT QUESTION

Later in the month, another speech, this time by the PRA Head of Enforcement, Oliver Dearie, set out the PRA's new enforcement strategy, on which it is consulting.

A key feature is the proposed introduction of an "Early Account Scheme and enhanced settlement discount". The latter would allow the existing 30% discount on fines in return for "early settlement" to rise to 50% if certain conditions are met. I've not seen a similar proposal from the FCA but it's hard not to imagine it following suit.

The main reason the PRA gives is that it "picks up on previous feedback that some subjects may be willing to admit breaches at an early stage. At present, there is no additional incentive to do so as settled cases receive a flat 30% discount, irrespective of when the subject accepts that breaches have occurred."

At this point, critics might ask how effective the 30% discount has been? It's hard to tell from the outside, but on the face of it the bar seems to have been set fairly low, with (as far as I can tell) all 20 of the financial penalties the PRA has levied since 2014 having qualified for the 30% discount. Several of these cases were taken jointly with the FCA and I suspect its own record would be similar.

Of course this won't be the whole story, but it does feel as though the 30% has more or less been priced in by the defence lawyers. If so, and with regulators (understandably) so reluctant to engage in even lengthier prosecutions, there must be a risk that the new 50% discount, even with conditions, will soon come under similar pressure.

UPPER TRIBUNAL RISK

Meanwhile, the FCA, in particular, seems to be coming under increasing challenge around its enforcement decisions and processes. Most recently, the Upper Tribunal overruled the FCA's findings that three Julius Baer employees lacked integrity, in the process criticising the regulator's disclosure of documents and delays in the process.

Stepping back, the FCA's 2017 decision to open more enforcement cases, always problematic, now looks like a clear mistake. It seems to have over-stretched resources, producing delays and increasing the length of time for cases to be resolved. And it's easy to infer from the unusually critical recent Tribunal judgements - see also the Forsyth criticisms - that it may also have eroded the processes themselves and led to lower quality case management.

The regulators will be embarrassed by these reversals and the accompanying criticisms, but none of the problems identified are easy to fix.

ROLE OF THE RDC

Andrew Tyrie, the former MP (now peer) and Chair of the Treasury Select Committee, has a long history of opposition to what he sees as excessive regulatory power, going back to his co-authoring of "Leviathan at Large", an early critique of the Financial Services & Markets Act (2000).

It was no surprise, therefore, to see him pushing an amendment to the Financial Services & Markets Bill that called for the FCA's Regulatory Decisions Committee (RDC), a key element of enforcement decision making, to have statutory independence.

The proposed amendment seems to have fallen but pressure around the RDC's role is likely to continue, fuelled by the FCA's 2021 move to partly bypass the RDC and take more decisions at executive level. This was an attempt to speed up the process and deal with some of the delays in the enforcement pipeline, but it has caused its own problems, including perhaps galvanising more defendants to appeal to the Upper Tribunal.

CONCLUSION

To state the obvious, all these issues - alignment with strategy, discounts, number and duration of cases, robustness of process and decision making, role of the RDC - are linked. There are several underlying causes but maybe the biggest is regulators' need to be seen to have teeth, to be taking action. They are also compounded by growing criticism of the limited resources that regulators in general, not just the FCA and PRA, seem able to devote to tackling financial crime.

The coming together of the regulators' latest attempts to square these circles with the cost-of-living crisis and the FCA's implementation of the Consumer Duty may well force a more public discussion of what level and type of enforcement we should expect from our regulators. It's a debate worth having...