Reed Smith Client Alerts

Authors: Tom Webley

On 2 July 2015, the UK’s financial regulator, the Financial Conduct Authority (FCA), published its annual report and accounts 2014/15.

Overview The annual report highlighted a number of areas in which the FCA has been active over the past 12 months, including:

  • The use by the FCA of its new consumer credit powers
  • The launch of ‘Project Innovate’ to encourage innovation in the financial services sector
  • The FCA review into competition in the wholesale market
  • Working towards the implementation of the Senior Managers Regime
  • The publication of the FCA’s cash savings and retirement income market studies
  • Implementing the new pension reforms
  • Enforcement action, especially in relation to LIBOR and FX
  • Responding to the findings of the Davis Review into the FCA’s own handling of the launch of its 2014/15 business plan

The report also highlights what the FCA intends to do over the coming year (which mirror the themes set out in its business plan published in March 2015).

As should be expected from a report of this nature, the focus is very much on highlighting and emphasising the achievements of the FCA over the last 12 months. These achievements are backed up by numerous eye-catching infographics containing various statistics relating to the FCA’s activities.

Some of these statistics are worth exploring in a bit more detail.

Enforcement The FCA makes it clear in the report that firms and individuals should have no illusions that any misconduct will be followed by meaningful sanctions. This is supported by statistics showing that, over the past 12 months, the FCA has imposed:

  • 43 fines
  • £1.4 billion of fines in total
  • £32.6 million average per fine

By way of contrast, in 2013/14, the FCA imposed 46 fines totalling £425 million, giving an average fine of £9.2 million.

This contrast follows a general trend over the last five years whereby (on the whole):

  • The number of fines being imposed has been decreasing; but
  • The total amount of those fines has been increasing

Therefore, there have been fewer fines, but the fines that have been imposed have been larger.

This year’s figures ostensibly support that trend, albeit the total amount of fines is over three times the size of the previous year, which is an unprecedented leap.

However, it is difficult to know what conclusions to draw from these statistics.

Although the £1.4 billion in total fines for the past year is a huge amount in comparison with previous years, £1.1 billion (or 78.5%) of that total was made up of five fines imposed by the FCA in relation to forex.

If those five fines are taken out of the equation, in 2014/15 the FCA imposed:

  • 38 fines
  • £309.8 million in total
  • £8.13 million average per fine

This paints a very different picture and raises a number of questions. For example:

  • Once the five forex fines are removed, the statistics for 2014/15 show a decrease in both the number and the amount of fines from the previous year. Does this suggest that the FCA considers that, in general terms, culture and conduct are improving or was the FCA merely too distracted by the forex investigation to dedicate its finite resources to other matters?
  • Were fines of the scale of those imposed in relation to forex a one-off? After all, the fines related to historic events.
  • Alternatively, will the FCA find what it considers to be more skeletons in the industry’s cupboards, like LIBOR and FX, in the future, which will result in fines totalling billions rather than millions?

The FCA insists that firms warn customers that past performance is not a reliable indicator of future results and the same warning should apply here. Only time will provide an answer to these questions and the equivalent statistics in the next few annual reports will make interesting reading.

However, imposing fines of such magnitude is likely to have increased the FCA’s confidence in relation to future enforcement action and sanctions, particularly given that the forex issues ostensibly resulted in no consumer detriment. Firms should work on the basis that the FCA will be looking to impose fines of that scale in the future.

Whistleblowers The number of whistleblowing cases rose by 28% from 2013/14 to 2014/15, taking the total number of cases to 1,340.

This is a significant increase, although not as impressive as the 58% rise of whistleblowing cases between 2012/13 and 2013/14.

The latest rise in cases of whistleblowing does, however, continue a sharp upward trend in such cases. This upward curve has resulted in a near tenfold rise since 2007/8. This is something firms should be mindful of and ensure that they have full procedures and policies in place to deal with whistleblowers and the resulting investigations.

The key areas being flagged by whistleblowers were typical areas of focus for the FCA. They included:

  • The impact of aggressive sales targets and incentives
  • The honesty and integrity of individuals in regulated firms
  • Negative outcomes for customers
  • Financial crime

Out of the whistleblowing cases reported to the FCA, 757 cases were investigated. Of these:

  • 10 directly resulted in action by the FCA
  • 172 assisted the FCA in carrying out its functions
  • 468 were of value to the FCA but resulted in no action
  • 107 were of little or no assistance

It would be easy to focus on the tiny number of cases which resulted in direct action and assume that whistleblowing was not a significant issue.

However, out of the cases assessed by the FCA, only 14% were of, in the FCA’s own words, “little value and…unlikely to assist the FCA in the discharge of its functions”.

This should be compared to the 62% of cases where the intelligence provided by the whistleblower was of value to the FCA, but not currently actionable. The FCA will not simply forget the intelligence received from whistleblowers and even if the intelligence was not enough to result in action at the current time, such intelligence might be used in relation to future investigations or enforcement action.

Individual accountability The FCA often repeats its mantra about the importance of individual accountability in relation to misconduct.

According to the statistics in its report, in 2014/15:

  • 31 individuals were subject to FCA action
  • 20 of whom were SIF functions
  • £6.6 million in fines was levied
  • 26 prohibitions were implemented

However, the FCA also conceded that:

“pursuing enforcement cases against individuals is resource intensive and can take a number of years to conclude.”

It will be interesting to keep an eye on this area to see how the full implementation of the Senior Managers Regime and the recommendations in the Fair and Effective Markets Review will impact the ability and efficiency with which the FCA pursues individuals.


Client Alert 2015-187