The FCA says it is ‘business as usual’ post-Brexit. Signature Litigation LLP’s Abdulali Jiwaji and Johnny Shearman untangle what business as usual could mean
Brexit will have significant implications for Britain’s financial sector. On the morning of the referendum result the Financial Conduct Authority issued a statement confirming that “[EU] regulation will remain applicable until any changes are made, which will be a matter for Government and Parliament” and “Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect”.
How the markets, and regulators alongside them, adapt to increasing volatility is of key importance but, for now at least, the FCA is keen to ensure that it is business as usual. In order to determine what ‘business as usual’ means for FCA it is necessary to look back at the FCA’s annual Business Plan and Risk Outlook, which was published in April of this year.
Many of the FCA’s aims remain the same or substantially similar to previous years, with individual accountability and changing the culture of regulated firms still high on its list of priorities. There is notably less emphasis on enforcement action, in line with comments made by Tracey McDermott, former CEO of the FCA, in October 2015, that the level of enforcement action was “not sustainable – for regulators or for the industry”. It is perhaps however unsurprising that the FCA has reiterated that the culture of regulated firms “has been, and remains, a priority”, particularly with the criticism that followed the scrapping of the thematic review of banking culture. The FCA seems to suggest that it will concentrate on working with firms on an individual basis. The regulator claims that a measure of success in this area over the medium to long term will be “a culture of accountability at all levels”, but there is no indication of what factors will be taken into account to assess progress towards this.
The Senior Managers and Certification Regime (“SMCR”) should assist in enhancing accountability. Managers for a business unit can now be held responsible if a firm contravenes requirements in that area. The FCA is looking to rely on this, and the data collection requirements of the SMCR, to continually assess key individuals within regulated firms and maintain a dialogue with firms as to what is expected of their senior management. Further, the FCA has made it clear that it intends to extend this accountability regime to all FSMA regulated firms in the future.
Market abuse was added as a priority by the FCA this year on the back of the Fair and Effective Markets Review (“FEMR”), which looked at Fixed Income, Currencies and Commodities (“FICC”) markets. The FCA views implementing the 21 recommendations made by FEMR as a major step in its wholesale markets agenda, and supervising of the now regulated FICC benchmarks is a main priority of the Authority in the coming year.
Financial advice is another addition to the Business Plan this year, following the Financial Advice Market Review (“FAMR”). FAMR was, as with FEMR above, run in conjunction with the Treasury, and it is no surprise that the FCA wants to focus attention on its plans for implementing two of its widest-ranging reviews. The findings of FAMR are seen as longer term objectives for the FCA, with a progress report due in 2017 and review of the outcomes of FAMR due in 2019. Whether Brexit will have a significant impact on the implementation of FEMR and FAMR remains to be seen.
This year will see the Financial Crime Annual Data Return being rolled out. It is hoped that it will allow for the identification of firms with material weaknesses in their anti-money laundering (“AML”) controls which the FCA can focus on and work with to resolve any issues. Interestingly, AML represents one area where the FCA has indicated how it plans to measure its success, giving each regulated firm a scoring. This will measure both the firms and the efficacy of the FCA itself. Firms with a low score may find themselves on the radar for potential enforcement action.
A key theme throughout the Business Plan is that the FCA is looking to be proactive in its supervisory role and look to work with firms on an individual basis. The focus looks to be on working towards more cooperative and manageable solutions as between it and regulated firms. This appears to mark a change in approach from the previous emphasis on enforcement. In previous years, hefty fines have been imposed by the FCA on a number of key financial institutions but can such action give rise to the industry wide changes it seeks? It may also be that the FCA does not want to over-commit to wide-ranging enforcement objectives, given that a new CEO, Andrew Bailey, will be joining in July of this year. We will have to wait and see what impact the new CEO will have on the FCA’s enforcement activity and it will be interesting to note how Mark Steward, still fairly new in his role of Head of Enforcement, will fulfil his mandate under Mr Bailey. The uncertainty caused by Brexit adds to the challenges faced by those taking on new roles, and this may feed into changes in emphasis.