Enforcement Trends Report 2021

Having expected a year largely dominated by Brexit preparations, the work and priorities of the FCA and PRA during 2020 had to be fundamentally reassessed in March as a result of the Covid-19 pandemic. Focus switched immediately to emergency measures to deal with the implications of widespread remote working and to support consumers and respond to volatile markets.

After an initial slowdown and some indications of caseload re-prioritisation and rationalisation as a result of the pandemic, the FCA and PRA still managed to progress and conclude several significant enforcement cases.

Published outcomes reflect the main regulatory priorities of recent years, with financial crime and market conduct featuring heavily. There have also been several decisions concerning the treatment of customers in arrears; the focus on the fair treatment of vulnerable customers will continue to be an important focus as we move into 2021, given the economic downturn.

Given the nature of the enforcement process (and further increases in the amount of time it is taking for cases to reach published outcomes), it will be some time before the events of the past year filter through into final notices.

In terms of risk, however, Covid-19 has brought a range of additional concerns for firms and individuals into sharp focus. Of these, two dominate; market conduct risks occasioned by home-working and volatile financial markets and the challenges of treating customers fairly against a backdrop of increasing customer vulnerability. These will be the likely areas to watch as we move through 2021.

The detail

In our Financial services enforcement trends 2021 report we highlight the most important enforcement developments in 2020, together with the key areas we believe will impact the nature and direction of enforcement activity by the UK financial regulators during 2021.

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Topics covered in our report

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Consumers

Consumers

  • Expect ongoing scrutiny of firms’ responses to the FCA’s 2020 measures to protect consumers from unfair disadvantages arising following lockdowns – particularly relating to vulnerable customers.
  • Issues concerning firms’ conduct of unregulated business (eg commercial lending) may be viewed as an indicator of risks in a firm’s regulated business areas.
  • 2021 may bring scrutiny of firms’ approaches to SME lending: enforcement action against firms and senior managers (whether in respect of lending falling within the regulatory perimeter, or unregulated activity carried out by regulated firms), complaints to FOS or BBRS, class actions where failings have a widespread impact or breach the LSB guidance for dealing with Business Customers (applicable to government-backed schemes) are all a possibility.
  • We may also see the FCA attempt to apply TCF to areas such as pricing and the possibility of enforcement action across a wider range of conduct matters.

109% increase in FCA scam warnings issued*
*Calendar year 2020 (pro-rated from data to 10 Nov) vs 2019

Market conduct

Market Conduct

  • FCA intends to open more market manipulation investigations – expect a rise in insider dealing and market manipulation cases based on conduct during lockdown.
  • Remote working has led to increasing reliance on firms’ monitoring and surveillance systems. The FCA now expects firms to have overcome issues arising out of the operation of these in a remote environment.
  • Firms should ensure their market abuse risk assessments respond to the current circumstances, make necessary adjustments to monitoring and surveillance, and review PA dealing controls including awareness-raising amongst staff.
  • Corporates continue to be in the FCA’s spotlight, especially as to the timing and content of announcements and related internal controls and governance. Firms should be mindful of new types of inside information brought about by Covid-19.

Operational Resilience

OpRes

  • Expect increased Enforcement-led focus on lessons learned relating to operational resilience during the pandemic, accompanying the introduction of new FCA, PRA and BoE rules intended to build the operational resilience of financial services.
  • IT change programmes continue to pose significant enforcement risks – third party outsourcing and change management generate the most technology incident reports to the FCA.
  • Outsourcing remains a significant FCA/PRA focus area – firms must exercise sufficient scrutiny and control over third parties performing key functions.
  • Cyber risk increased in 2020 – new FCA/PRA operational resilience rules suggest that firms should bolster their capabilities not just to identify and mitigate cyber-risks, but also to detect and respond to risks as they crystallise.

AML and Financial Crime

AML

  • Financial crime is one of the most significant global enforcement risks for firms – some of the FCA’s most significant fines in the past two years related to AML breaches.
  • Common issues arising in enforcement cases include resourcing constraints and internal challenge; timeliness of CDD; weaknesses in automated processes to detect financial crime; inadequate policies and procedures; and adherence to UK requirements when relying on global centres of excellence or shared service providers.
  • Continued FCA emphasis on a more integrated approach to managing financial crime risks, including anti-bribery and corruption, and the use of more sophisticated surveillance and data.
  • Fintechs and challengers responsible for much of the growth in DAML SARs filings. Their innovation and new tech may make them targets; they should grow and adapt their financial crime controls as their businesses develop.

247% increase in DAML SARs filed by fintechs*
52% of all DAML SARs are now filed by fintechs*
*UKFIU reporting year 2019-20

Conduct, culture and governance

Culture

  • FCA and PRA regard culture as playing a significant role in reducing conduct risk. It sees a link between poor culture and harm to consumers, markets and other stakeholders. In wholesale banking, the understanding and identification of conduct risk is viewed as remaining “unacceptably weak” (Five Conduct Questions 2019/20).
  • In 2021 we expect greater scrutiny of firm culture as a means of ensuring the quality of decisions made at speed in response to pandemic-related risks.
  • Continued focus on whistleblowing arrangements and protection, with several ongoing investigations and a whistleblowing VREQ published in early 2021. Whistleblowing arrangements must evolve with working conditions and the subject of reports, particularly whilst remote working. FCA shifting focus towards the need for firms to foster a “listen up”, as well as “speak up”, culture.
  • Continued scrutiny of the way that reward arrangements incentivise/disincentivise conduct: this has underpinned some recent retail enforcement actions but has wider relevance.

Practice, policy and procedure

Practice

  • With the pandemic FCA and PRA concentrated upon urgent measures to address threats of immediate harm, such as implications of widespread remote working, consumer vulnerability and market volatility. Recognising the diversion of resources, enforcement work continued but there was some case rationalisation and re-prioritisation.
  • Expect a short term reduction in the number of new investigations opened and a continued increase in average case length. During 2021, the FCA is likely to shift from immediate harm prevention towards enforcement action in respect of inadequate implementation of FCA’s Covid-19 guidance and investigative work in priority areas such as boiler rooms and scams.
  • Continued pressure on the FCA to act in respect of unregulated activities and even unregulated firms, particularly in cases of consumer detriment. In 2021 this may coalesce around SMEs’ obligations to repay loans made under government-backed schemes.
  • International collaboration remains a priority on cross-border investigations.

FCA investigations opened, closed and open at end of reporting year

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