Financial services regulation has seen significant changes in recent years. And it is not only the regulation itself that has changed. The architecture to enforce it has also changed, from the implementation of the Senior Managers and Certification Regime (SMCR) to the changes to the enforcement process and practices. Here, we look at some of the changes that we as practitioners have seen on the ground, as well as setting out what we consider to be the likely future direction of enforcement.
For some period now, the Financial Conduct Authority (FCA) has wanted to hold individuals more accountable than previously. While the FCA has successfully taken action against individuals in the past, it wants now to secure disciplinary outcomes against more senior individuals for failings on their watch. While the SMCR is a new weapon in its arsenal towards that, in many ways, in terms of enforcement, it changes little. It is interesting to see that the FCA and the Prudential Regulation Authority hailed their recent fining of Barclays CEO Jes Staley as the first case brought under the new SMCR regime. In reality, however, this was not an SMCR case at all. The trumpeting of it as such further emphasises the desire of the FCA to secure SMCR disciplinary outcomes. There is a lead time, and we will no doubt see SMCR cases coming down the track.
As for the conduct of investigations, we have in recent times certainly seen investigations starting on lesser evidence than previously. This is unwelcome. While it is true that we have also seen a greater willingness to drop cases, the very fact of having been under investigation can unfairly cause real problems for subjects, for example for individuals in their future employment. This is a trend that we believe is set to persist.
An equally unwelcome trend is what appears to be a willingness of the FCA to interview earlier in the investigation than it had previously done. This willingness can also potentially lead to some real problems for subjects. For example, it can be especially problematic for individuals who have more limited access to documents than they would have done if the interview had come later in the process.
We will no doubt see SMCR cases coming down the track
Although interviews are taking place earlier in some investigations, a common complaint is the length of time investigations are taking. While it has been suggested that these delays are confined to the so-called ‘legacy’ cases dating from the financial crisis, that is not always the way it appears to the market. We are aware of cases where matters seemingly unaccountably go quiet for long periods. The brunt of the delay is often borne by individuals who may be placed on long-term suspension, or in the absence of any firm timeframe, are left in limbo, unable to move jobs. It is hoped that this trend will diminish, but we see no real sign of that at present.
Another trend is the increasing criminal track that cases take. This can lead to delays, especially where the Serious Fraud Office (SFO) is also involved. It is a matter of public record that, in the Barclays Qatar matter, the FCA intended in 2013 to fine Barclays, but the FCA’s case is on hold pending the outcome of the SFO matter. Indeed, such has been the time taken in the SFO matter (its investigation started in 2012) that the civil litigation that the events spawned has also had to be postponed. The postponement was the result of an interesting case where Barclays, and this firm for the former CEO, John Varley, made contested applications to postpone the civil litigation pending the SFO trial.
Privilege for firms’ internal investigations still looms large over the enforcement landscape. The case of ENRC rather shook up many people’s views of where the limits of privilege were factually. This was welcome news to the FCA, which was pushing for what many may previously have regarded as protected material. The ENRC appeal is due to be heard by the Court of Appeal in July. This will be a significant hearing. The direction of travel on privilege may well be largely shaped by what the Court of Appeal decides on privilege or, after it, the Supreme Court.
As for topics for future action, beyond SMCR more generally (and possibly culture and governance in particular), there are many candidates, and it is difficult to know where exactly action may come from. Nevertheless, here is our view of some of the candidates for enforcement action down the line:
One strong possibility is anti-money laundering (AML). AML remains an issue for the FCA, particularly in respect of high-risk jurisdictions, and we may well see action coming out of its thematic review of AML in capital markets. Data security and resilience is an area that is receiving an increasing focus. We think it may well be an area that receives attention and focus from enforcement too. Beyond that, pension transfer advice has also been receiving attention and, given some of what we are hearing, looks like a prime candidate for enforcement action. Another possibility is potential abuse in the wholesale financial markets, where the FCA has been talking about focusing attention beyond the historical emphasis on equities. We would not be surprised to see action in any of the fixed income, commodity or non-standard derivative markets.
Adam Epstein (pictured above right, top) heads the Financial Services: Contentious Regulatory and Enforcement team at Mishcon de Reya LLP. Katharine Bond (pictured above right, bottom) is a managing associate in the team. You can read more of our regulatory insights in our tri-annual bulletin, Enforcement Watch.