Financial Services Regulatory Enforcement mini-series, season 2, episode 1: What's on the horizon for FCA and PRA Enforcement in 2025?

Nathan:

Hello and welcome to another edition of the Ashurst Regulatory Enforcement Podcast. I'm Nathan Willmott, and I'm joined here in the Fruit & Wool Exchange in London by two fellow specialists in financial service regulation. My colleague Adam Jamieson.

Adam:

Good to be back for season two, Nathan.

Nathan:

And also a big welcome to Saima Hanif KC, a barrister at 3 Verulam Buildings.

Saima:

Thank you for inviting me, Nathan. It's great to be here.

Nathan:

And thanks to you both for being part of the podcast today.

Now, amongst us, we have many years of dealing with regulators and other authorities on difficult and contentious regulatory matters, representing financial services firms as well as their senior management.

And our mission for this podcast series is to share with you, our thoughts, on the new approaches and strategies that we're seeing in contentious financial services.

We want to highlight any areas of concern about how the regulators and authorities are conducting their investigations and to suggest ideas about what they could be doing differently.

And so we are looking ahead to the coming year 2025. And I'm keen to explore with you both your thoughts on what's going to be big in enforcement in the year ahead. What are the issues they're going to be keeping the FCA and the PRA busy, and what should we be looking out for?

And Saima, maybe I could start with you. I know that the Upper Tribunal has a busy case docket ahead for the year. So maybe you could give us what you think your highlights are going to be for the year ahead.

Saima:

Yeah, thanks Nathan. So as you say, 2025 will be a bumpy year for the Upper Tribunal, assuming all the cases stand up.

There's obviously the Jes Staley case. But in addition to that, we've got Banque Havilland and the three individuals, which as you may recall, the allegation there is that they were involved in producing and disseminating a presentation, which allegedly recommended a manipulative trading strategy, which would have amounted to a criminal offence had it happened in the UK. And I think what's very interesting about that case, is both the institution and the individuals have referred the matter to the Upper Tribunal.

We'll also have the three traders that were banned by the FCA for placing allegedly misleading orders in respect of various futures. That's the Gonzalez, Sheth and Urra cases. So we'll see what happens there.

And then we also have the Metro Bank CEO, Craig Donaldson and the CFO, David Arden, who have referred their notices, for allegedly being knowingly concerned in respect of a statement that was made to the marketplace in October 2018 relating to the risk weighted assets of Metro Bank.

What's interesting here, Nathan, is Metro Bank are not referring the notice to the Upper Tribunal. So essentially, they've accepted the fact that it was an incorrect statement, which breached the listing rules but the individuals have challenged it. And I think it looks, from my read of the notice, that there'll be an interesting discussion around the internal and external legal advice that was given, and the extent to which that plays into this test of knowing concern.

And as you're aware, Nathan, there's always been this tension with the FCA on the one hand saying, "It doesn't matter if you took legal advice, that's not relevant for knowing concern." We've had recent high calls to authority which suggest very differently. So it'll be interesting to see how these matters play out.

Nathan:

It does feel like we're seeing more cases being challenged and going through that Upper Tribunal process.

Adam:

Absolutely.

Nathan:

I'm interested in your view, Saima, do you think there's a particular reason for that or do you think it's just where we currently are?

Saima:

It's a really good point because I think for all three of us, we've been doing this work for so long, we can remember a time when very few cases went through.

So I think your question, it's very well put and I suspect it reflects a number of things. So as you know, by the time you get to the Tribunal, there's been in a sense a whole period behind it.

So I suspect, what it reflects is a time and place in the enforcement philosophy where they were bringing a lot of cases and bringing them very aggressively. So I suspect what we're seeing here is the tail end of that philosophy. And as we all know individuals, they will fight these cases. If you're facing a P1 allegation and a ban, you will quite rightly fight to the hilt.

Nathan:

Some of these are very old cases as well.

Saima:

Aren't they? Yeah, it's a good point.

Nathan:

What sort of challenges does that bring for barristers and those people trying to run and argue these cases?

Saima:

It's a good question, Adam. Obviously, we're all aware of Seiler where the delay ... And actually, it was favourable to the individuals, not so favourable for the FCA. But as you say, the real issue here is recollection of events. That's the first thing.And then I think secondly, if you take a step back, if you're a regulated individual, as we all are, you've had this thing hanging over you for a number of years. And often, there's a sense that even if at the end of the process they're vindicated by the Upper Tribunal. In the marketplace, actually, there's a sense in which they've almost been punished in effect by the marketplace, irrespective of what the Upper Tribunal finds just by virtue of the passage of time.

And I think that's the really unfortunate thing about all these cases. As we know, there's a huge emotional burden placed on these individuals as they're waiting for these matters to go through the system.

Adam:

We see that as a huge factor in individuals deciding to settle cases early, even where there is a good defence to the case. Because the reality of having that hanging over you for two or three years, in circumstances where you know can settle for an amount that you're willing to live with and with language that you're willing to live with, it's a huge factor.

Nathan:

It's not quick to go from an investigation and a settlement phase to potentially having to go to an Upper Tribunal hearing.

Saima:

Absolutely. And I think as we know, I think the one hazards of the world we live in, which is very virtual, which is very social media led, is actually often, sometimes I feel you have the court of public opinion. And I think because of the way that information is transmitted, that tends to have far more impact and has a volume which is above and beyond what happens in the dry courtroom that we are all involved in.

Nathan:

And once the decision notice is published and reported in the press, it's like you say, once you finally get through to maybe an Upper Tribunal and get exonerated, query how you still feel about that matter. Obviously, pleased to have won, but equally brought a terrible experience.

Saima:

Yeah, absolutely. Absolutely.

Nathan:

And two other changes in terms of the Upper Tribunal. So firstly, we're in the post-Tim Herrington era. Interested in your thoughts on how that will impact Upper Tribunal hearings. And then secondly, the FCA has announced its new approach to disclosure in relation to Tribunal cases. What are your thoughts? Will this make any difference at all?

Saima:

These are all great points actually. So as we say, the end of a legacy, so when I step back from the Upper Tribunal, Tim Herrington and you just look at as it were, judicial roles as a whole, I never think it's a good thing to have a small pool of judges looking at the cases. And I think that doesn't matter which division you're in, you can be in the Admin Court, you can be in the Commercial Court. I think having a wide variety of judges is always a good thing.

And I think the reason for that is because if you are one or two individuals just repeatedly seeing the same thing, I think it's impossible for that actually not to have an impact on you at some level. So I think it's no bad thing that we will see, as it were, new judges coming to the fore.

Some might say that we might see a more even-handed approach vis-a-vis the FCA. So I think it's good for these things to be refreshed at regular intervals. So let's see how it plays out, but I've got no doubt that the judges that we'll be looking at these cases will approach them with the same degree of rigour and independence as we expect from those in all judicial posts.

In terms of the approach to disclosure, it's an interesting one actually, Nathan, and they've obviously published their statement and they've set up, they're going to apply, they'll be looking at it slightly differently. My view is, I think what they ought to do is at the RDC stage, actually, notwithstanding the fact that the Upper Tribunal rules have a heightened standard for the Upper Tribunal.

If I were them, I would just apply that and run up to the RDC stage, because fundamentally, they're a public body. As you know, they're subject to public law principles including the duty of candour. And I actually wonder whether, if they took this view of, "Well, you want this stuff, you have it, here's a document dump." Contrary to what parties may think, it may not contain the silver bullet that they think it has. Because I think otherwise, they're just going to get embroiled in never-ending disclosure dispatch, of the type that we see in commercial litigation.

Nathan:

It's interesting for the early disclosure point, we've certainly had some stage-one settlement discussions where you get the annotated warning notice. And I've certainly had cases where, the quantity of documents that the FCA is supplying with that, or the regulator is supplying with that, is more than they're willing to print out and provide you in hard copy form.

Saima:

That's interesting.

Nathan:

Literally, 10s of thousands of documents which you are meant to ensure that you are on top of within the 28-day period that you have for early settlement. And that presents its own challenges.

But looking back at the other end of the spectrum, the FCA seems very, very keen on promoting how quickly it's able to deal with investigations now. And that leads to some questions in terms of case selection and how the FCA is handling investigations.

It's talked about before the House of Lord's Financial Services Regulation Committee. It talked about the fact that it has a target to reduce the percentage of cases that get discontinued. It talked about the fact that historically, that was 66%, it's currently gone down to 56%, but their target is to get that down to 33%.

And so Adam, I'm interested in your views, as to what you're seeing in terms of both case selection and case handling from the FCA, given there's this real focus on getting cases through more quickly and having fewer discontinuances.

Adam:

Yeah, it's a really interesting question, and there's a number of different aspects to it, I think. Because there's a historical context, which is the change in approach that there was to enforcement around 10 years ago, whereby the FCA compared to now, we're doing relatively few cases. Certainly, I think, let's say around the 200 mark in around 2014, 2015, and then at its peak they were doing perhaps around 600 cases. So huge growth in their caseload.

Inevitably, those cases were going to take longer. They were needing to resource them at a different level with more junior staff members taking responsibility on some cases. And difficult to get things through all the checks and balances internally, and progress them. As a result, we saw when they were reporting year-on-year, how long cases are taking to resolve, it was getting longer and longer, into the years rather than the months.

So I think it's absolutely right, that they should be thinking about streamlining the number of cases that they're doing. Because of course, they can't investigate every regulatory breach that goes on at firms. There needs to be some sort of proportionality.

Nathan:

But streamlining down, last year it was 11 cases against regulatory firms.

Adam:

Well, I think the streamlining begun, hasn't it? So I think that ...

Nathan:

They've been on a crash diet more than streamlining.

Adam:

Exactly, exactly. But there've been periods where, look, there's been tsunamis of new cases opened.

Thinking back to 2016, 2017, there were huge volumes of AML cases for example opened. And we're not seeing that now, whilst they get their portfolio down to a level where they feel comfortable that they can properly resource it. Move things forward at an appropriate pace, because frankly, what's the purpose of enforcement, is a good starting point question of, what are they trying to achieve?
And a big part of what they're trying to achieve is show the market, what are the issues that they care about from a policy perspective. What type of misconduct should end up in enforcement? In order that the market is aware that the FCA cares very seriously about those issues, such that, they can review their own controls in that area, and make sure they're getting it right. If it takes three years for a case from referral, or longer, to be published, then you really lose a lot of the impact of that I think.

Nathan:

And so that goes to the number of cases that you refer to enforcement. What about, what are you seeing in terms of how they're choosing those cases?

Adam:

Well, I think we're still seeing, as you said, relatively few cases being open. So it's got to be cases where there is an obvious crystallised risk, or publicity about an issue, where they really feel they must act and open a case to take action.

Otherwise, I think what we'll see is look, they'll reach that equilibrium. And then, they'll be in a position to sit back and think, "Look, what are the issues that we really care about as a regulator? What's our focus going to be?" Thinking about things like the consumer duty, operational resilience. I'm sure financial crime will continue to be an area of focus.

And in a sense, I think, they've probably felt slightly hamstrung whilst they've been trying to bring down the number of cases. And address that first before they can go, "Right, these are the issues we want to start looking more seriously and we're going to try and open cases in those types of areas where we see misconduct by firms or individuals. And we're going to try and progress them quickly with good amount of resource such that we can get a message out to the market that this is an issue that we care about."

Saima:

Yeah, I think those are all fair points, Adam. It's always difficult for regulators. You want to have enough cases going through to show actually you are quite firm and forward-thinking. So I think it's this delicate balance, but you don't want too many, but I think as a difficult balance to draw. But I think as you say, clear that they are going to pick and choose their battles a bit more wisely than maybe hitherto has happened.

Adam:

And also, there was criticism in the past over them cherry-picking cases that perhaps they thought were definite winners. And it's interesting, Nathan, the statistics you referred to around potentially measuring discontinuances. And is that a good metric for success from an enforcement perspective?

Nathan:

It troubles me that the FCA has a target for the proportion of discontinuances in relation to the cases it takes on. I feel that that's not something it should have a target on. I think it should very much have an open mind in terms of areas of concern, where there are circumstances suggesting that breaches occurred. And it will encourage a very risk averse approach, presumably if you feel that you need to get an outcome in 67% of your cases.

Adam:

Maybe it goes to the fact that if they felt that there were a high number of discontinuances, perhaps they were opening more cases than they needed to?

Nathan:

My own take on this is that I worry that too much emphasis is being put on the speed of investigations. In every announcement, in speeches, we're regularly seeing how well the FCA is doing in terms of the speed of its investigations.

But the reality is, in my view is it's being very careful in terms of picking cases where it already has a report that very clearly shows the firm has acted in breach of its regulatory duties or there's been an admission by the firm. And so there is no need to do an investigation. There may be an information requirement, there probably are not going to be any interviews in some of these cases.

And therefore, whilst they can then showcase that this is only taken a year or so, the reality is something that could have been done in a month with enough focus. And the danger is that these are reverse engineered, so they're not picking the right cases that send the right message to the industry. But instead, are picking those that they're able to deal with quickly, efficiently, and improve those statistics. And I think that's the wrong way of looking at these issues.

Saima:

I think that's fair actually, Nathan, because as you say, there are regulatory body. They've got statutory objectives, so they should be acting to uphold and implement those objectives. And as you said, that should be the starting point as opposed to, as you are saying, reverse engineering things to arrive at a number or a percentage that they've chosen for reasons that seem unclear.

Nathan:

Absolutely. I think the other effect of it is probably a downgrading of their focus on individual accountability. Because the FCA will know that where individuals are placed under investigation alongside a firm where there's been a systems and control failing, that it's very resource intensive in terms of those investigations into individuals. Individuals are far more likely to contest matters than firms.
And so anecdotally, we've seen a real reduction in circumstances where individuals are placed under investigation alongside a firm. And I think again, that's probably driven by a desire to get those cases done and dusted quickly, and to improve their rates in terms of discontinuances.

Because the standard on individuals is different to the standard on firms, there is the reasonableness test for individuals. And as a result, you'd naturally think that the level of discontinuances against individuals will be higher than those against firms. So again, that goes to that target of only having a third of cases leading to discontinuances.

Now separately, I want to ask you about penalty setting, because obviously the FCA has its five-step framework for setting penalties. Where it looks at whether there should be disgorgement of profits, then looking at relevant revenue, the seriousness of the breach. And then looking about whether there should be adjustments for aggravating or mitigating factors.

But as part of that process, the FCA has the power to substitute a different number if it thinks that's necessary for credible deterrence, or if it thinks that the number is too high and disproportionate.
I'm interested in your views on how that framework is operating in practice and whether you see any issues.

Adam:

Yeah, it's a bit of a regulatory geeky topic when you get into the depths of-

Nathan:

There's nothing wrong with that.

Adam:

... the penalty setting policy. But you're right, it's got real impact on these cases. And very often it may not be fully considered until quite close to a conclusion of an investigation and potential settlement discussions.

The big challenge that I think their current policy faces, is that a lot of the penalty is premised upon an income or a revenue figure attached to the area of the business in which the breach occurred. Which, particularly within large institutions, can create a huge number.

And then there's the great problem of, well, how do we then go through the rest of the calculation to make sure that we end up with a number that's fair and proportionate? And there's ability to within the policy to make adjustments as a result. But they can obviously then, feel quite arbitrary. And then how do you assure consistency across both similar cases and perhaps, similar types of institution?
And I think it's a really difficult issue for the FCA. I'm interested Saima ... Also, it leaves them open to challenge whether a focus resolution agreement centred into and somebody decides to go to the RDC or Tribunal about penalty. What do you think about the challenge side?

Saima:

You're absolutely right. And I think to use your language, I think there is that sense of these are just arbitrary figures, and I think particularly when they talk about credible deterrence, you just feel like there's actually no rationale there. It's essentially the length of the FCA's foot. And I think both from a regulatory perspective, but also from a public law perspective, that's not how decision-making ought to happen.

So as you say, actually, I think there is fertile grounds for challenge. And I think actually, this fertile grounds for challenge on a public law basis actually. Because fundamentally, what you are saying is, there's no certainty or there's no clear objective, applicable guidelines as to how at the various stages you'll ratchet up or ratchet down. And it does seem very arbitrary, And I think that's unsatisfactory, and from their perspective.

So I feel yes, it would be good to see more challenges because it's only as you test the regime and you push the envelope out, that actually you really get a proper sense of holding them accountable.

Nathan:

Yeah, and it's funny because when you look at the fines that have come through in the second half of 2024. It now seems like it's quite rare for that five-step framework to be applied without a very significant uplift or decrease to get to the number that the FCA thinks is appropriate.

And that does for me, call into question, what's the point of having that framework at all? If you're only going to substitute what's the number that's appropriate in all the circumstances, which is what the test used to be.

And so we saw in the Starling Bank, the Metro Bank case, the numbers decreased significantly for proportionality. The TSB arrears handling case, there was a 40% reduction at the step two stage. And in the TSB case, there was a 40% reduction taking into account both aggravating and mitigating factors, which is I think unprecedented.

In the PwC case, they didn't use relevant revenue at all and just substituted their own figure, whereas in a range of other cases, they've gone the other way and just massively increased the level of penalty to give effect to credible deterrent. So we saw that in the CB payments case.

We've seen it in some individual cases, Leigh Mackey and Kristo Kääarmann. Kristo Kääarmann would've been fined £41,000 that was increased to £500,000. And we saw it in the Macquarie case as well.

So it feels almost as if this is now the standard practice rather than the exceptional case. And so for me, that calls into question the whole fining framework.

Adam:

It feels like an area that it's time to look at. I'd be interested if there were any statistics. They may have them internally, on the number of cases that are able to just flow straight through that framework without some form of material adjustment being made. But it does, the PRA have obviously looked at their penalty policy and come up with a new solution, I think, to solve some of the issues that we've just discussed. And I wonder whether the FCA will also be considering doing the same.

Saima:

It's an interesting point you make about the PRA. There's almost this sense of the small nuances and differences in the way they approach these issues, which actually they're quite fundamental to enforcement philosophy.

So I often wonder how much regulatory dialogue there is because I feel actually, if on something as fundamental as penalty, the PRA has got an approach, which actually it looks quite good. It's objective, you can advise clients on it. There's something to be said that actually, "Well, from a reg perspective, it's slightly unsatisfactory to have the sister regulator taking a different approach." So I wonder whether we're seeing a slight sort of…divergence in ... The PRA essentially, asserting its own remit as a regulator.

Adam:

I think that's absolutely right, we are.

Nathan:

They're moving further and further apart, aren't they, in terms of their approaches?

Saima:

Exactly.

Nathan:

And from the PRA, we are yet to see a case come through in terms of the early account scheme. It'll be interesting when the first cases do come through. It feels almost if the FCA has adopted that process behind the scenes in a far less formal way to say, "Okay, unlike the Mark Steward approach, where the mindset was, we won't rely on internal reports." I think the FCA sees the real benefit of relying on internal reports and being able to get outcomes out far more quickly,

Adam:

But without the enhanced settlement discount that the PRA offer for an early account scheme.

Nathan:

And then finally, anything else that you think will be big in enforcement in 2025?

Adam:

Well, we should say something about naming and shaming.

Nathan:

Of course.

Adam:

I know.

Nathan:

And we'll of course be doing a separate podcast on that. But we have the FCA's new revised proposals and the deadline for responding to that revised consultation is 17th February 2025.

Adam:

Stay tuned for that episode.

Nathan:

And so what else do you think will be big in enforcement new in enforcement in 2025?

Adam:

Well, I think, what people will be looking out for, certainly within retail financial services, will be perhaps the first case on the Consumer Duty. And obviously, it's still fairly new and cases do take time to come through, but I wonder whether that will happen.

We've obviously seen other old ... Treating customers fairly, TCF cases published over the last year, which I think will probably foreshadow where we go with the Consumer Duty to a certain extent. But it will be interesting to see what those first Consumer Duty cases look like. Whether we will see one in 2025, I don't know, but it's certainly possible. So I think that would be my big pick from the crystal ball gazing.

Saima:

I suppose what springs to mind is the rules around non-financial misconduct, which we are told I'll do anytime soon.

So the marketplace is no doubt waiting with bated breath to see what comes out of it. But I think it'll be interesting to see how that evolves and matures.

And I think from the FCA's approach, whether they've done enough to recover from the shock of Frensham, which I think was not an outcome they were expecting.

Nathan:

Absolutely.

Well, that is all we have time for in this edition of the Ashurst Regulatory Enforcement Podcast. Many thanks to you, Saima for joining us and to you, Adam, for sharing your experiences and insights with us today.

And a big thank you to you for listening to the podcast. We hope you found it interesting and useful.

As ever, if there's anything that we've discussed that you have your own views on and would like to share with us, then please do reach out, email, give us a call. We'd love to hear from you. So thank you very much.

Saima:

Thanks so much, Nathan.

Adam:

Thank you.