Regulatory enforcement mini-series part 3: FCA Enforcement strategy under the new "Bad Cop, Bad Cop" double act

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 and Wool Exchange in London by two fellow specialists in PRA and FCA investigations, my colleagues Andrew Sims and Adam Jamieson. Thanks, Andrew and Adam, for joining us this morning.

Andrew:

Thank you for having me on the podcast.

Adam:

Thanks, Nathan. Looking forward to it.

Nathan:

So together we've worked on quite a range of enforcement matters representing all types of financial services firms, as well as their senior management.

And our mission for this podcast series is to share with you the new approaches and strategies that we are seeing from the regulators to highlight areas of concern about how the regulators are conducting their investigations, and to suggest what they should be doing differently to ensure that they act both fairly and effectively.

So today's topic is the FCA's relatively new co-heads of enforcement, Therese Chambers and Steve Smart. Therese assumed the role approaching a year ago now in April 2023. And then Steve Smart joined the FCA from the NCA a few months later.

I'm keen to explore with you today what are the changes they're bringing to FCA enforcement? What are the ways in which we will see different styles of investigation, different approach to investigation? And are those things positive or problematic changes?

Andrew, I wonder whether you could kick us off with, what have they said so far in terms of their new approach to enforcement?

Andrew:

Yeah, so one of the key indicators we've seen was actually the 27th of February speech that Therese gave to the Market Abuse and Market Manipulation Summit. One of the very interesting things she did say was she referred to her and Steve as "bad cop, bad cop, double act double act."

And what's very interesting there is effectively it implies that they're going to be using a much more aggressive approach, an assertive and decisive approach to what the FCA is going to be doing.
And a few of the things they said are genuinely positive things; albeit I'm sure in other podcasts and today we'll be discussing, there are some clear negatives there as well.

But one of the things they've said is that the enforcement strategy is going to have the maximum impact in deterring misconduct and crime, obviously, as a starting basis. That's a clear positive. As well, they've talked about speeding up investigations and sending signals to markets and consumers; again, a huge positive.

If you look at what's happened before; I think a year ago; the current FCA delay was 40 months. That's a huge amount of time for an investigation to get going to the end of an investigation.

And in that pace and in that time, clients are really going to be having long time where they're being investigated with uncertainty as to the outcome, not being able to perhaps get other permissions or conduct certain work that they want to do. So if that's sped up, that's a huge positive.

But as I'm sure we're going to be dwelling on today in this podcast as well, there are some clear negatives coming through as well in terms of what we're seeing and what might be done.

Nathan:

What have we actually seen so far in terms of action from Therese and Steve?

Adam:

Well, it's interesting, Andrew, the bad cop, bad cop reference in the speech. Because I think one thing I've noticed is been an uptick in criminal actions and criminal prosecutions, and use of their criminal enforcement powers.

Now of course, they've always had these. But I certainly think they're pursuing those in a slightly different way. And I'm not sure whether that's in part already an impact from Steve Smart having had the NCA background, or whether it's just the types of cases that they're focusing on, particularly in relation to investment frauds. But that's been one thing.

I mean, generally it's been quite a quiet year. From a regulatory enforcement perspective, there've been relatively few outcomes from the FCA. Perhaps that's as part of their portfolio rebalancing exercise, which we're going to be discussing; and also spending the time thinking about what their enforcement strategy is going to look like going forward.

Nathan:

Portfolio rebalancing, tell us: what do they mean by that?

Adam:

Andrew mentioned the long time period it was taking for them to conclude even preliminary findings on regulatory investigations. In a large part, that's due to the caseload. I think they've topped out at around 600 cases, up from approximately 250 a few years ago. And the strain of that has been felt.

And the idea is to try and bring down the number of cases in order that they can progress them more quickly. This is the portfolio rebalancing.

So how do you rebalance the portfolio where you make decisions on the cases that you've got open, as to whether they're going to be pursued? You take action or you close them?

Then in the meantime, you take on fewer cases in order that you can bring that number down to a manageable level. And then work out what that perfect equilibrium is between how long it takes you to investigate your ongoing cases, and then how many cases you can accept into enforcement through supervision and the referrals, in order that you don't get yourself into the same position you were in previously.

Nathan:

Let's just break that down. In terms of the portfolio rebalancing, we've seen, haven't we, a huge number of discontinuances. Some cases that have been going on for years, and I think firms felt pretty certain that they were going to get fined in respect to those matters that have just been discontinued. And then also this new approach to the types of cases that the FCA will take on.

What's your view in terms of the second of those: the new approach to taking on cases?

Andrew:

Well, one thing we're expecting to see, but we're also currently seeing is the FCA almost going for more low-hanging fruits, as it were. So perhaps less-challenging fact patterns, or when the case against a company is more of a dead cert, or indeed where the company has already accepted, or seems to be likely to accept that there has been a breach.

You might see that the FCA supervision will be liaising with a company on a certain case. And actually, where the company is accepting wrongdoing, or indicating that it may be willing to do so, you could actually see the FCA coming in there with enforcement: effectively doing a quick and dirty, and getting a case against the company agreed quite quickly. And indeed, we are seeing a few of those cases at the moment coming through Ashurst.

Nathan:

Right. But doesn't that cut across this idea that they're going to be taking on cases that go to their priority areas? Because it seems to me that there's a choice to be made between, do you go for the cases, as you say, that seem to be clear-cut breaches that you can get through the system fairly quickly?

Or do you go for the cases that are in your priority areas, where you really feel it's important to send a message to the industry? Are they pulling in different directions?

Adam:

I'm not sure. I think it makes sense from an enforcement taking a step back. It makes sense if you're thinking about what's the purpose of FCA enforcement, what's it for? To think about the focus areas for the FCA more broadly and supervision to get the market focused on those issues through enforcement action, if people breach those standards. So focusing on particular target areas, I think, makes sense.
And there's always been an appetite for the FCA to take action against firms bumping along the bottom, firms that have got issues. And it may be that they perceive those as low-hanging fruit. But I don't necessarily think they can't do both.

I think the concern is where they're targeting specific areas is, notwithstanding that targeted approach to referrals to enforcement and choosing those cases, that they're still looking at things with an open mind.

And if they're going to try and do things quicker, I think empowering themselves to take early decisions to discontinue, rather than feeling, "Actually, this is a priority issue for the FCA at large. And we'll doggedly pursue this case for longer than it needs to be pursued."

Andrew:

When we talk about target areas, do we mean particular regulatory breaches or particular industries? Or could it be both?

Nathan:

Yeah, I think probably both. I think that they have particular areas, financial crime being a key one. But also aspects of the market where, both through aggressive supervisory action and appropriate enforcement action, that they're sending some pretty clear signals to those sectors in the market.

Adam:

I mean, what you used to get typically would be they would look at certain sector, they would do a thematic review on a particular issue within that sector. They publish their supervisory paper with good practise, bad practise. And very often, a couple of firms who might have been within that review, who were seen as being some of the bad actors, may be referred to enforcement.

I wonder whether that's the type of route they'll go down if they're going to try and realign themselves with supervisory priorities.

Nathan:

Yeah. So putting aside the very active and aggressive supervisory activities, particularly with some of those smaller firms ... but not exclusively smaller firms ... Do you see this new approach from the FCA as being a bit of back to the future in terms of going back to the old FSA approach to enforcement? I know Therese has been keen to distance herself from that. But isn't that effectively what they're now doing?

Adam:

I think there's an aspect of that. But then there's good things about the old approach in terms of the number of cases they were doing, and the speed at which they were carrying them out.

They have changed, because they're using their supervisory powers more frequently, like their early intervention powers around VREQs, voluntary requirements and own-initiative requirements. So the landscape has changed because they're using their toolkit in a different way.

Are they going back to the FSA of old? Would that particularly be a bad thing? Yeah, I don't know. What do you think, Nathan?

Nathan:

I mean, I think they are. And I don't think they need to be ashamed of that. I mean, I do think that this is a wholesale rejection of the Mark Steward approach of using enforcement as a diagnostic tool, and taking on far more cases.

I think that's been seen to be problematic, just because there isn't the ability to really manage those cases and push them through with appropriate speed.

I think the tactic of using early interviews as a way of deciding which cases you wish to pursue, and which ones you'll discontinue quickly, didn't work. Because the fact is, they would do those early interviews, but they wouldn't discontinue early. As a result, they were swamped by far too many cases that has led to the statistics that Andrew's talked about.

So I think I do see it as a return to the old approach, but I don't see that as being particularly problematic.

Adam:

Empowering people to close cases quickly, and investigators to close cases quickly, I think is really important. And people feeling actually at the FCA, whilst of course they'll be challenged, that they'll be supported when they say, "Look. We've had a quick look at the evidence here, and we really don't think this is a case that warrants disciplinary action."

Being able to do that in a swift way is difficult. But I think that's the key challenge for them if they're going to successfully pursue this strategy.

Nathan:

Andrew, you mentioned this idea of "quick and dirty" investigations: this idea of commencing investigations where you know that the firm has pretty much admitted in supervisory correspondence as to wrongdoing.

We've seen a number of examples recently of the FCA enforcement team really launching investigations; not doing a thorough investigation, but then saying to the firm, "Come on. I'm sure we can wrap this up quickly."

Do you see that as being part of the new approach that's designed to bring down the average time of each investigation?

Andrew:

Absolutely. One of the real issues with the long amount of time that the FCA was taking was credibility. People were looking at them as a regulator. Accusations perhaps that they were falling asleep at the wheel, missing things, taking too long, dawdling.

If there are these quick investigations, people will actually be like, "Look, this is a regulator which is taking action. It can be trusted."

And my genuine belief is that part of what the FCA will be doing is targeting these quick and dirty investigations, in part, to reduce the wait time.

That's not to say to do an investigation for an investigation's sake. But I think there will be, as we discussed earlier, certain target areas where yes, you'll be like, "We want to close cases against particular clients in a certain industry," or in relation to specific allegations. I think they'll be looking for those.

And a lot of time we'll go into working out where they can bring investigations. Hopefully, that will mean that the wait time goes down for actual investigations once they happen.

Adam:

If you want to do investigations quickly, you need to keep the issues fairly narrow. And as soon as you start broadening it out into other issues; if you go kicking the tyres at any business; then you're going to find policies that might not be being complied with. But ultimately, you've got to focus on the issue at hand if you're going to do things in a quick way.

One of the legacies of the last few years has been this idea that in order to pursue disciplinary action, or settlement discussions even, you need to be litigation-ready.

You need to have looked at everything, compiled all the evidence, and be ready for almost contested proceedings in relation to it, which was never the old way.

They would have gathered evidence and have a good understanding as to what had happened. But ultimately, if a firm wasn't going to settle, there would be a gap; sometimes a significant gap of time whilst the FCA prepared itself for those contested proceedings.

Nathan:

Yeah.

Adam:

And if you front-load that, then of course it's going to take a lot longer. And it would appear that we're seeing the signs that they're moving away from that approach. Which I think, frankly, is probably a good thing for firms, and a good thing for the FCA.

Nathan:

So in a way, this is the PRA Early Account Scheme on steroids. The FCA is looking for those early settlements without conducting its own investigation.

If that's right, what will the impact be on the types of cases it takes on, and cases against individuals?

Adam:

Yeah, I mean, look. I guess it's interesting, isn't it, where you compare it to the Early Account Scheme. And they haven't ruled out doing something similar themselves.

I think there's going to be an appeal to cases where there's been an internal investigation already carried out, where there's been a skilled person review. Those findings can be piggybacked on, because of course that will make things quicker.

Because absent that, they're still going to be doing investigative work. They're going to be issuing information requirements, gathering evidence; and that will take time.

So I think there'll be some cases where actually you can do it much quicker, because the position's already quite clear. And you only really need to kick the tyres of a case theory, or findings that have already been made by a third party, say a skilled person.

And there'll be other cases where actually they do need to do the hard graft themselves. And they might wish they had an Early Account Scheme equivalent.

Nathan:

But it feels like both the PRA and the FCA are embracing a world that didn't exist a few years ago of being willing to settle without having conducted their own thorough investigation. I think that feels to me like a real change in mindset.

Andrew:

I think a really perhaps impossible question to answer; but I'm going to ask you both anyways, and I appreciate you've got a few more years experience on me.

Adam:

Just a couple.

Andrew:

But how long do you think the FCA will be targeting bringing its cases down to? What would be the average length that they'll be hoping for?

Adam:

Historically, I think 16 months from opening to a settlement was seen as being a good period of time, a reasonable period. I think anything under 12 months would be very optimistic.

Obviously, some cases can be discontinued quickly, in six months and under. But if it's a case that's going to be pursued: when you average it all out, I mean, my feeling is between 15 and 18 months would be a good metric.

Nathan:

Yeah, I mean, I think here you have the misleading nature of averages. Because you often have investigations commenced into, for example, suspicious dealing ahead of an announcement. Those are quite quickly investigated, and then discontinued often within a few months. Because the rationale for the trading can be seen quickly, and the FCA can discontinue those investigations.

You then have some that go on for years and years. And I think the focus will be on a combination of really reducing those very, very lengthy investigations down.

But also having some systems and controls failings where they really get in there early, they accept the firm's own findings of breach, and they don't feel they need to collect all the evidence to draught a very, very long final notice. But are happier putting out shorter final notices that really focus on the key issue.

But I do have questions in my mind as to the impact that will have on cases against senior managers. We've seen under Mark Steward where there's a systems and control failing, typically three or four individuals placed personally under investigation, both in the first line and the second line, where they had some responsibility for the area of the business where the problem had occurred.

And I think if you're going to be doing quick settlements with firms on those systems and controls failings, it's a difficult ask, then, as to taking action against individuals. Because then you will need to do thorough and lengthy investigations.

And I think there's a strategic decision to be made by the FCA as to whether they see the benefit of quicker investigations, or whether they see the need to go after individuals.

And obviously, so far in terms of those managerial obligations, it's been the PRA rather than the FCA that has had those outcomes.

Adam:

If they're investigating individuals in parallel with firms, as we've seen in the past, then there's obviously a benefit to individuals of them doing things quicker: particularly if they need to be much quicker at having a look at individuals. The real culpability points and quickly discontinuing those cases where it's appropriate to do so.

Of course, the flip side is if you don't do the investigations into individuals in parallel, you carry out your investigation into a firm, the firm settles, and then you launch investigations into individuals.

I think in a lot of respects, depending on how much evidence you've gathered that's relevant to the case against that individual, you are starting from scratch. That will need to be acknowledged. And there'll need to be a thorough investigation in the event that you are looking to actually take disciplinary action.

Nathan:

Yeah. Just to finish off, what sort of priority areas do you think that the FCA under Therese and Steve will be focusing on? What do you think the issues are that they will really be spending their time wanting to get messages out to the market on?

Andrew:

One of the key ones they've mentioned; and I think it goes without saying, this is something we will be seeing more of; are non-financial misconduct cases.

This has obviously been a huge priority area for the FCA. And we are going to see that in the investigations that they do bring, going forwards.

I perhaps would like to draw attention here; and I appreciate this to be something that you referred to in your first podcast; but the whole FCA naming and shaming in relation to non-financial misconduct is a really interesting issue there.

Again, it will depend on what the suspected breach is. But you can imagine that, for instance, if the misconduct is harassment or bullying; as soon as the FCA naming and shaming the company on what the breach is in relation to, you could get quite a few whistleblowers or witnesses coming forward to discuss that.

And what we will see is clients perhaps might be slightly more blindsided by the allegations that are brought out. It creates an area of uncertainty. But it could also increase case lengths as well, because all of a sudden you'll have the FCA being given more allegations potentially in relation to certain cases, or a more complex fact pattern.

And that in itself could take longer to investigate and could bring the average case times up, particularly in relation to those cases.

Nathan:

Yeah, so that's non-financial misconduct into firms, into the way that they've handled non-financial misconduct issues. What other issues, Adam, do you think Therese and Steve will be focusing on?

Adam:

I mean, maybe with the exception of the non-financial misconduct culture agenda, I don't think the themes are going to change much from what we've seen in the past.

The financial crime focus, particularly anti-money laundering systems and controls, anti-bribery and corruption; sanctions compliance, I think will remain a big focus across sectors.
Market abuse within wholesale markets, again, I think will be the primary focus, both in terms of active misconduct and insider dealing, et cetera, but also surveillance controls and how firms are managing that.

Operational resilience: we've got new rules coming in for dual-authorised firms in March 2025. People need to be able to comply with their tolerances that have been set for outages.

And again, whether it's cyber attack issues or operational disruptions that impact the market or customer service, I think we'll see enforcement action where firms haven't been properly prepared for those events.

And then finally, there's the consumer piece and the retail piece. Obviously, the consumer duty is enforced now. There've been some mixed messages around the extent to which when we're going to see consumer duty enforcement action. And maybe it's not going to take the traditional guise of disciplinary enforcement action by the FCA. But they're going to be using intervention powers.

And that's what we seem to be seeing more: is where they're looking at voluntary requirements, say around marketing or customer comms or whether a particular type of product's going to be offered in the way that it's been proposed.

Saying to firms, "You need to enter into a requirement that you are not going to do this, or do this in that way. And if you don't, then we'll pursue more aggressive action against you."

And then separately, "How are you going to put it right? How are you going to fix it? If there's been some detriment to them, to consumers, then what's your position on redress? How are you going to compensate people?"

And thinking about redress as part of the enforcement toolkit in a way that it hasn't been in the past. And maybe Therese will bring that to the role; she's previously held senior roles within consumer supervision.

And I think taking those positive actions and being able to point to, "Look, this is how much money went back into consumers' pockets as a result of the action we took," will be something that the FCA will say.

"That's a metrics of success. That's something that we are keen to tell people that we are doing and is a good use of our time and resource, rather than just finding firms for having made mistakes in the first place."

Andrew:

Absolutely. And Therese did say, I think back in February at the Market Abuse and Manipulation Summit, that the FCA will be prioritising compensation to consumers over fines. And that's part of what they believe is a right thing to do. So I think we will see some of those consumer redress claims coming through.

Nathan:

So we've talked a lot about Therese and her impact on the department. What about Steve Smart? We've heard less from him. How do you see his role alongside Therese? And how's it going to really impact on how the FCA does its investigations?

Adam:

It's a good question. He's obviously not come from a financial services background, at least in his last role. And it'll take him time, I'm sure, to get up to speed with the way the FCA works and some of those focus areas.

I've got some scepticism about how two people generally can make decisions together if they're not taking the divide-and-conquer route, which I understand they're not; that they are going to be making decisions together, and what impact that will have.

They've obviously got particular skill sets. Like I mentioned earlier, Therese has obviously been at the FCA for a long time. She's been within consumer supervision, et cetera; so I'm sure is very familiar with some of those issues.

Steve, I think, will contribute more on the criminal side and also in relation to how they can deal with data, and how they can analyse data that they're getting. They've obviously got pretty sophisticated systems in relation to, say, monitoring market abuse. But perhaps bringing in data in other areas, and in some of their retail work, could be one area that he focuses on.

And also technology around investigations: because with AI coming through, we are seeing more and more in the way that we carry on our practise about how AI can help us, how it can speed up review of millions of documents, which in the past with legacy investigations, has really slowed down the way the FCA can act. Because they've got long relevant periods for breaches. They've got millions and millions of documents; how can they deal with it?

So there's an opportunity there around technology, notwithstanding the public procurement issues that they have in bringing in New Tech.

But leaving that to one side, I think I'm sure Steve will have views on how they can do that better and analyse data better.

Nathan:

And it's quite telling, isn't it, that they have talked about doing the role jointly. And yet the matter that we've heard from Steve Smart on publicly, was the arrest of individuals presumably part of an organised crime gang for insider dealing, market manipulation type breaches. It really feels as if that's playing to his strengths, in terms of his past career experience and his particular skill sets. Whereas Therese-

Adam:

And also cooperation with other regulators too.

Nathan:

Absolutely.

Adam:

And working with other authorities on some of these matters. That's not always an easy thing for regulators to do. Everybody wants to take the case for themselves often. And it can be difficult and challenging to have those discussions with other regulatory bodies and work with them, particularly internationally. So perhaps as you say, that will be a focus area.

Nathan:

So despite what they've said, I suspect that they will move towards their own areas of focus and to carry out the role in that way, rather than entirely jointly.

Adam:

It's probably inevitable, isn't it?

Nathan:

Well, thank you so much, Andrew and Adam, for sharing your experiences and insights with us today.

A big thank you to everyone listening to the podcast. We hope you found it useful and interesting. As always, if there's anything that we've discussed that you have your own views on, then please do drop us an email, give us a call. We would very much like to hear from you.

So from the Fruit and Wool Exchange, it's goodbye for now. And please do remember to subscribe to be sure to catch the next edition of the Ashurst Regulatory Enforcement Podcast.