Drop in FCA fines does not signal return to regulatory 'light touch', says enforcement head

Giving a speech in London last week, Mark Steward of the FCA said that tougher accountability for senior managers was creating a "different dynamic" with regards to enforcement.

The new 'duty of responsibility' on senior managers imposed by the Senior Managers Regime (SMR), which came into force in March 2016, meant that it was now less likely that firms would agree to early settlement, Steward said.

"First, we don't expect senior managers to agree so readily to pay high fines to resolve cases," he said. "We expect there will be more contest and more litigation."

"Secondly, firms may well be reluctant to spend such high sums to resolve investigations where those resolutions do not also resolve cases against senior managers who may also be in our cross-hairs. And thirdly, there lurk latent tensions in the way in which firms may self-report misconduct or cooperate with the FCA where senior managers in the firm may also be or become subjects of investigation for the same matters," he said.

Steward said that although firms were "often eager to provide us with their own investigation reports" in response to misconduct, there was an "inherent conflict of interest as the reports have been commissioned by and prepared for senior management who may well be part of the problem".

"I am yet to see an internal investigation report that has filleted the involvement of existing senior management in suspected misconduct," he said. "In these circumstances, the public interest requires a full and thorough investigation by the regulator."

"All of this means investigations need to be more thorough with stronger disciplines and, where evidence of misconduct is sufficient, there is more likely to be a dispute," he said.

The SMR, which came into force on 7 March 2016, is designed to make it easier for the regulators to hold senior individuals within banks personally accountable for failings on their watch. It requires firms to assign responsibility for certain areas of the business to named senior individuals. The rules currently apply to banking staff, while a separate Senior Insurance Managers Regime (SIMR) applies to insurers. The rules are due to be extended to all regulated financial firms from 2018.

According to Steward, the FCA and its predecessor, the Financial Services Authority (FSA), imposed more than £3 billion in financial penalties over the last five years. However, most of these came out of early settlements with the firms involved, and were imposed before 1 April 2016, he said.

"In most of these cases, the firm took the full weight of responsibility and culpability without any action being taken against any member of the senior management of the firm," he said.

"While there is an undoubted public interest in cases resolving themselves through agreement, I would like to make early detection rather than early settlement our primary virtue. This is not the soft option, by any means," he said.

Proposed changes to the FCA's dispute process were particularly timely given this "different dynamic", Steward said. The FCA consulted last year on introducing streamlined 'focused resolution agreements' in partly-contested cases, through which a firm or individual would be able to agree all relevant facts and accept the regulator's conclusions on regulatory breaches, but would be able to refer the action that the regulator plans to take to its internal Regulatory Decisions Committee (RDC) for review.

"The aim of every proceeding will be to ensure fairness and, where the person is found to be liable for misconduct, to ensure the sanction properly reflects the gravity and impact of the misconduct on our markets and the consumers," Steward said.

The FCA would be announcing its final decision soon, but had received "several supportive submissions" in response to its consultation, he said.