Change for the better: the FCA’s evolving approach to enforcement

Speaker: Therese Chambers, joint executive director of enforcement and market oversight
Event: AFME Annual European Compliance and Legal Conference
Delivered: 24 September 2024
Note: this is the speech as drafted and may differ from the delivered version

Key messages:

• We are adapting our approach to enforcement to meet evolving threats and maximise the deterrent effect.
• We are making our investigations faster and more focused to nip financial crime in the bud and send timely signals to markets and consumers.
• Enforcement is just one of our tools – industry cooperation, assertive supervision and intervention powers are also key in dealing with harm.

Introduction

You could be forgiven for missing the Department for Transport’s summer publication on official taxi and private hire statistics.

Not everyone’s ideal summer holiday read, I know.

Buried in the report was the revelation that 20% of Private Hire vehicles in England are a Toyota Prius.

For any of us who’ve been caught short in a London shower - or just not felt quite brave enough to face the Central Line at rush hour! - that may not come as much of a surprise.

It certainly hasn’t escaped the notice of internet sleuths, with entire subreddits devoted to exploring that vital question, ‘Why are there so many Toyota Priuses in London?’ 

But the ubiquitous Prius is just one piece of the puzzle that’s seen Toyota grow to become the largest car maker in the world.

Central to the company’s success has been the much-lauded ‘Toyota Way’ of operating, a key part of which is the Japanese philosophy of kaizen. ‘Kai’ meaning ‘change’ and ‘zen’ meaning ‘for the better’…. Change for the better.

It’s about embracing self-criticism and challenging the status quo…

Adapting and evolving to meet new challenges…

Taking a more efficient approach for better outcomes.

I think we can all learn a little something from Toyota - other car manufacturers are available! - and the philosophy of kaizen.

You could even say that we are applying our own interpretation of kaizen at the FCA:

• We are improving our processes and embracing innovation… intervening earlier, acting faster and with more focus.
• We are taking a targeted, outcomes-based approach… not shying away from tough conversations in pursuit of long-term success.
• In short, we are raising the bar on ourselves… enabling a fair and thriving financial services sector for the good of consumers and the economy.

A hard line on financial crime

Key to securing those positive outcomes is the ongoing fight against financial crime.

Why? Because financial crime does not just hurt individual consumers… It hurts rule-abiding firms – not least in the pocket, by adding costs into the system… And it hurts us all, by damaging the reputation of our markets.

For the UK financial services industry to grow and be competitive, investors and institutions need to have trust in it. And how can we expect them to have that trust, if they don’t see system integrity?

That is why reducing and preventing serious harm from financial crime is a focus of our current strategy and will remain a significant pillar in our next, due in 2025.

Enforcement clearly plays a vital role in delivering this aim. Fines, bans and prosecutions are often what the public notice most about our work.

Not surprising when you consider our recent outcomes:

Just this month we fined PWC £15m[2] for failing to alert us to suspected fraudulent activity at London Capital & Finance…

We recently brought charges against 9 so called 'finfluencers[3]’ for promoting foreign exchange trading schemes on social media without authorisation…

And we have over 45 people currently facing FCA criminal proceedings, covering offences from fraud to forgery, insider dealing to money laundering. 

But enforcement action is not just about dishing out punishment; it’s also about educating the whole market on what we expect, and where others have fallen short. 

Collaboration

Collaboration - with both firms and other enforcement agencies - plays an important role.

Take money laundering for example. We supervise around 18,000 firms under the Money Laundering Regulations, and anti-money laundering investigations represent a meaningful portion of our enforcement caseload. Around 15%. Banks play a vital role in helping to detect money laundering in the first place – supporting the FCA to act earlier to nip financial crime in the bud.

This is really important work that not only helps us reduce and prevent crime, but plays a bigger part in boosting the perception of the UK as a trusted place to do business. That is something all of us here today benefit from, and I strongly urge banks to keep up that good work with us.

The FCA also maintains strong relationships globally. We recently worked with the French regulator, the AMF, to censure asset manager H2O LLP for failures[4] which had left investors unable to access their funds since 2020. As a result of this international collaboration, we were able to secure €250m in redress for the investors who had lost out.

Closer to home, we worked closely with the PRA in successfully fining Citigroup £61.6m for failures in the firm’s systems and controls[5]…Failures that had allowed a trader to erroneously sell US$1.4bn of equities in European markets in May 2022 when they should not have. Thanks to excellent collaboration between the regulators, we were able to successfully settle the case within just 23 months.

And I want to touch on a couple of really important takeaways from that particular case:

First, systems need to be designed with real people in mind. Let’s be honest, who hasn’t blindly clicked ‘Accept’ on a pop-up without fully reading it? So controls must be robust: recognising and reflecting human behaviour patterns, constantly reviewed to keep pace with changing market conditions.

Second, let’s learn the lessons of the past few years - especially on common issues around risk management. Yes, we live in a fragile macro-economic environment. But we all know that; this is a ‘predictable volatility’. We must do better, plan better, using all the tools we now have - data and operational - to their full power.

Data and technology

And data and technology are certainly playing a growing role in our work at the FCA.

I like to remind people that the name of my division is Enforcement and Market Oversight.

While our enforcement work might grab the headlines, behind the scenes our Market Oversight teams are quietly working away, using sophisticated digital tools to monitor the market and detect misconduct in real time. I may be biased, but I think they’re the unsung heroes at the FCA!

We have more than doubled our trading data coverage from 500m to around 1 billion records per day, and our systems can interrogate data across multiple asset classes quickly. But of course it’s not enough to just have the data. We also need the tools to use it.

That is where our refreshed analytics come in - helping us spot ever more complex patterns, for example involving organised crime groups.

Our Cyber Forensics Unit is equipped with the latest technology and expertise to handle complex digital forensic tasks, and we are improving those capabilities all the time. Going forwards, our approach will be ever more data - and technology - driven, and I’d strongly encourage firms to collaborate with us in this. Because the quicker we can gather accurate information, the quicker we can respond to challenges as they arise... helping us to speed up and stay ahead of the criminals looking to exploit our markets.

Increased pace and focus

Because if we want our financial services sector to be competitive, if we want our economy to grow, we must protect and maintain the UK’s strong reputation for integrity. High standards of regulation and effective enforcement are critical to that effort. Visibly holding wrongdoers to account gives confidence to consumers, businesses and investors that the UK is a place where high standards are upheld.

We know that the deterrent effect of enforcement action is greater the closer in time it is to misconduct occurring. The longer it takes for outcomes to be determined, the longer it takes for us to send important signals to the markets.

Our data tells us that investigations closed in 2023/24 took an average of 42 months to complete. There are good reasons for these timelines: cases are often highly complex and we, like all enforcement agencies around the world, are adapting to the ever-growing amount of digital evidence that must be analysed. Each case is about 60-70,000 documents! But we believe we can improve on those timelines. We have made significant advances already: 24 outcomes under our belt so far for 2024, compared to 26 for the whole of 2023.

This includes an investigation into Coinbase Group[6] for breaking restrictions and allowing thousands of high-risk customers to make cryptoasset transactions totalling around USD$226m. After an investigation completed in just 16 months, they received a multimillion pound fine.

We have seen some ‘firsts’ in the crypto space, such as prosecuting an individual for running a network of illegal crypto ATMs[7] – a thorough and focused investigation which took 15 months to complete.

We closed 60 operations in the financial year 2023/24, compared to 38 in the previous year - more than 25% of these were less than 2 years old.

And as I speak to you today, my team is actively negotiating settlements in cases where it has taken less than 2 years to complete the investigation.

I am encouraged by these green shoots and we are committed to conducting our investigations at greater pace. Hand in hand with increasing our pace, will be streamlining our caseload and focusing on investigations better aligned to our strategic priorities.

But let me be clear: a reduction in the number of investigations does not mean a reduction in effort. Quite the opposite. It’s about making a conscious decision to identify cases where we believe there may be conduct creating the greatest risk of harm, and where an investigation is most likely to drive the greatest deterrence. Neither does it mean going for the low hanging fruit.

We will continue to investigate potential misconduct by individuals and firms, and will never shy away from challenging and complex investigations. So, whilst we may be opening fewer investigations, we expect to see a greater number of outcomes and a greater impact from our enforcement activity.

Transparency

Now, it’s not surprising that accelerating our investigations and adopting a laser focus on cases we pursue has been widely welcomed. But the lightning rod has clearly been proposals for greater transparency on who we are investigating and why.

While consumers groups, whistleblowers and some other regulators welcomed the prospect of greater transparency, the companies we regulate were overwhelmingly against.

So first, let me assure you all: we are listening. We have analysed each and every one of the more than 130 responses to our consultation. And we are not going to rush this.

Amongst the strong feelings on all sides, I want to return for a moment to what it is we’re trying to solve, and why.

At the moment, bar ‘exceptional circumstances’, we are silent during the period between looking into a potential issue and reaching an outcome. What that has meant in practice, is that ‘exceptional circumstances’ has usually translated into ‘computer says no’ in response to requests for further information. We put forward a proposal for greater transparency on our investigations into firms, where it was in the public interest.

We did so on the basis that appropriate openness could:

• support consumer protection by giving them information that may support their decision-making
• improve the market by highlighting concerning conduct, allowing others to course correct sooner, lessening risk
• assure those who have potentially vital evidence, including whistleblowers, that we’re looking into concerns and our door is open

What’s more, it could address the odd situation we find ourselves in, where a fellow UK regulator can announce an investigation, but we would be unlikely to be able to announce -  also in a factual and measured way  - that we too were running enquiries.

That happened in the recent fine for PwC; the FRC was able to announce an investigation running parallel to ours, around 2 years before we confirmed our findings (and that our investigation had existed at all).

But that is not to say our proposals indicated a sudden switch to a blanket ‘computer says yes’ approach. We are not proposing moving from publicity in zero cases now, to 100% of cases in the future. Rather, a case-by-case approach following assessment of clearly defined criteria - including consideration of the potential impact on the firm and market. But we heard loud and clear that the criteria we consulted on were too high level and lacked specificity.

This autumn, we will intensify our engagement – meeting with trade associations, firms, those on all sides of the debate – exploring how we can develop our proposals. As part of this, we recognise the desire for greater definition on any new public interest test.

Later this autumn we plan to provide greater detail on how it could work in practice. To bring this to life, we will publish case studies examining how the criteria might apply and what announcements could look like, as well as more information on the numbers of cases that might be affected.

We heard clearly too the concern that firms felt they would not have sufficient time to make representations, and will respond to the constructive feedback we’ve received on this point. Allowing firms time to provide their views on whether, what and when we announce, will be part of any proposal we take forward. So I want to reassure everyone here today that we have heard the strength of feeling on this – from all sides – and that this is very much an ongoing conversation.

Since the consultation closed in April, we have been reflecting on the range of serious concerns raised and working to build understanding. We do think the case for a degree more transparency remains strong. But it needs to be seen within the vital context of a focused number of cases likely to deliver the greatest deterrent, and delivered much faster. 

We are committed to achieving this in the right way for UK consumers and markets, so we won’t be rushing into any decisions. We want the right solutions, not the quickest ones. And rest assured, as we work to find those solutions, we will be mindful of all our objectives – including supporting the international competitiveness of the UK’s financial services and the medium to long term growth of the economy.  

Conclusion

So the FCA’s approach to enforcement is changing – but this is not change for change’s sake, or change that should be feared.

It’s change to increase public confidence in financial services.

It’s change for the better. It’s kaizen.

But kaizen can’t just be a one-person job; it requires cooperation and commitment from all of us here today, across industry and regulators…to stop market abuse, keep our markets clean, and to build trust.

This is how we will attract talent to our sector, bring in investment to our shores, and grow our economy.

This is how we will all prosper.