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Topics covered in our report
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Consumers
- Expect ongoing scrutiny of firms’ responses to the FCA’s 2020 measures to protect consumers from unfair disadvantages arising following lockdowns – particularly relating to vulnerable customers.
- Issues concerning firms’ conduct of unregulated business (eg commercial lending) may be viewed as an indicator of risks in a firm’s regulated business areas.
- 2021 may bring scrutiny of firms’ approaches to SME lending: enforcement action against firms and senior managers (whether in respect of lending falling within the regulatory perimeter, or unregulated activity carried out by regulated firms), complaints to FOS or BBRS, class actions where failings have a widespread impact or breach the LSB guidance for dealing with Business Customers (applicable to government-backed schemes) are all a possibility.
- We may also see the FCA attempt to apply TCF to areas such as pricing and the possibility of enforcement action across a wider range of conduct matters.
109% increase in FCA scam warnings issued*
*Calendar year 2020 (pro-rated from data to 10 Nov) vs 2019
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Market conduct
- FCA intends to open more market manipulation investigations – expect a rise in insider dealing and market manipulation cases based on conduct during lockdown.
- Remote working has led to increasing reliance on firms’ monitoring and surveillance systems. The FCA now expects firms to have overcome issues arising out of the operation of these in a remote environment.
- Firms should ensure their market abuse risk assessments respond to the current circumstances, make necessary adjustments to monitoring and surveillance, and review PA dealing controls including awareness-raising amongst staff.
- Corporates continue to be in the FCA’s spotlight, especially as to the timing and content of announcements and related internal controls and governance. Firms should be mindful of new types of inside information brought about by Covid-19.
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Operational Resilience
- Expect increased Enforcement-led focus on lessons learned relating to operational resilience during the pandemic, accompanying the introduction of new FCA, PRA and BoE rules intended to build the operational resilience of financial services.
- IT change programmes continue to pose significant enforcement risks – third party outsourcing and change management generate the most technology incident reports to the FCA.
- Outsourcing remains a significant FCA/PRA focus area – firms must exercise sufficient scrutiny and control over third parties performing key functions.
- Cyber risk increased in 2020 – new FCA/PRA operational resilience rules suggest that firms should bolster their capabilities not just to identify and mitigate cyber-risks, but also to detect and respond to risks as they crystallise.
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AML and Financial Crime
- Financial crime is one of the most significant global enforcement risks for firms – some of the FCA’s most significant fines in the past two years related to AML breaches.
- Common issues arising in enforcement cases include resourcing constraints and internal challenge; timeliness of CDD; weaknesses in automated processes to detect financial crime; inadequate policies and procedures; and adherence to UK requirements when relying on global centres of excellence or shared service providers.
- Continued FCA emphasis on a more integrated approach to managing financial crime risks, including anti-bribery and corruption, and the use of more sophisticated surveillance and data.
- Fintechs and challengers responsible for much of the growth in DAML SARs filings. Their innovation and new tech may make them targets; they should grow and adapt their financial crime controls as their businesses develop.
247% increase in DAML SARs filed by fintechs*
52% of all DAML SARs are now filed by fintechs*
*UKFIU reporting year 2019-20
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Conduct, culture and governance
- FCA and PRA regard culture as playing a significant role in reducing conduct risk. It sees a link between poor culture and harm to consumers, markets and other stakeholders. In wholesale banking, the understanding and identification of conduct risk is viewed as remaining “unacceptably weak” (Five Conduct Questions 2019/20).
- In 2021 we expect greater scrutiny of firm culture as a means of ensuring the quality of decisions made at speed in response to pandemic-related risks.
- Continued focus on whistleblowing arrangements and protection, with several ongoing investigations and a whistleblowing VREQ published in early 2021. Whistleblowing arrangements must evolve with working conditions and the subject of reports, particularly whilst remote working. FCA shifting focus towards the need for firms to foster a “listen up”, as well as “speak up”, culture.
- Continued scrutiny of the way that reward arrangements incentivise/disincentivise conduct: this has underpinned some recent retail enforcement actions but has wider relevance.
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Practice, policy and procedure
- With the pandemic FCA and PRA concentrated upon urgent measures to address threats of immediate harm, such as implications of widespread remote working, consumer vulnerability and market volatility. Recognising the diversion of resources, enforcement work continued but there was some case rationalisation and re-prioritisation.
- Expect a short term reduction in the number of new investigations opened and a continued increase in average case length. During 2021, the FCA is likely to shift from immediate harm prevention towards enforcement action in respect of inadequate implementation of FCA’s Covid-19 guidance and investigative work in priority areas such as boiler rooms and scams.
- Continued pressure on the FCA to act in respect of unregulated activities and even unregulated firms, particularly in cases of consumer detriment. In 2021 this may coalesce around SMEs’ obligations to repay loans made under government-backed schemes.
- International collaboration remains a priority on cross-border investigations.
Key contacts
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