The FCA – Transformation to Assertive Supervision

27 May 2022

There can be little doubt that the failure of London Capital & Finance Plc, and the subsequent report by Dame Elizabeth Gloster, have significantly changed the FCA’s approach to the supervision of regulated firms and protection of consumers in an increasingly complex financial environment. 

Criticised in the Gloster report for its passive and silo-ed approach to the identification and mitigation of risk, the FCA under Nikhil Rathi is becoming increasingly assertive and aggressive. In its “Our Strategy 2022 – 2025” paper, the FCA stated that “by acting earlier and more assertively we will prevent harm and intervene before problems become systemic” and this new supervisory approach is likely to impact all regulated firms and their senior managers.

Indeed, since the appointment of Nikhil Rathi as CEO in 2020, the FCA has been undergoing an extensive internal “Transformation” programme that has sought both to implement the recommendations of the Gloster report and also to build the necessary infrastructure to facilitate this move to an assertive model. Key changes include: a recalibrated attitude towards legal risk, with the FCA more willing than ever to challenge firms, litigate borderline cases, and push the boundaries of its statutory intervention powers; a new streamlined decision-making process for the quicker use of supervisory powers without the involvement of the Regulatory Decisions Committee; and significantly investing in its technological capabilities to become “data led” and able to identify harms more quickly than ever before. 

In addition, the FCA now has proactive supervisory teams operating across a range of sectors, including retail lending, payments, and financial promotions. These teams are actively searching for evidence of harm and seeking to mitigate it quickly and effectively. It is also expanding its dedicated interventions capacity, and has recently launched a new Appointed Representatives Department to improve standards in that sector. The FCA is also building a regulatory nursery function, where newly authorised firms will receive more intrusive supervision than those with an established track record of compliant behaviour.  

Similarly, firms that are failing to use their permissions, or acting outside the scope of their permissions, can now expect to be removed from the regulatory perimeter more quickly than ever, whilst those that are considered to be inherently problematic by the regulator and pose an unacceptable risk to consumers (for instance where they fail to reply to information requirements, offer unsuitable high risk investments to retail consumers or have a difficult supervisory history) are also likely to be subject to particularly close attention and possible supervisory action through a new “Worst firms” initiative. 

We are already seeing the tangible impact of these changes. In 2021 the FCA used statutory intervention powers more frequently than ever, publishing 21 First Supervisory Notices (in contrast to 10 being published in 2020). In addition to the greater volume, the FCA also deployed them more aggressively and creatively than before. For instance, against Raedex Consortium Ltd, it extended a requirement to include unregulated group companies for the first time, in its intervention against Dolfin Financial (UK) Ltd. it froze over $1bn in client money and custody assets which led to the firm entering special administration, and it also banned the world’s largest crypto exchange, Binance Markets Ltd, from operating in the UK. 

There is every indication that this is only the start for the FCA and firms and individuals in regulated financial services must understand the potential impact of such changes on their businesses and to seek specialist advice as soon as they perceive they may be the focus of supervisory interest.

FURTHER INFORMATION

For further information on the issues raised in this blog post please contact James Alleyne, or a member of our criminal litigation team.

 

ABOUT THE AUTHOR

James Alleyne is Legal Counsel in the firm’s Financial Services Group. He advises clients on the full spectrum of financial services and FCA-related matters, including on authorisation applications, perimeter and supervisory issues, enforcement investigations and cases before the Regulatory Decisions Committee and Upper Tribunal.

 

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