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08 Jun 2023

First speech by new FCA Head of Enforcement – key takeaways

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Last week, Therese Chambers made her first speech as newly appointed Joint Executive Director of Enforcement and Market Oversight at the FCA. In this update, we highlight the key themes discussed and consider what they might mean for the FCA's enforcement agenda going forward.

Doing the right thing

In some broad and rather philosophical messaging, Therese Chambers encourages those in financial services to face up to problems when they are still small rather than allowing them to blow up - doing the right thing earlier should underpin all of their actions. She emphasises that "Doing the right thing when nobody is watching and when we as individuals do not directly benefit" is "a true test of integrity".

Future enforcement approach

Expect strong alignment between FCA's enforcement work and its overall strategy. Joint leadership of enforcement alongside Steve Smart, given his background as NCA's Head of Intelligence, involves not just two instead of one but may well to lead to a greater focus on AML issues.  She also refers to extensive improvements made to the FCA's data, technology, and digital tools. We would suggest Ms. Chambers' reference to the pair between them having "all bases covered" indicates they propose to follow a broad enforcement agenda.

Volunteering redress

She warns firms and individuals against trying to avoid taking responsibility for the harm they have caused to their customers. In contrast, she praises one particular firm for taking responsibility for a harm it did not cause, offering redress and co-operation beyond what was expected of it. 

In what she described as a highly unusual move for FCA, they decided not to impose a financial penalty on a firm because its new owners put in place a proactive redress exercise quickly.

She compares this with cases where firms have to be "strongarmed" into making things right, seeking to evade their responsibilities, "[o]ften running up large legal bills in the process."

Punishment must be real and meaningful

Enforcement penalties are a very important deterrent in FCA's toolkit. There must be real and meaningful consequences for breach.

However, she refers at the same time to early detection where cooperation from those inside firms can also be extremely effective. At the same time, given FCA's investment in data and technology, they will "find out eventually", so firms are encouraged to come forward first if they have any concerns about activity or individuals. 

Looking back

Ms. Chambers lists a number of enforcement successes in the preceding financial year including imposing financial penalties of nearly £216 million, but also mentions a number of criminal convictions and prosecutions. She also refers to FCA's having 71 open investigations into suspected insider dealing. Should we therefore expect more dual track enforcement investigations? While her stated priority is to "see the maximum possible penalty imposed on the firms and individuals that cause the greatest harm", she added that it was also essential that we secure the maximum redress for consumers.

Redress schemes again…

Ms. Chambers highlights the proposed compensation package of £235 million to investors who had lost out when the Woodford Equity Income Fund collapsed. Ms. Chambers indicated that the FCA's investigation had found that Link Fund Solutions – LFS -  the authorised corporate directors, had made critical errors in managing the fund’s liquidity, and that LFS’s errors meant that the fund failed to have the right level of liquidity from about September 2018. FCA had therefore concluded that LFS had thereby breached the FCA’s Principles 2 and 6.

Through FCA's involvement, the parent company of LFS has agreed to make a voluntary contribution to bolster the funds available for redress by up to £60 million. This substantial sum would not be otherwise available to investors. 

In describing the proposals, she expressed the view that it "offers investors the quickest and best chance to obtain a better outcome than might be achieved by any other means", and although the redress scheme did not cover all losses,  "it is in the interests of investors to seriously consider it."

As such, she said "The proposed scheme offers investors the best chance to obtain a better outcome than might be achieved by any other means."

She also commented that "I notice that there has been some self-interested criticism about this, and the suggestion dangled that there could be greater financial settlements if victims join a private litigation fund. This promises an unrealistic return."

She added that Link Group would also fight the FCA's findings should creditors vote against the scheme, which would further deplete funds available for redress.

Reining in inappropriate activity

Reference was made to an authorised firm's carrying out what FCA looked at as inappropriate activity. In response, the FCA had used its our regulatory powers to ensure the firm immediately ceased all regulated activities, namely by obtaining the appointment of Special Administrators to oversee the wind down of the firm coupled with an injunction and worldwide freezing order against a connected individual.

While the facts of the case are somewhat unusual, she hoped it was clear that the FCA will not tolerate authorised firms being used to improper conduct. We wonder whether this might mean we will see more special administration appointments going forward, either encouraged by or directly sought by the FCA?

The role of lawyers?

Going back to her earlier theme of "could something have been done sooner to stop this?" and doing the right thing, Ms. Chambers indicates that the way a firm responds to an issue is also an opportunity to do the right thing.

While some firms take this opportunity, others "too often" do not. She asks rhetorically "How many chains of command does something questionable pass through before it is queried?" We think this could be a nod to enforcement of duties under the SMCR.

She then refers to the role of lawyers, who "like to see themselves as risk managers". Ms. Chambers indicated that those defending the firms should ask themselves what poses the greatest risk in the long term, saying "You can use your skills to block an inquiry, to claim privilege for every piece of paper and generally get in our way, but what is that going to achieve?"

She questions whether such action will mean the lawyers will get its client off the hook, or that the FCA will look more sympathetically on your call for leniency for your client? Answering her own question, Ms. Chambers says they will follow the evidence and will hold to account those responsible for any failures identified.

Aggressive diversionary tactics may prolong the timeline but will not deflect the FCA from its purpose. She adds that "the extent to which they serve your clients’ reputations and improve their regulatory outcome is interesting to consider."

Relevance to the Consumer Duty

Ms. Chambers ends by pointing  out that the right thing is also at the very heart of the FCA's Consumer Duty .

Conclusion

The key message is that firms and individuals must do the right thing, they must do so sooner rather than later and do so in the right way and not hinder the right outcome. Reading more between the lines, other themes include proactive reporting, the merits of voluntary redress schemes, and potentially continued or greater use of dual track enforcement and special administrations. Ms. Chambers also made clear that she believes she and her team have the necessary tools to root out bad behaviour in any event.

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