Current climate, key drivers and issues in FCA enforcement

May 2023  |  SPECIAL REPORT: FINANCIAL SERVICES

Financier Worldwide Magazine

May 2023 Issue

On 1 April 2023, the Financial Conduct Authority (FCA) hit its 10-year milestone. As it nears pre-teen status, we see an increasingly confident regulator take a more interventionist approach to firm supervision, addressing issues via its supervisory powers rather than wait for formal FCA enforcement referral (and the evidentiary, practical and legal hurdles this would then involve).

This proactive approach is reflected across a wide range of issues where the regulator intends to prevent and remediate consumer harm. This is against a turbulent background involving anticipated global recession, proposed new FCA powers and Mark Steward, executive director of FCA enforcement and market oversight, stepping down in Spring 2023 after seven years in the role.

We set out below a more detailed summary of the current climate, key drivers and issues we foresee in FCA enforcement for firms to focus on in the coming months, focusing on how we anticipate the Consumer Duty will impact on heightened supervisory and enforcement action and firms’ redress and remediation processes. We also summarise the key potential areas where we foresee a rise in mass claims, complaints, perimeter issues and FCA enforcement action.

Consumer Duty

The new Consumer Duty will apply to open products from 31 July 2023 and back-book products from 31 July 2024. The overarching principle that firms must act to deliver good outcomes for retail customers cuts across all sectors and all regulatory themes. Firms will from 31 July 2023 be required to proactively consider matters in the context of this new duty, so will need to be alive to redress possibilities from that point.

The Consumer Duty is likely to be central to FCA prioritisation decisions regarding conduct after 31 July 2023 in the regulator’s approach to the following. First, enhanced supervision. The FCA will take compliance with the Consumer Duty into account when visiting firms and agreeing risk mitigation programmes and reviews by skilled persons under section 166 of the Financial Services and Markets Act 2000. Second, enforcement action. The regulator is likely to act against firms which are slow to implement the Consumer Duty, particularly where issues have been flagged in portfolio letters.

At present, there is no right of private action for breaches of the Consumer Duty, but we anticipate Financial Ombudsman Service (FOS) referrals will begin within a few months of the duty coming into force. From 31 July we also expect the FOS to proactively refer to the Consumer Duty, which will in turn prompt more FOS referrals by consumers.

The FCA’s rules and approach, particularly in relation to the Consumer Duty and its 2022-25 strategy, are heavily focused on preventing consumer detriment. However, where harm does occur, the FCA places significant value on how a firm has conducted itself when putting the matter right when deciding whether to investigate or take enforcement action. Regulatory escalation may be minimised if a firm follows the FCA’s Enforcement Guide’s guidance and acts “promptly to take the necessary remedial action agreed with its supervisors to deal with the FCA’s concerns” (see FCA Enforcement Guide 2.12.2).

Deploying prompt, effective and comprehensive remediation and redress remains the key tool for managing risk events, and subsequent discussions with the regulator. Under the FCA’s Dispute Resolution: Complaints Sourcebook (DISP) rules, firms need to identify and remedy any recurring or systemic problems and proactively consider offering redress and remediation. This may include, for example, carrying out an analysis of the root causes of customer detriment and making timely changes to controls and management to avoid foreseeable harm. This is particularly relevant as rules under the new Consumer Duty on the investigation of and redress for back-book issues come into force on 31 July 2024.

Key potential areas of focus for mass claims, complaints and perimeter issues

FOS data suggests a sustained trend of high rates of ‘upheld’ complaints in respect of pensions, mini-bonds and short-term credit, a pattern echoed through ongoing claims in the courts. Similarly, the FCA’s proactive supervision and enforcement work under the 2022-25 strategy has thus far focused on high-risk investments and investment scams.

The FCA has worked closely with the FOS and the Financial Services Compensation Scheme (FSCS) on a number of issues. Over the next year we foresee the items outlined below as the areas involving heightened regulatory scrutiny and potential mass claims and complaints.

Pre-paid funeral plan mis-selling and rule breaches. Pre-paid funeral plans came into FCA regulation from 29 July 2022. FOS confirmed in its recent annual report that it has begun to receive complaints about these plans. We also anticipate that we will start seeing regulatory action in this area later this year.

Appointed representatives (AR) oversight and implementation. Oversight of ARs (including introducer ARs) is another priority under the FCA’s 2022-25 strategy. New rules in this area have been in force since 8 December 2022, giving rise to enhanced oversight expectations on principal firms and ongoing enhanced reporting requirements. There is a new FCA department dedicated to AR oversight, signalling significant regulatory investment. Enforcement action is likely against principals that demonstrate longstanding and high-value deficiencies, or control failings which impact vulnerable customers.

Operational resilience. Minimising disruptions through strengthened operational resilience is a key priority under the FCA’s 2022-25 strategy. Following new rules in force since 31 March 2022, there is an expectation that firms will map out their operational risks and business services, test them and invest in controls as soon as reasonably practicable – and by no later than 31 March 2025. This has close links with, but is wider than, the FCA’s approach to IT resilience and cyber crime prevention.

Implementation of the strengthened financial promotions regime. With the growth of social media, the FCA is faced with an increasingly difficult role in policing non-compliant financial promotions, yet has increased its interventions in relation to misleading and rogue financial promotions, and proposed new measures to raise standards in this area.

Changes to approval rules and the promotion of high-risk investments came into effect in December 2022, with further rules taking effect from February 2023. The FCA published Consultation Paper CP 22/27 in December 2022, which supports legislative changes proposed by the Financial Services and Markets Bill. These concern the introduction of a new regulatory gateway, requiring authorised firms intending to approve the financial promotions of unregulated firms to obtain the FCA’s permission, subject to exemptions.

The recent and proposed rule changes in this area will enable the FCA to act more quickly to stop harmful financial promotions being communicated to unauthorised firms, including in relation to high risk investments and buy now pay later (BNPL) firms. While watching this increasingly changing space, firms need to ensure their approved and communicated promotions are clear, fair and not misleading, and they fully and accurately convey the risks involved.

Unauthorised business and fraud. In tandem with its supervisory work on financial promotions, the FCA has continued to use both civil and criminal powers in perimeter cases. In November 2022, the regulator brought proceedings against London Property Investments (U.K) Limited, a related company and two connected individuals. The High Court found that the defendants’ activities breached the general prohibition and were in breach of the financial promotion restrictions. We anticipate that the regulator will bring similar cases to court as it continues to take an increasingly early intervention approach to supervision.

Financial crime. Financial crime systems and controls remain a key priority in the FCA’s 2022-25 strategy. With the PSR consultation (CP22/4) on reimbursement for authorised push payment fraud, and the potential ‘failure to prevent fraud’ offence in the Economic Crime and Corporate Transparency Bill, we expect increasing regulatory scrutiny on fraud prevention.

Defined benefit (DB) pension transfers. The commencement of the FCA’s British Steel Pension Scheme (BSPS) section 404 Consumer Redress Scheme and related enforcement action indicates a renewed focus by the FCA on DB pension transfer misselling.

In December 2022, the FCA fined a financial advice firm (Pembrokeshire Mortgage Centre Limited (PMC)) £2.35m for providing unsuitable DB pension transfer advice. It held that PMC failed to adequately monitor and oversee the quality and suitability of advice given to its customers, that customers were also provided with suitability reports that contained misleading, generic or unclear information, and that PMC breached principles 3, 7 and 9 of the FCA’s ‘Principles for Businesses’. There remain over 30 ongoing and advanced BSPS-related enforcement cases and the FCA has also acted against firms that attempted to circumvent the BSPS section 404 Consumer Redress Scheme.

Firms need to take care when applying pension transfer rules and guidance and consider what proactive remediation steps they ought to be taking in relation to DB pension transfer misselling more generally. This may include, for example, considering the relevance of common drivers of unsuitability from BSPS and obligations under FCA rules (including DISP, the Principles for Businesses and the upcoming Consumer Duty – noting its proactive investigation and redress requirements for back-book issues).

We anticipate an increased number of FOS complaints in the above areas and expect this may cause delays in the FOS being able to deal with complaints promptly and a greater number of open, unresolved FOS cases.

We also anticipate the regulatory perimeter further expanding to include some cryptoassets (following HM Treasury recent proposals) and pre-paid probate plans (given recent FCA consumer alerts). Mass claims and complaints in these areas of course will not be possible until these areas fall within regulation, but these remain areas for firms to keep a watchful eye on going forward.

 

Jonathan Cavill is a partner, Hannah Ross is a senior associate and Nicholas Kamlish is an associate at Pinsent Masons. Mr Cavill can be contacted on +44 (0)20 7418 7014 or by email: jonathan.cavill@pinsentmasons.com. Ms Ross can be contacted on +44 (0)20 7667 0137 or by email: hannah.ross@pinsentmasons.com. Mr Kamlish can be contacted on +44 (0)20 7054 2678 or by email: nicholas.kamlish@pinsentmasons.com.

© Financier Worldwide

BY

Jonathan Cavill, Hannah Ross and Nicholas Kamlish

Pinsent Masons

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