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April 20, 2021

What Enforcement Actions Can We Expect from the UK's Financial Conduct Authority in 2021 and Beyond? (Part 2)


This Advisory is the second in a series on the enforcement landscape in the UK, looking at expected and potential actions from various enforcement agencies. Following on from last month's review of the Serious Fraud Office (SFO), Part 2 considers the position in relation to the Financial Conduct Authority (FCA) and how we see its regulatory actions developing over 2021 and beyond.

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As the UK comes to grips with the government's "roadmap" out of the coronavirus pandemic, attention turns to how specific sectors will fare in the coming months, as the economy shifts gear while we come out of lockdown. As matters stand, the most pressing question for the financial services sector is what terms will be agreed in the Memorandum of Understanding between the UK and EU which is currently being negotiated, as well as whether equivalence will be granted by the EU. Whether and how UK firms will continue to operate in the EU will be dependent on the outcome of these two issues.

The FCA itself is expected to undergo structural and cultural changes in the coming year. With a new CEO at the helm since October 2020, the FCA is expected to seek to address recent criticisms raised against it, particularly in light of the Gloster review into the FCA's supervision of London Capital and Finance, which we have reported on previously. The FCA has already signalled its commitment to putting consumer matters at the forefront of its regulation, with the amalgamation of its supervision divisions with the policy and competition functions. This has created one division with two Executive Directors, with one focused on consumer protection and competition issues and the other focused on financial markets. Additionally, amongst a number of senior appointments, the FCA has announced the appointment of its first Chief Data, Information and Intelligence Officer.

As the FCA looks to bolster its own technological know-how and with its focus on consumer issues, we also expect attention to turn to regulation of the FinTech sector, and in particular those dealing in cryptocurrencies, especially in light of recent publicity around the volatility of the market. Since January 2020, the FCA has been the anti-money laundering supervisor for firms conducting crypto-asset activity, such as crypto-asset exchange providers and custodian wallet providers, and all such firms needed to be registered with the FCA by January 2021. Now that these businesses fall within its purview, the FCA has started extending its regulatory oversight. Last month it was announced that crypto-asset businesses will now be included among the firms that need to submit an annual financial crime report. As we have seen with previous extensions to the types of businesses captured by the Money Laundering Regulations, we expect that the FCA will focus on ensuring sector-wide compliance in the coming year, for example, with requirements to "know your client" and conducting due diligence and risk assessments.

In terms of enforcement issues, the FCA has a number of issues to deal with that have arisen out of the coronavirus pandemic. The FCA itself has had to adapt to provide agile regulation, as the firms it regulates have adapted to the situation. Firms have been reminded throughout of their responsibilities for maintaining effective systems and controls to prevent money laundering and terrorist financing despite the pandemic. This included warnings about the potential for laundering the proceeds of pandemic related frauds, such as scams relating to vaccines. Firms were provided with some concessions, such as allowances for delaying ongoing customer due diligence reviews or reviews of transaction monitoring alerts. However, as we moved into early 2021, these concessions were removed and the importance of ensuring purposeful anti-money laundering controls has been reemphasised. Moreover as the UK moves back into more "business as usual", we expect the FCA to focus on how firms have acted during the pandemic and start to bring enforcement actions for breaches of money laundering legislation.

Another associated area that may see enforcement action is market abuse, with firms having experienced a year of potentially having less oversight over employees working remotely. It is not difficult to envisage instances that have allowed for insider trading, such as housebound individuals from different firms living together and colluding. Both the FCA and the European Securities and Markets Authority have flagged these types of concerns, particularly in relation to ensuring recording of telephone and email communications in remote working, as well as the responsibility of senior management for ensuring the right culture and governance within firms. Enforcement actions are sure to follow where firms have failed in this vein during the pandemic.

Looking further into the future, the FCA is involved in implementing recommendations arising from the Taskforce on Climate-related Financial Disclosures, starting with requiring listed firms to provide climate-related disclosures within their annual financial report. We think that this focus on climate-related matters, as well as other issues of environmental, social and governance matters, is likely to be a growing area of regulation in the coming years and something that financial services firms should be thinking about and addressing in short order.

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.