This blog was first published by Law360 on December 17, 2024.

"The FCA's approach to enforcement is changing." So stated Therese Chambers, joint executive director of enforcement and market oversight at the Financial Conduct Authority, speaking in September to the Association for Financial Markets in Europe's Annual European Compliance and Legal Conference in London.¹ Over the last year, we have already seen change at the FCA, and apparently, more is to come.

The year started with a bang, with the FCA announcing in February a potential policy change involving the early and public naming of entities under enforcement investigations, and quicker, more efficient investigations, among other proposals.²

The FCA's announcement of its consultation on greater transparency of enforcement investigations was met with uproar from both practitioners and, unusually, politicians. In response to widespread criticism, on Nov. 28 the FCA published part two of the consultation. This significantly amended the proposals, clarifying that if the proposals come into force, there would only be additional proactive announcements of investigations "in a very small number of cases" when compared with the current policy on announcements.³

The FCA has markedly shifted to intervening early and using powers other than formal enforcement investigations. Many practitioners have seen what could be described as a clearing of the decks, with the FCA concluding historic cases that were opened under the previous head of enforcement without beginning the same number of new investigations. The FCA has also increasingly focused on using data and analytics to take action early and thereby prevent harm.

In terms of subject matter, though, the FCA's focus has predictably remained the same; the prevention and reduction of financial crime has been at the forefront of the FCA's assertive supervision and formal enforcement action. It will remain "a significant pillar" in the FCA's strategy going forward⁴ and was named in a speech by Emily Shepperd, FCA chief operating officer, in late November as the second of four main themes of the strategy the regulator will pursue through 2030.⁵

Early Intervention: The New Enforcement?

According to the FCA's annual enforcement data published in September,⁶ the interventions team advised on 268 cases, up from 209 the previous year. In total, there were 102 voluntary outcomes, almost all entailing voluntary requirements or written undertakings. This reflects the FCA's strategy of seeking to agree outcomes with firms rather than using its own-initiative powers.

That said, everyone knows that these outcomes can hardly be described as voluntary; in many cases, it is clear that the FCA can, and will, seek to use its own-initiative powers if a voluntary requirement cannot be agreed upon. Own-initiative outcomes were also up from 22 in 2022-2023 to 25 in 2023-2024.

Many practitioners reported the continued use of voluntary requirements and written undertakings as the year has progressed. The FCA is also increasingly seeking to reference, and hold individuals and firms to account for, prior undertakings during enforcement investigations. They can feature heavily in compelled interviews and should not, therefore, be seen as a blunt instrument as they may once have been.

Statistics derived from the enforcement data do appear to show a declining trend in the formal, more traditional, form of enforcement; the number of financial penalties imposed halved from 24 in the previous year to 12 during 2023-2024, while the total value of financial penalties imposed — £42,588,840 ($54,023,091) — was just slightly more than 21% of those imposed the previous year. Furthermore, 60 operations were closed, compared to 38 the prior year, and only 25 operations were opened, compared with 34 the year before.

However, regulated firms should take heed: Chambers has emphasized that the FCA "will continue to investigate potential misconduct by individuals and firms and will never shy away from challenging and complex investigations."⁷ Chambers has also stressed that an overall reduction in the number of investigations does not equate to a reduction in effort on the FCA's part.

Practitioners may, however, disagree. Many have commented that effort by the FCA is increasingly being transferred to regulated firm. This is demonstrated by an exponential rise in the use of Section 166 reviews, with 83 being commissioned in 2023-2024, compared to 45 and 37 in the previous two years. The FCA's increasing use of such reviews effectively outsources investigating to a third party and expends the time and resources of the regulated firm, rather than the regulator itself.

So, is early intervention the new enforcement? No, but voluntary requirements, own-initiative outcomes and Section 166 reports are increasingly being used as quicker methods of preventing harm and may well be used in conjunction with later enforcement action.

Financial Crime: A Key Focus of 2024 Enforcement Action

Enforcement data for the year covering April 1, 2023, to March 31, 2024, showed that 83 of the 188 open enforcement operations during that time frame related to the reduction and prevention of financial crime. So too have three of the four largest enforcement outcomes in 2024 to date, in which total financial penalties of approximately £73 million were imposed for failings relating to systems and controls for preventing financial crime in both the retail and wholesale banking sectors.

Further, more than half of the enforcement operations opened in the 2023-2024 year related to financial crime: 13 out of 25 operations. It is clear that enforcement action relating to financial crime has been a significant feature of 2024 and will continue to be so.

2025 and Beyond

The first quarter of 2025 looks set to be dominated by the potential change of enforcement policy. Responses to part two of the FCA's consultation are due by Feb. 17, and the FCA board is aiming to make a final decision on the policy in the first quarter of 2025. The key points of the amended proposals are as follows.

• Firms would be given 10 days' notice ahead of any public announcement of an investigation, as opposed to the one business day originally proposed. This will allow firms to make representations, which many called for. The FCA is also proposing to allow firms an additional 48 hours' notice before publication if the authority decides to announce the investigation.
• The FCA has clarified that if the proposals come into force, there would only be additional announcements of investigations "in a very small number of cases." Investigations that commenced before any changes to the policy come into effect will not be announced under the new policy, unless they are already in the public domain.
• The public interest test used to assess whether investigations should be announced will also now include two significant factors that were noticeably absent from the original proposals: the potential negative impact on a firm of the announcement; and the potential for an announcement to seriously disrupt public confidence in the financial system or the market.

While these amendments have addressed many of the concerns expressed about the original proposals, the proposed policy still departs from the fundamental legal principle of "innocent until proven guilty" as it involves announcing an investigation at an early stage in the FCA's investigative process, before any wrongdoing is proven.

Chambers' emphasis in recent speeches has been on collaboration — between the public and private sectors, and between enforcement agencies. In 2025 and beyond, it will therefore be more important than ever for regulated firms to ensure compliance with all regulatory and investigating agencies, particularly regarding financial crime.

There will be a continued focus on timely and accurate filing of suspicious activity reports, and suspicious transaction or order reports, for example, and firms should ensure they carefully consider the need for concurrent filings about the same subject matter.

The FCA has also emphasized its cooperation and work with international regulators and law enforcement agencies, and we are likely to see more of this in 2025. Shepperd recently acknowledged that financial crime is cross-border and the FCA must respond accordingly.

Although the practical ramifications for large international organizations remain to be seen, we hope this will lead to more streamlined and efficient investigations, rather than disjointed consecutive investigations involving similar subject matter, with slightly different scopes. These significantly increase the burden on the subjects of investigations and those in receipt of compelled information requirements in multiple jurisdictions.

The FCA's approach to early intervention and increasing use of methods other than formal enforcement investigations is set to continue. Make no mistake, however: The FCA will not stop enforcing any time soon. And while 2025 may still be too early to see public enforcement outcomes relating to the implementation of the consumer duty, those will almost certainly come in the years that follow, as will further outcomes relating to nonfinancial misconduct.

Tips for Mitigating Risk of FCA Scrutiny in 2025

The regulator has experienced a year of heavy criticism, culminating in a report by the All- Party Parliamentary Group on investment fraud and fairer financial services at the end of November, which dubbed the regulator's failings "incompetent at best, dishonest at worst."⁸ This will likely strengthen the FCA's resolve for some quick wins and, potentially, high-profile outcomes.

Here are our top tips for firms to mitigate the risk of receiving unwanted regulatory scrutiny in 2025.

Firms must ensure that all regulatory enquiries, no matter how small they may seem, are responded to promptly, comprehensively and comprehensibly. This will demonstrate the seriousness with which a firm takes its regulatory obligations and relations.

Where potential concerns are identified, firms should address those promptly and in full, documenting enhancements to systems and controls accordingly and notifying the FCA if necessary.

Firms that are the subject of voluntary requirements, written undertakings or own-initiative outcomes should ensure that they take these seriously and that they implement the requisite processes to ensure continuing compliance with the restrictions or obligations imposed. The FCA will not hesitate to take action in the event of noncompliance.

Given the political and regulatory environment, 2025 is not the time cut costs in compliance. Ensure that compliance functions are adequately resourced both in terms of personnel and finances.

The political and regulatory focus on nonfinancial misconduct, together with the FCA's imminent publication of new rules, should prompt firms to prioritize an assessment of their risk in this area, and enhance their processes and procedures accordingly.

2. https://www.fca.org.uk/publication/consultation/cp24-2.pdf.

3. CP 24/2 Part 2 Greater transparency of our enforcement investigations.

4. Speech by Therese Chambers, FCA joint executive director of enforcement and market oversight, delivered at AFME Annual European Compliance and Legal Conference on Sept. 24, 2024.

5. Speech by Emily Shepperd, FCA chief operating officer, Nov. 26, 2024.

6. https://www.fca.org.uk/data/fca-enforcement-data-2023-24.

7. Speech by Therese Chambers, FCA joint executive director of enforcement and market oversight, delivered at AFME Annual European Compliance and Legal Conference on Sept. 24, 2024.

8. https://www.appgifffs.org/wp-content/uploads/2024/11/APPG-Press-statement-November-2024.pdf.