The FCA’s Proactive Enforcement Approach Exacerbates Growing Case Backlog

The FCA’s Proactive Enforcement Approach Exacerbates Growing Case Backlog

Blog WilmerHale W.I.R.E. UK

On 20 July 2023, the UK Financial Conduct Authority (FCA) published its Annual Report and Accounts for the year ending March 2023 (the “Report”).1 The Report represents the first opportunity to assess progress made in the three-year strategy set out by the FCA in April 2022 and supplemented by its annual business plan.2

Although the Report and the linked enforcement statistics reflect an increasingly proactive regulator, they also point to a growing backlog of investigations amid calls for additional resources to tackle what the FCA Chair calls a “vast swath of responsibilities” covering “an unprecedented set of challenges and opportunities”.

Focus on Financial Crime

As part of an effort to ensure the efficient use of resources, the FCA announced in April 2023 that it would allocate any additional resources to four of its 13 priorities:3

1. Putting consumers’ needs first;

2. Preparing financial services for the future;

3. Reducing and preventing financial crime; and

4. Strengthening the UK’s position in global wholesale markets.

The FCA’s efforts to reduce and prevent financial crime have involved strengthening its authorisation process, improving assessments of regulated firms and increasing staffing levels dedicated to the investigation and prosecution of financial crime.

As part of this drive, the FCA has established a permanent fraud team, which has put an internal fraud framework in place to assess firms’ anti-fraud systems and controls.

Enhanced Approach to Authorisation

These initiatives have produced some positive results. Investment in staffing and technology has reduced the pending authorisations caseload by almost 60% despite heightened scrutiny of authorisation applications. In the financial year ending March 2023, the FCA rejected 24% of applications, up from 21% in the previous year and 7% in the year ending March 2021, assisted by the establishment of a dedicated authorisations intelligence team.

A significant driver of the increased rejection rate is the high bar set for the authorisation of crypto asset businesses; only 7% of such applications resulted in successful authorisation. The FCA has collaborated with other law enforcement agencies in its efforts to reduce illegal crypto activity, including assisting with an investigation that resulted in restraining orders for over £3m in crypto assets in November 2022.

In addition to a tougher approach to authorisations, the FCA has sought to tackle the risk of harm caused by firms that are already authorised. This has led to a 30% increase in the number of firms whose authorisations have been cancelled by the FCA and a 34% increase in the number of alerts caused by potentially unlawful online activity.

The FCA continues to invest in technology to assist its market oversight responsibilities and is phasing in a new Market Surveillance system that will be fully operational by October 2023.

Assessing the true impact of actions taken by the FCA to reduce levels of fraud and other financial crime is a difficult task. Although the number of reported victims of fraud fell by 3.5% year on year, according to the National Fraud and Intelligence Bureau (NFIB), actual losses increased by 6.8%, albeit this represents a significant slowdown in the rate of growth over the previous year, down from 53%.

Enforcement Statistics Paint a Mixed Picture

The view held by market participants of the FCA’s success is decidedly mixed. Half of firms responding to the 2022/23 FCA and Practitioner Panel Survey think that market abuse remains an issue in the UK and only 60% consider the FCA to be effective at promoting market integrity, protecting markets from delayed or misleading disclosures, insider dealing and market manipulation.

This equivocal picture is reflected in the FCA’s enforcement figures. Although the number of fines handed out to individuals tripled over the past year to 9, the overall value of fines issued to firms and individuals fell from £313m to £215.8m.

The FCA has ramped up the use of its investigatory powers, opening 613 new financial crime supervision cases over the year, an increase of 10% over its 2021 baseline and an increase of 65% over 2022. The FCA opened 158 interventions cases in 2022/23, up from 142 the previous year, and it also opened 51 cases using its own initiative powers, up from 35 the previous year.

The FCA’s increasingly proactive approach sits uncomfortably alongside the time it takes for the FCA to complete an investigation. The average duration of criminal investigations undertaken by the FCA rose in 2022/23 to 59 months, almost double the duration recorded in the previous year. Including the average nine-month duration of the resolution or litigation stage of a criminal case, this means defendants face an average of over five and a half years from the start of an investigation to a final resolution.

A Call to Arms

Key to the implementation of the FCA’s three-year strategy is putting in place sufficient resources to ensure it can meet its objectives. Headcount at the FCA has increased over the past year by almost 20% to 4,500, with a particular focus on the Authorisations Division and the Enforcement and Market Oversight Division.

However, further investment will be required to meet the FCA’s growing remit and to tackle the backlog in enforcement cases. According to the 2022/23 business plan, a “material increase in funding in cash terms is needed to ensure we can continue to protect consumers from harm, ensure market integrity and foster innovation so our economy can grow”.

To that end, the FCA’s funding requirements show a 7.6% increase in the Ongoing Regulatory Activities (ORA) budget in 2023/24 and a total Annual Funding Requirement (AFR) of £684.2m, an 8.5% increase over 2022/23. The AFR in 2021/22 was £613.7m.

Conclusion

The FCA will point to its more robust approach to authorisations and the enhanced scrutiny of firms that are already authorised as markers of success at this junction in its three-year plan. Likewise, its continued prioritisation of the reduction and prevention of financial crime has led to an increase in investigations, interventions and fines levied against individuals. However, the FCA’s approval rating among regulated firms is tepid. The corollary of increased investigatory activity is a growing case backlog and a negative trend in the time taken to resolve cases. This will only improve with increased funding that is efficiently allocated.


1 https://www.fca.org.uk/publication/annual-reports/annual-report-2022-23.pdf

2 https://www.fca.org.uk/publications/business-plans/2023-24

3 https://www.fca.org.uk/publications/business-plans/2023-24

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