FCA enforcement report indicates shift towards data-driven interventions

The FCA’s enforcement data for the 2023/24 financial year, which has been released alongside the FCA’s annual report for the same period, shows a 28.2% rise in the number of interventions cases the financial regulator considered compared to the previous year. The shift in its enforcement approach is also reflected in a decrease in the number of enforcement investigations opened last year, marking a 29.4% drop from 34 cases opened in 2022-23 to 24.

Jonathan Cavill, financial services expert at Pinsent Masons, said that the FCA’s enforcement data confirms a trend that many in the market will have observed. “The FCA is increasingly deploying its interventions tools at earlier stages following the development of its concerns, as a means of securing outcomes more swiftly than would otherwise be possible if it were to open enforcement investigations,” he said.

There are two main types of intervention case outcomes. The first one, resulting in voluntary outcomes, involves the FCA suggesting requirements or undertakings that are then agreed by firms. The second one involves the FCA imposing requirements at its own initiative or using similar powers. The so-called FCA own-initiative outcomes are typically unilaterally imposed by the FCA’s Supervision, Policy and Competition (SPC) division, with the support of the FCA’s interventions team within its wider enforcement division.

According to FCA’s report, 102 interventions cases involved voluntary outcomes last year, representing a 24.4% increase from 82 cases in 2022-23. There were also 25 cases where the regulator had imposed requirements on firms, a 13.6% increase from 22 cases in the previous year.

Firms should take note of the low “triggering” position for FCA intervention, Cavill SAID. The FCA’s position is that it only needs to establish that it has concerns that misconduct may be taking place. It does not need to carry out an investigation to formally establish whether evidence in fact leads towards or away from that theory.

“The result is that these interventions tools, which can often mean firms are required to cease a line of business or cease onboarding new clients, with significant commercial impacts on firms, may be applied even where misconduct has not in fact taken place,” said Cavill.

“It is therefore more crucial than ever for firms to take great care in proactively managing their engagement with the FCA, to ensure that engagement does not inadvertently lead to misunderstandings which exacerbate any concerns the FCA may incorrectly hold,” he said.

While interventions cases are on the rise, the rate of enforcement investigation openings is decreasing. About 24 cases were opened during 2023-24, compared to 34 in the year before. The number of open investigations at the end of the financial year is also dropping, due to a higher rate of cases reaching closure. This is driven by the regulator’s recent push towards greater pace and transparency around enforcement cases, and a policy shift within its enforcement division to “prioritise a more ‘streamlined portfolio’ of enforcement investigations, aligned to its strategic priorities where it can deliver the greatest impact”.

On 31 March 2024, the FCA had 188 open enforcement actions, investigating 341 individuals and 162 firms. This was down 16.1% from 224 open cases on 31 March 2023. Last year, 60 investigations were closed, 114.3% higher than 28 in the previous year. Those closed cases led to 21 final notices being issued and £42.6m in financial penalties, as well as 11 criminal convictions.

The trend towards the increased use of interventions tools is also echoed by the increased use of skilled person reports. Under the Financial Services and Markets Act 2000 (FSMA), the FCA can appoint a skilled person to produce a report or require a firm or individuals to provide such a report, to support its supervision and enforcement functions. Last year, a total of 83 skilled person reports were commissioned, representing an 84% increase on the number of skilled person requirements in the previous year. In 17 of these cases, the FCA appointed the skilled person, while firms appointed the skilled person in the remaining 66 cases. These reports provided specialist views on a range of regulatory issues, such as the consumer duty, corporate governance and senior management arrangements, and market abuse. The total cost incurred by firms for providing these reports reached £38.3 million in 2023-24.

Sébastien Ferrière of Pinsent Masons said: “From the FCA’s perspective, its policy shift from enforcement to interventions will mean a smaller amount of financial penalties will be levied. However, the FCA’s calculus is likely to be that this allows a more efficient use of its resources to secure more and earlier outcomes through interventions. The FCA is effectively shifting the onus of evidencing misconduct away from its enforcement investigative teams, and placing the onus of proving a lack of misconduct on regulated firms and individuals that will be eager to address FCA concerns and draw interventions and skilled person reviews to a close. In other words, the FCA is looking to achieve its aim of protecting of protecting consumers and markets more assertively and expediently, while using its resources more efficiently.”

These trends are likely to continue, as policy shifts continue to embed, alongside the new tools the FCA has developed to detect harm. The FCA’s publications notably highlighted the new intelligence tools it has developed, such as the Digital Unified Intelligence Environment (DUIE) that connects data and information across the FCA’s systems. These tools automatically identify trends and instances of harm across its various data and intelligence systems and help the regulator to speed up its analysis and actions to stop harm.

The FCA’s enforcement data also highlighted another development in its supervision regime – a surge in the cancellations of regulatory permissions and final notices under the ‘threshold conditions’ framework, which sets out the minimum standards for authorised firms and individuals carrying out regulated activities. Last year, there were 851 cancellations compared to 316 in 2022-23, while 195 final notices were issued compared to 70 in 2022-23.

“The statistics appear to show that these significant increases are particularly driven by FCA’s efforts relating to requiring firms to confirm or update their details annually and the cancellation of firms’ unused permissions under its ‘use it or lose it’ initiatives,” said Ferrière.