Record-Breaking Financial Penalties Exposes Need for Conduct Risk Framework and Clearer Understanding of FCA Expectations within Businesses

In its first year of existence, the Financial Conduct Authority has shown to have a far more proactive and hard-line approach to regulatory enforcement in comparison to its predecessor the Financial Services Authority, a stance reinforced byWolters Kluwer Financial Services’ research described in its Compliance Resource Network. The FCA has issued financial penalties amounting to a record breaking £409million*, the majority for breaches of Principles 3 (management and control), 6 (customers’ interests) and 7 (communications with clients) with 13 financial penalties issued for mis-selling and or misleading provision of information and eight for market abuse. Wolters Kluwer Financial Services’ experts have evaluated the effect the regulator has had on compliance culture in the U.K. market over the past 12 months by highlighting six key lessons learned: 

• The FCA appears most concerned with enforcement actions against larger institutions through its substantial penalties rather than the masses, such as hedge funds, asset managers and IFAs.
• “Tick box” compliance culture has been removed as the regulator now expects full transparency on transactions, internal processes and governance on demand.
• The FCA’s expectations have evolved over the past 12 months, moving away from regular routine compliance visits to more focused thematic reviews of which it has published 15.
• The FCA is paying less attention to discussion papers, having only issued one so far and more on taking decisive and definitive action at an earlier stage.
• The regulator has come good on its word to intervene earlier in institutions’ product development, addressing root causes of problems for consumers, scrutinizing an institution’s governance and how it designs, operates and sells products.
• Despite the hard-line stance demonstrated by the FCA, institutions are still allowing breaches of its Principles of Business.

The FCA and Prudential Regulation Authority became active on April 1, 2013 following royal assent of the Financial Services Act 2012. Today’s CRN research also shows the following key findings over the 12-month period:

• 45 financial penalties handed out in total by the FCA, less than the FSA in 2012.
• 135 enforcement actions of note issued by the FCA.
• 7,620 combined FCA/PRA Handbook pages updated.
• £310 million in fines handed to banks alone.
• 13 financial penalties issued for mis-selling, the most of any reason.

“The £409 million of fines issued by the FCA is a truly staggering figure in such a short space of time and the fact the same principles are continuously breached suggests that firms are not adapting to the change in initiative exemplified by the workings of the new regulator”, said Mary Stevens, manager Regulatory Analysis Europe at Wolters Kluwer Financial Services. “If the industry is to avoid making the same mistakes, firms must place the highest priority on developing a clearer understanding of what the FCA requires of them and monitor existing and new products and services on an ongoing basis.”

Read extended commentary from Mary Stevens here.

“There is a strong need for many financial institutions to explore what conduct risk involves and how to apply it to the infrastructure of their organizations,” said Richard Pike, market manager for Non-Financial Risk at Wolters Kluwer Financial Services. “Unless firms put in place a process to systemically identify potential conduct risks and risks of unfair treatments of customers across all products and business units, we can certainly expect the FCA to continue to make example of those firms who step out of line.”

*Fines accurate as of 24 March 2014

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Wolters Kluwer Financial Services provides more than 15,000 customers worldwide with risk management, compliance, finance and audit solutions that help them successfully navigate regulatory complexity, optimize risk and financial performance, and manage data to support critical decisions. With more than 30 offices in 20 countries, our prominent brands include: AppOne®, ARC Logics®, AuthenticWeb™, Bankers Systems, Capital Changes, CASH Suite™, FRSGlobal, FinArch, GainsKeeper®, NILS®, TeamMate®, Uniform Forms™, VMP® Mortgage Solutions and Wiz®. Wolters Kluwer Financial Services is part of Wolters Kluwer, a leading global information services and solutions provider with annual revenues of (2013) €3.6 billion ($4.7 billion) and approximately 19,000 employees worldwide.