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This Week in Regulation

13/04/17

Statement on the FCA’s Enforcement Investigation into the Discovery of Misconduct at UK Banking Group

The Financial Conduct Authority (FCA) has recently announced its investigation into the events around the disclosure of misconduct across the Impaired Assets team of a leading UK banking group.

The FCA’s investigation was previously put on hold by Thames Valley Police in 2013, due to the force’s own investigation, which resulted in six individuals being jailed for a total of 47 years. The background and breadth of knowledge of the areas of misconduct is the central point of the FCA’s current investigation into these matters across the firm, as well as communications with the FCA since the misconduct was detected.

FCA bans and fines two individuals for market abuse

A recent ban has been placed on two employees from a former spread betting business that went bankrupt in 2012.

The former Chief Financial Officer and Financial Controller have both been fined for market abuse and have had a permanent ban on them from carrying out any further regulated activity within the financial services industry imposed on them.

During 2007, the owners of the spread betting business floated on the London Stock Exchange across the Alternative Investment Market. The Chief Financial Officer was closely involved in preparing and certifying the documentation used for admission for the flotation. The documentation failed to meet FCA expectations, as it contained misleading information and failed to include key information that was crucial for enabling investors to make an informed decision about investing in the company.

In addition, fake client trading accounts and the unapproved use of real client trading accounts were managed by the Chief Financial Officer under a secretive ‘internal heading’ strategy. The individual used this information to magnify the assets on the company’s balance sheet.

These failings were identified in the annual accounts for 2010 and 2011 that the two colleagues had purposely submitted false critical financial information regarding client liabilities and the company’s cash position. Amounting to a total of £15.9 million in material shortfall within the company’s client money position and this was covered by investors in March 2011. The business was unable to pay out all of this money back to clients which led to their bankruptcy in 2012.

Mark Steward, Director of Enforcement and Market Oversight commented on the behaviour of the employees, highlighting that the two colleagues were knowingly aware of the false and misleading information they provided within the company. Addressing the fact that this information not only led to the collapse of the company but caused harm to the integrity of the markets, he emphasised that this behaviour goes against the FCA’s key objective of making markets work well for consumers. The employees acknowledged they had caused market abuse, settling at the early stages of the investigation.

The FCA also concluded that this case should be pursued under the Market Abuse Regime.

Innovating for the Future: The Next Phase of Project Innovate

The FCA’s Executive Director of Strategy and Competition, Christopher Wollard recently delivered a speech about the next phase of Project Innovate.

The main purpose of Project Innovate is to work through regulatory barriers to enable firms to bring their innovative approach to market for the benefit of consumers. With Project Innovate entering a new stage of growth, the FCA is aiming to evolve its approach on an international, national and regional level. This includes working with international partners to establish key concepts of good innovation, as well as working with more regional FinTech companies, using their expertise to help firms around the country.

The case for innovation in financial services

Christopher Woolard highlighted the FCA’s role in promoting innovation, as well as emphasising their strategic objective in making markets work well for consumers. The FCA’s focus is on promoting competition, researching how markets are performing and making sure market integrity stays intact.

In line with the regulator’s strategic objective, it is also their responsibility to promote competition in the interest of consumers and investigate the operation of markets whilst implementing competition law. Encouraging competition and innovation enables firms to develop better value products and services, leading to improved outcomes for customers.

The main purpose of Project Innovate is to enable firms to innovate in the interest of consumers and reduce the regulatory barriers to innovation. For example, by confirming regulatory expectations, reviewing FCA rules and ensuring policy changes are consistent with regulatory change.

Measuring success

The FCA determines the success of innovative markets, products and business models using three critical measures:

  • Whether more innovative firms have entered the market?
  • Whether large firms demonstrate better innovation and competition, independently and between larger firms?
  • If consumers are benefitting from increased innovation in the market and through better innovation and competition amongst larger firms?

There was concern that the number of innovative UK firms would fall following the EU referendum in 2016. Although there has been a drop in the number of innovative firms since this date, it is not to say that these were a consequence of the referendum but was more likely due to the uncertainty of the economic climate. Since the referendum, there has been a considerable increase in the amount of requests for support and the amount of innovators in this new wave of the project, in comparison to the first cohort. The FCA has accepted almost double the amount of applications in their second cohort, indicating the presence of more innovative firms looking to enter the market.

Embedding our approach

The FCA has emphasised the need to continuously build on their regulatory approach in accordance with developments within the industry, highlighting a wish for their work on innovation to define how they operate in the future.

Future plans

For the remainder of 2017, the FCA wishes to expand the markets they assist firms in establishing automated advice models. For example, helping firms within the mortgage, general insurance and debt sectors, also including firms that seek guidance rather than regulated advice.

The international nature of innovation

The FCA are keen to expand their innovation to international markets, with many regulators around the world interested in innovation and the recent signing of co-operation agreements in countries such as Japan, China and Canada.

Transferring these ideas globally helps reduce barriers to entry and enables firms to have increased freedom and flexibility of the way in which they innovate, benefitting consumers and the wider economy.

However, it is not to be overlooked that expanding the approach of innovation internationally, comes with certain challenges. Different authorities have their own regulatory sandboxes that contain different models and standards, which could go against the FCA’s objective of minimising risk. In addition, if a regulator’s sandbox does not prepare firms to the appropriate standard, firms will struggle to succeed in the market long-term.

It is important to acknowledge that innovation is occurring across many different markets for a variety of reasons, therefore innovation has a different purpose across these different markets. The FCA does emphasise that constructing a thorough understanding of the key concepts of good innovation can strengthen international development and protect the future of the industry long-term.

Regional

In light of the FCA’s innovative strategy, the regulator has recently seen the development of several FinTech companies across the UK, expanding their previous work with firms in various locations through the innovation hub.

Two locations have been identified in the north of the country in the Edinburgh/ Glasgow region and the Leeds/ Manchester area, which would both be great additions to the innovation hub. The FCA is keen to work with local authorities, development partners and firms within these locations.

The FCA has a responsibility to encourage more firms to promote good innovation, both internationally and on a regional level. Emphasising they will continue to support firms as long as they are developing products, services and solutions, improving the outcomes for customers.

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