Inside the FCA: Insights from ex-regulators

Internal drivers

At the heart of our work is advising clients at financial institutions who are under constant internal pressure from their respective boards and stakeholders, as well as managing the firm’s regulatory risks and exposure.  We are conscious that it can sometimes seem as though the FCA is not under the same commercial burdens and that it may appear to be moving more slowly than firms would like.  

However, although not subject to the same commercial pressures, as an independent financial regulator the FCA is under significant pressure to get things right and exercise its powers legally and proportionately otherwise it risks potential legal and political challenge, as well as reputational damage.     

The FCA is accountable to the Treasury and Parliament, regularly giving evidence to and appearing before Parliament’s Treasury Select Committee three times per year, in order for all aspects of the regulator’s work to be appropriately scrutinised.  Good judgment and high levels of accuracy (within a tightly defined budget) are therefore critical – something that, in our experience, is ‘felt’ very keenly within the regulator from the top down. Appropriate use of its tools and powers is also key to avoiding where possible the risk of judicial review.  

Practicalities

It has been widely reported that the regulator has faced challenges in terms of available human resources.  Clearly, this has to be managed and prioritised effectively.  Over the past couple of years for example, the creation of the new Appointed Representatives department and the expansion in the specialist interventions team has been indicative of what was on the horizon, given the increase in interventions and implementation of the new AR regime over the past couple of years.  Looking ahead, the FCA’s progress update on its priority to tackle financial crime, published on 8 February, signals more data driven enquiries and increasing intervention and enforcement activity in the near future - perhaps especially so in relation to fraud, given that over 70 new staff have joined the FCA since April 2022 to work on fraud-related initiatives. See our Regulation Tomorrow briefing for a summary of the FCA update.

The regulator’s work has to be prioritised in a logical way with a risk-based approach.  For example, in enforcement, investigations are prioritised according to various factors, including the level of risk of harm or potential harm to consumers/markets.  From a supervisory perspective, firms may be supervised as part of a portfolio alongside firms with a similar business model that share similar products, target markets and risks. Firms that are identified as having the potential for the most impact on consumers and markets, will be supervised with more tailored objectives. With this in mind, at the point of authorisation, it is key for the regulator to assess a firm’s business model and target customer base to ensure appropriate supervision can be achieved. This may mean that more complex business models or those with a higher potential for risk for markets and consumers may take longer than others to review and approve.  Knowing how the regulator is likely to approach a particular business can help to position the firm to its best advantage.

Tips for managing your relationship and communicating with the FCA

We have found our combined experience of working in the FCA, and understanding the internal pressures and challenges it faces, to be useful when navigating complex legal and regulatory challenges for clients, and have set out below our top tips for firms when managing correspondence and enquiries from the FCA: 

1. Dedicated point of contact: Appoint a sufficiently senior individual at the firm to be responsible for handling regulatory interactions and co-ordinating the response from the different areas of the business as appropriate – this ensures consistency of firm contact from the perspective of the regulator. 
2. The FCA team/department: Consider which area of the FCA the enquiry or other communication has come from, and plan your response accordingly:  your approach may differ depending on whether it’s from one of the specialist interventions or enforcement teams, supervision or perimeter team, for example.
3. Scope: If the enquiry or request does not make sense or is too wide in scope to meet the deadline specified in the FCA’s communication, for example, consider opening a dialogue with the FCA as soon as possible. In light of the obligation to exercise its powers proportionately, it is often helpful for the regulator to understand the implications of an unwieldy information requirement, so that they can adapt the scope and/or timeframe for responding accordingly. 
4. Background briefings: Do not assume that the FCA understands the ins and outs of your business model.  For instance, typically portfolio/flexible firms have little engagement with the regulator and your individual contact at the FCA may be engaging with a number of similar firms. It might be helpful to offer an overview of the firm’s governance structures, the business and its senior management, for example.  
5. Be factual: Refrain from giving an opinion – respond to any enquiry or communication as factually as possible. The FCA is moving to be a “data driven regulator”, so firms should have sufficient, clear, and concise metrics and data to share with them. 
6. Legal privilege: If a requirement from the regulator includes information or material that may be legally privileged, consider carefully whether you wish to disclose that material (and waive privilege), and the associated risks in doing so; if in doubt, seek legal advice.
7. Be transparent and cooperative: In light of the Principle 11 obligation on regulated firms, ensure that responses are timely and do not be afraid to seek clarification on a request.
8. Be proactive: The regulators expect firms to be proactive, especially when an issue or concern has been identified.  Consider whether it is appropriate to put your ‘best foot forward’ and make the regulator aware of any steps the firm is already taking to mitigate an issue or concern that has arisen, as this may reduce the risk of further regulatory action.
9. Senior manager accountability: The FCA will expect sufficiently senior oversight of an issue, so consider carefully who at the firm is best placed to acknowledge the relevant correspondence or attend any meetings with the regulator.
10. The regulator’s priorities: Put yourself in the regulator’s shoes – what do they want to know?  What is the regulatory objective at the heart of the issue: consumer harm? Financial crime?  And how can you provide suitable assurance to the regulator that the risk is being managed appropriately?