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FCA Annual Report 2019-2020 enforcement data

Chris Chapman, Partner and Amanda Plowden, Senior Associate Mayer Brown International LLP discuss the report's findings and advise companies on how best to minimise the cost and reputational risk of an investigation and what the consequences of an investigation would be 

In October 2020, the UK's Financial Conduct Authority (FCA) published its enforcement annual performance report for the year ended 31 March 2020. Although the number of enforcement cases opened in 2019/20 compared with 2018/19 has dropped significantly, from 343 to 184, the risk of investigation remains relatively high – firms and individuals have been presented with new challenges and business failures as a result of the COVID-19 pandemic, despite regulators allowing firms a degree of leniency and flexibility in areas such as financial reporting.

The drop in the overall number of cases opened has not affected the length of time for cases to be resolved. In 2019/20, it took on average 37.4 months for cases which settle early (compared with 29.1 months in 2018/19), and 53.5 months on average for cases which are subject to a formal final decision by the FCA (compared with 50.8 months in 2018/19). This reflects the FCA's current policy of investigating cases thoroughly before agreeing to any settlement. Although the number of new cases opened has decreased, the heavy workload of FCA enforcement teams remains broadly the same, with 646 live cases at the end of 2019/20, compared with 647 live cases at the end of 2018/19.

The length of time for cases to be resolved is likely to be of little comfort to those currently subject to investigation, since longer cases generally also mean more expensive cases. The data shows that the average cost to the FCA of all regulatory and civil enforcement cases has risen to £229,000 in 2019/20, from £103,400 in 2018/19. The cost to firms to conduct the investigations is even greater – costs can escalate to several hundred thousand pounds a year, or for very large cases more than a million pounds a year, in addition to any fines. Investigations also require significant time and resources from internal teams and management, which can distract them from dealing with normal business. On top of all of this, it is possible that senior managers may be joined as official targets of an investigation; the 2019/20 data shows that 16 final notices, including 3 fines, were issued against individuals, compared to the 12 fines issued against firms.

There was a drop in the number of financial crime cases opened during 2019/20 – 11 in comparison to 29 during 2018/19. The FCA published information in mid-September that showed it had discontinued half of its ongoing criminal investigations into breaches of money laundering regulations since January 2020. The cost, length, complexity and – perhaps above all else – difficulty of financial crime prosecutions could be the reason why the FCA has not pursued these actions further, and why fines for breaches of rules (e.g. in relation to systems and controls) are a more common outcome where there are issues related to financial crime.

However, the drop in civil and criminal financial crime cases is not necessarily a signal that the FCA is taking a more relaxed approach in relation to this important area. In 2019/20, the largest single fine issued was for anti-money laundering breaches, against Standard Chartered Bank for £102.2 million. We expect that the FCA's focus on combating financial crime to continue, given the continued emphasis this is receiving in FCA publications, including in connection with the risks arising from potential criminal activities during the COVID-19 pandemic.

We also expect the pandemic to give rise to more enforcement action in other areas, as it creates problems for firms and their investors and customers, which will lead to pressure on regulators to investigate who may be to blame.  

All of this means that regulatory and law enforcement will remain a significant risk area for financial services firms, at least in the short and medium term, and in the aftermath of COVID-19. And it is not just the financial impact that firms will be concerned about. The reputational damage caused by enforcement action can also be significant. For example, following the financial crisis we saw that the public and the media were eager to find firms at fault where the members of the public had been affected. We also live in a time when investigations and other regulatory issues are perhaps more likely to become public than was necessarily the case in the past – as has been illustrated by the media and public interest in #metoo type cases in the financial services sector and, more recently, by the FinCEN documents leak.

Chris Chapman is a partner and Amanda Plowden is a senior associate in the financial services regulatory and enforcement and litigation and dispute resolution practices at Mayer Brown International LLP in London.

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