Financial crime has been a key area of focus for the UK Financial Conduct Authority (FCA) for a number of years, attracting some of the highest financial penalties, and this looks set to continue. With improvements to FCA data gathering and increased levels of intervention expected, there are a number of steps that firms can take to help guard against future supervisory or enforcement action.
Firms as a vital first line of defence
The FCA emphasises the vital role played by firms as a first line of defence in preventing and reducing financial crime through “strong prevention cultures and effective systems and controls”. Firms have an obligation to manage the risk of financial crime and operational disruption. This is something the FCA has also emphasised in recent portfolio letters. Extra vigilance is required during times of major geopolitical uncertainty when the threat to consumers and markets posed by adverse incidents such as, for example, cyber-attacks is heightened.
The FCA is on a quest to deliver assertive action on market abuse and is focusing its attention on ensuring that firms have robust controls in place around, for example, inside information. We can expect to see supervisory scrutiny of firms’ systems and controls around market abuse and, in particular, their ability to spot and report market abuse to the FCA.
The FCA has been exploring the use of synthetic data sets to test firms’ financial crime controls. It continues to work on this with a view to making the data available more widely.
The appointed representatives (AR) regime also finds itself in the spotlight. The FCA has pledged to improve oversight of ARs, requiring principal firms to provide the FCA with additional and more timely information on their ARs, and how they are overseen, to help spot risks more quickly.
FCA putting greater resource into intelligence gathering
Through its enhanced data coverage and analytics capabilities, the FCA plans to increase its ability to detect and take more immediate and assertive enforcement action against financial crime and market abuse.
Over the next two years, the FCA plans to significantly upgrade its market surveillance systems, enabling it to keep pace with evolving market abuse techniques and to take advantage of advancements in big data analytics. This will include moving its market monitoring capability closer to real time and improving data capabilities so that it can better monitor a broader range of asset classes.
The FCA hopes that improvements to its data and analytics infrastructure will also allow it to more readily identify and track potentially fraudulent activity at scale and reduce the average amount of money lost due to scams.
Expect greater levels of intervention
Our 2021 analysis of financial services enforcement trends highlighted some of the effects of the FCA’s promise to be more innovative and more assertive. Continuing this approach, the FCA promises to “rapidly intervene where firms risk being used as conduits for illegal activity” or where firms “pose harm to consumers or market integrity”.
The FCA has identified a number of specific outcomes that it hopes to achieve when it comes to reducing and preventing financial crime and delivering assertive action on market abuse, which include the following.
- Slow the growth in investment fraud and authorised push payment fraud.
- Lower the incidence of money laundering through FCA supervised firms.
- Increase resilience to market abuse, install robust systems and controls, improve the quality of reporting practices and implement a strong anti-market abuse culture.
- Increase timely and accurate disclosure of corporate information.
Progress in achieving these outcomes will be measured in a number of new and different ways. For example, incidence of money laundering will be assessed with reference to the proportion of applications rejected, withdrawn or refused by the FCA under the Money Laundering Regulations for financial crime reasons. While market cleanliness data will be considered alongside the number of FCA interventions to track market abuse and disclosure of corporate information by listed companies.
The FCA states that it will continue to use its enforcement powers to disrupt, pursue and sanction those committing financial crime, fraudsters and their enablers and will use its “full range of…supervisory and enforcement tools, including criminal or civil sanctions where appropriate” to pursue offenders and provide effective deterrents.
- Regularly review and re-evaluate existing financial crime and market abuse systems and controls. Any changes to a firm’s profile (e.g. as a result of the Covid-19 pandemic, or the ongoing situation in Ukraine) should inform the scope of the firm’s financial crime systems and controls including, for example, applicable risk assessments, governance and training.
- Consider risk culture strategy and framework as a key component of financial crime risk management approach. Developing and maintaining a healthy risk culture that enables a firm to identify and understand financial crime risks, whilst openly and proactively discussing its current and future financial crime risk profile are crucial components of a strong risk management approach. Consider how senior management can demonstrate consistent role modelling, supporting rapid escalation of threats and concerns, supported by a well-communicated financial crime risk strategy.
- Skilled Person Reviews. A high proportion of recent skilled person reviews have focused on financial crime issues / issues relating to controls and risk management frameworks. Always seek specialist advice and support in connection with a skilled person review, which can sometimes be a pre-cursor to an enforcement investigation.