The UK Financial Conduct Authority (FCA) 's 2021-22 Business Plan was published on 15 July 2021 and it sends an important message for firms and the market of the FCA going forward approach to enforcement actions.
It is clear that the FCA intends to be more aggressive and take an increasingly assertive approach in its enforcement activity in the coming year and innovate to tackle challenges yet to come in the future.
The FCA's senior leadership team has messaged it on several occasions over the last year with their "to CEO letters" about its enforcement activities. Furthermore, the 2021-22 Business Plan reinforces the FCA's public commitment to a more robust approach.
Aside from the general enforcement activities and a "forward-looking, proactive regulator" message, the FCA focuses on other areas such as ESG regulatory risks and market abuse. Listen to the FCA Chief Executive Nikhil Rathi talking about the ideas behind the priorities set out in the 2021/22 Business Plan in this podcast.
Environmental, Social and Governance (ESG) regulatory risks
The FCA states that "financial services and markets have a central role in the transition to a low carbon economy and a more sustainable future", and they will help the government achieve its aim of a net-zero economy by 2050 by adapting the regulatory framework to enable a market-based transition. The FCA is working on a sustainable strategy to support a market-led transition to a more sustainable future.
With that the regulator ask firms to ensure that they have incorporated an assessment of ESG risks into business and have strengthened the firm systems and controls to mitigate ESG risks.
What is next regarding the FCA agenda for ESG
The FCA has lots to achieve and a busy agenda regarding ESG. On the Business Plan the FCA stated that will:
- bring new rules into force from 1 January 2022 to standardise climate-related disclosures by listed companies and other FCA-regulated market participants
- implement disclosure rules in line with the recommendations of the TCFD
- work to address concerns about greenwashing and will continue to clarify expectations in relation to greenwashing through supervisory and authorisations processes
- encourage innovation in sustainable finance
- publish a Climate Adaptation Report later in 2021
Not only the FCA but all regulators are increasing their expectations around Environmental, Social and Governance Compliance. It means that firms need to demonstrate their commitment to upholding ESG principles and implement a solution to monitor risks and effectively manage the due diligence of both externally managed funds and internally managed investments.
Other blogs on ESG Compliance
- SEC's Annual Agenda Includes Focus on ESG Disclosures
- SEC Guidance on ESG: The Impact on Compliance and Due Diligence
The FCA already has the ability to detect and investigate misconduct, and it has always been a priority for the regulator to ensure that firms are effectively preventing market abuse and reducing financial crime risks. However, the FCA will be doing a significant investment in data collection, analysis and technology to improve its ability to detect and investigate misconduct. According to the plan the investment will reach £120 million over the next three years.
This investment complements the FCA campaign launched in March 2021, focusing on whistleblowing and encouraging individuals to report potential wrongdoing to the FCA.
In the Business Plan, the FCA highlighted market abuse risks heightened by the pandemic and market integrity risks of remote working, which requires regulated firms to continuously update their market abuse risk assessments and ensure that risks arising from different working environments are appropriately mitigated.
Senior Managers Regime (SMCR)
Since the Senior Managers Regime (SMCR) implementation in 2016, there have been 34 investigations and one enforcement action. The FCA is investigating a CEO of an international financial institution in response to allegations raised by a whistleblower. The FCA Business Plan under the Market Abuse section mention its plan to continue its whistleblowing campaign. Firms are advised to ensure that their whistleblowing policies and procedures are effective and encourage employees to raise concerns.
"Covid-19 may have played a role in terms of delaying or disrupting any investigations, and the remote working situation also makes monitoring and reporting misconduct much more difficult. In time, as it has begun to already, the regulator will find ways to adapt, and we may see more enforcements", said Ben Blackett Ord, Chief Executive Officer at Bovill.
As other countries such as Singapore and Malaysia look to introduce similar senior managers regimes, it's important for the regulator to learn from the FCA's experience with SMCR and what has proven effective or ineffective about the regime.
The understanding from the FCA Business Plan is that firms and individuals who fall within the scope of SMCR will need to rapidly focus on a pro-active compliance approach, particularly in relation to non-financial misconduct.
You can learn more about the UK SMCR & Enforcement Investigations in our recent webinar with Gowling WLG and learn what you should do to be prepared for the next phase of enforcements of the regime in the UK.