Regulatory update: October 2021

Robbie Constance, partner at DWF, outlines key regulatory changes in the finance sector in the past quarter. Updates as at end Jul 2021, republished from Oct print edition of The Review

We’re pleased to welcome the team at DWF who will be keeping us updated on relevant regulatory developments via The Review and in our Professional Refreshers in MyCISI.

DWF is a global provider of integrated legal and business services to clients around the world, with considerable expertise in the financial services sector.

Our first regulatory update by DWF is brought to you by Robbie Constance, partner.

FCA news and regulatory developments

FCA Business Plan

The FCA published its (delayed) Business Plan on 15 July, setting out its plans and priorities, and thereby setting the regulatory agenda, for the year ahead. In his ‘Chief Executive's message’, Nikhil Rathi provides a useful summary:

We are an organisation that also needs to transform. Profound forces – the pandemic, Brexit, technology, the drive to a greener economy – are transforming the entire landscape of financial services. We need to change the way we do things, and in some cases what we do. We are becoming a different organisation. The FCA must continue to become a forward-looking, proactive regulator.

That involves three distinct changes. We will be:

  • more innovative – taking advantage of data and technology to increase our ability to act decisively in the interests of consumers
  • more assertive – testing the limits of our own powers and engaging with partners to make sure they bring their powers to bear
  • more adaptive – constantly learning and always adjusting our approach as consumer choices, markets, services, and products evolve.


We have to be prepared for disruption and to adapt our priorities to reflect the changes around us. Our remit is large, and it’s growing, so we need to make complex trade-offs to focus our efforts. We need to be upfront about what we see are the biggest issues in financial services, and how we’ll address them. This year, we will:

  1. continue to deliver for consumers by taking forward the four priorities we identified in last year’s Business Plan, as well as our new Consumer Duty
  2. continue to enhance market integrity by reinforcing the effectiveness of UK wholesale markets and enhancing our supervisory approach to specific issues
  3. focus on six of the most important cross-market issues: fraud, financial resilience, operational resilience, improving diversity and inclusion, enabling a more sustainable financial future, and international cooperation.
FCA failings
The changes proposed are partly the FCA's reaction to substantial criticism in relation to recent 'scandals' and in light of reports into its failings, old and new.

The Gloster report into the London Capital & Finance (LCF) scandal has been the leading example as it exposes the FCA's weakness when policing its perimeter. The Treasury Committee's report (of 24 June), Change in Financial Conduct Authority’s culture needed to protect consumers and financial markets’, slates the FCA's culture and failings in relation to LCF, saying:

In the future, the FCA should be more interventionist and make more frequent use of its powers regarding financial promotion breaches rather than maintaining a culture of risk aversion. HM Treasury should, as a priority, re-evaluate the Financial Promotion Order (FPO) exemptions to determine their appropriateness and consider what changes are needed to protect consumers.

The government should include measures in the Online Safety Bill to address fraud via online advertising. Pending any legislative changes, the FCA should continue to work with online platforms to remove misleading and fraudulent advertisements as quickly as possible.

The Committee supports the views of the current FCA leadership that the organisation 

needs to become a more “proactive”, “agile”, “decisive”, and joined-up regulator that is willing to act to protect consumers and financial markets.

It is not readily justifiable for the FCA to require the firms that it regulates to adhere to the principles of the Senior Managers Regime but seemingly not to apply similar principles internally when there are failings of practice and culture in the organisation.

The perimeter of regulation determines what the FCA can and cannot regulate. The case of LCF illustrates how important it is that the FCA looks at a regulated firm’s activities both within and outside of the perimeter. Dame Elizabeth described the “halo effect” as the “imprimatur of respectability” that regulation gives a firm by using its FCA-authorised status to promote risky products to attract investors for an unregulated activity. … The FCA should be given the power to recommend changes to the perimeter of regulation formally to HM Treasury.

In apparent response, the FCA published (along with its Business Plan) an update report on Implementing the recommendations from the independent reviews (i.e. the Gloster report into LCF and the Parker report on the Connaught Fund). The update identifies each recommendation and explains the work the FCA has undertaken in response, including:

  • its 'use it or lose it' agenda – taking action so that firms holding an FCA permission use it for the purpose intended, thereby reducing the risk of an undeserved 'halo effect'
  • enhancing its capabilities to detect, assess, monitor and take appropriate supervisory action through developing its regular management information, including key risk indicator trends for escalation to senior management within supervision
  • new policies, processes and procedures to tackle repeat breaches by firms of the financial promotion rules.

On 22 June, HM Treasury published the response to its consultation on the Regulatory framework for approval of financial promotions. It agrees that a gateway should be introduced for the approval of unauthorised persons' financial promotions by way of option 1 (imposing FCA requirements to restrict financial promotion approvals). It believes that this approach will achieve the desired objective of strengthening the FCA's supervision of firms approving unauthorised persons' promotions, while maintaining the existing distinction between regulated activities and financial promotions as set out in the Financial Services and Markets Act (FSMA).

Is your management team diverse enough to provide adequate challenge and do you create the right environment in which people of all backgrounds can speak up?All new and existing authorised firms will be prohibited from approving unauthorised persons' financial promotions by way of a requirement on their permission: the Financial Promotion Requirement. Both new and existing authorised firms that wish to approve financial promotions will have to apply to the FCA to have the prohibition removed either entirely (allowing them to approve all types of financial promotions) or partially (allowing them to approve certain types of financial promotions). Firms will do this by submitting a variation of requirement (VREQ) application to the FCA. The FCA will determine, and accept or refuse, an application under powers in Part 4A of FSMA.

Unauthorised promotions often involve scams. Mark Steward, FCA executive director of enforcement and market oversight, spoke on 18 May at an FCA Investigations & Enforcement Summit about the rise in scams and the “threat to a legitimate financial services industry", noting in particular the rise in unregulated adverts: "This year to date we have issued 632 specific warnings, which means we are running at more than 100% of last year’s figures". Steward addressed the FCA's difficulty in policing its perimeter, saying: 

While the FCA does have statutory power over the use of false or misleading statements in relation to securities, those offences will not bite where the investment product is outside the financial promotions perimeter. The perimeter, or perimeters (there is more than one), is an intricate boundary that can produce different results in terms of regulatory power, consumer protection and outcome, depending on some equally technical distinctions. … Despite these circumstances, the FCA remains very active and engaged in tackling the scourge of investment fraud in this country.

The LCF scandal has been the prime example but the internet generally, social media and web-based trading and investment platforms from other jurisdictions make for a similar minefield of boundaries and perimeters which appear to leave the FCA fighting a losing battle with insufficient powers (or appetite to use them in place of criminal law enforcement agencies).

“More assertive”
The FCA has reacted to much of the criticism by 'coming out fighting'. True to its word, the FCA has already been taking increasingly bold and novel actions that, together, evidence its preparedness to be assertive, innovative and to take more (legal) risk.

The FCA's Board minutes from April (published on 8 June) confirm as much. They include: “It was noted that the FCA operated within the rule of law and should not engage in actions which are not legally defensible. However, a willingness to take legal risk, especially in situations where the law is unclear or FCA action is intended to prevent imminent consumer harm, was entirely appropriate.”

One of Nikhil Rathi's early focuses has been on diversity and inclusion (D&I) and the connections with non-financial misconduct. In a speech on 17 March at the launch of the HM Treasury Women in Finance Charter Annual Review, he explained how lack of diversity in firms' senior management raises questions about their ability to understand the different communities they serve, and their different needs, and to strengthen consumer outcomes. Rathi would like to see the FCA's '5 conduct questions' expanded to all firms and a sixth question added: 'is your management team diverse enough to provide adequate challenge and do you create the right environment in which people of all backgrounds can speak up'? Supervisory tools are available – the diversity of management and inclusivity of a firm's culture could be part of the FCA's consideration of senior manager applications. The FCA will increasingly treat D&I as a conduct and regulatory issue, regardless of the political and jurisprudential debates that continue about the role and reach of a financial conduct regulator.

In another example of aggressive and innovative steps, the FCA is taking unprecedented action to 'pierce the corporate veil' in bringing a restitution claim personally against a former IFA and his partner. The FCA issued an update (on 14 May) about its case against Paul Steel (the IFA) and Jacqueline Foster (his partner) in which it froze their assets pending a hearing of its claim alleging that (now) both were 'knowingly concerned' in contraventions resulting in the removal of Steel's former company's assets leaving it unable to meet potential liabilities. The FCA has applied to the High Court under s382 FSMA for a restitution order requiring Steel and Foster to compensate consumers who have suffered losses as a result of receiving unsuitable pension transfer advice, thereby seeking to impose personal liability for mis-selling by individuals within a regulated firm for (we believe) the first time.

The FCA is taking unprecedented action to 'pierce the corporate veil'

Individuals, particularly in intermediary and advisory firms where management liability cover adoption is lower, are encouraged to review their directors and officers liability insurance arrangements to cover not only regulatory investigation costs but also individual liability insurance.

The Greensill Capital 'scandal' has heightened and publicised the FCA's significant supervisory and enforcement activity in the regulatory hosting market. On 24 May 2021, the FCA published a first supervisory notice issued to a principal firm, imposing a number of 'requirements' relating to its Appointed Representatives (ARs). The Treasury Committee's report on Lessons from Greensill Capital includes:

It appears that the appointed representatives regime may be being used for purposes which are well beyond those for which it was originally designed. We welcome the FCA’s investigation into the oversight of Greensill’s regulatory permissions by Mirabella and we await its conclusions with interest. The FCA and HM Treasury should consider reforms to the appointed representatives regime, with a view to limiting its scope and reducing opportunities for abuse of the system.

Somewhat hidden in a fees consultation (CP21/8) and earlier correspondence with the Treasury Select Committee, the FCA has summarised its thematic review and its planned work programme (to be funded by around £10m raised from a new flat periodic fee for each AR) which will involve even greater engagement with, and scrutiny of, firms as they appoint ARs (having already instituted a de facto approval process for what should only require registration), proactive supervision of principal firms, and use of its full range of supervision and enforcement tools to reduce the risks it identifies. The FCA will carry out targeted supervision activity in sectors or portfolios where it considers that the AR regime is a particular driver of harm. Based on this work, it will then determine whether policy interventions, such as rule changes, are required and it may even recommend legislative change (presumably with the backing of the Treasury Committee).

Consumer Duty
In an apparent attempt to regain control of the political agenda and to be seen to take significant action, the FCA published CP21/13 on 14 May setting out the plans for A new Consumer Duty which, according to the accompanying press release, “will set a higher level of consumer protection in retail financial markets for firms to adhere to". The consultation closed on 31 July.

The FCA is proposing to expand its existing rules and principles (such as TCF – treating customers fairly) to ensure firms provide a higher level of consumer protection consistently which will enable consumers to get good outcomes. The new Consumer Duty (the Duty) is intended to drive a shift in culture and behaviour for firms, meaning that consumers always get products and services that are fit for purpose, that represent fair value and are clearly communicated and understandable. Apparently, this will help, rather than hinder, consumers to make good choices and be confident that they will receive good customer service. The Duty will cover all firms selling products and services to retail clients, including manufacturers and suppliers with no direct customer relationship. 'Retail clients' will likely be interpreted widely to include SMEs.

The Duty will have three key elements:

  1. The 'Consumer Principle', which will go beyond Principle 6 (TCF) and reflect the overall standards of behaviour the FCA expects from firms. The wording being consulted on is:

     “a firm must act in the best interests of retail clients” or “a firm must act to deliver good outcomes for retail clients”.

  2. Cross-cutting rules requiring three key behaviours from firms: taking all reasonable steps a) to avoid foreseeable harm to customers, b) to enable customers to pursue their financial objectives, and c) to act in good faith.
  3. underpinned by a suite of rules and guidance that set more detailed expectations for firm conduct in relation to four specific outcomes:(1) communications, (2) products and services, (3) customer service and (4) price and value.

In an attempt to reassure nervous regulatory lawyers, the FCA has confirmed that it is not intending to impose a fiduciary duty where none previously existed in law. 'Good outcomes' is a potentially vague concept without established legal meaning, while 'best interests' is already a familiar concept in some FCA Handbooks. The paper does note that many products are simply just risky and so the FCA does not expect firms to protect consumers from risks they reasonably believed the consumer understood. Consumers should be empowered to make their own choices and ultimately must be responsible for their own decisions. However, firms should create an environment in which consumers can act in their best interests. There is generally an imbalance in bargaining position, and asymmetry of knowledge and expertise between consumers and firms and so firms must act openly and honestly with consumers if they are reasonably to be expected to take responsibility for their decisions.

The four outcomes develop the existing six TCF outcomes, with express reference to 'customer service' and 'price and value'. The Duty may simply codify the good practices most firms already demonstrate in relation to TCF and consumer outcomes but in doing so the ba

Firms will have to be prepared to provide evidence of such compliance to the FCA if required. The supervision and enforcement approach will be considered in a second consultation but firms will have to follow the new rules or face regulatory action, including enforcement investigations.r gets lifted ever higher and there will be added burdens on firms to prove compliance through ongoing monitoring and testing of their systems and controls, processes and procedures, products and services and their clients' outcomes.

CP21/13 does not contain any draft rules as the FCA is still developing its views on certain issues, including the potential introduction of a private right of action for breaches of Principles under s138D FSMA. However, we can expect to see these in a second consultation paper due out by the end of the year with the rules due to come into force on 31 July 2022. While firms will welcome acknowledgement of consumers' responsibility for their decisions (and confirmation the Duty will not apply retrospectively), the burden on firms to give clear, fair and not misleading information will increase – and experience suggests a key test for such liability issues will follow when cases reach the Ombudsman. The recent experience of self-invested personal pension providers, such as Berkeley Burke, will concern other firms that provide what they currently believe to be a limited service with minimal responsibilities but who will soon expressly have an added consumer duty to contend with.


The FCA published its Enforcement data Annual Report for 2020/2021 on the same day as the Business Plan (15 July). The data shows:
  1. A 15% decrease in total fines from £224.4m in 2019/2020 to £189.8m in 2020/2021
  2. A decrease in the single largest fine imposed from £102.2m in 2019/2020 to £64m
  3. A slight increase in the average length of all enforcement cases (including those resolved by agreement, referred to the Regulatory Decisions Committee or Upper Tribunal, and those where the FCA decided to take no further action) to 24.7 months (from 23.9 months).

The number of open cases has decreased to 593 (from 645). The FCA has also opened significantly fewer cases over the past year: only 134 when compared to 184 the previous year. This may reflect the impact of Covid-19 which has, in general, increased the time it takes for firms to provide information to the FCA, and equally lengthened the time it takes for  the FCA to review and assess the information provided. It may be that we see a flurry of enforcement cases opened over the coming months.

While the overall picture painted by the enforcement data may well be welcome news to regulated firms and individuals alike, it should not be seen as evidence of the regulator's appetite for enforcement waning. The 2020/2021 Business Plan reinforces the FCA's commitment to enforcement: the regulator states that it is "improving how we detect, triage, disrupt and take enforcement action to help reduce fraud and harm" and will "take assertive enforcement action where there is serious misconduct".

Interestingly, the average cost of cases resolved by agreement has increased to £365.7k from £341.6k. This is likely due to the complexity of the cases, and/or the volume of information reviewed in order to resolve them. We have noticed an increasing tendency by the FCA to issue extremely broad information requirements over the past 18 months, far broader than they have historically.  

Excluding unauthorised business, the largest number of open enforcement cases relate to: retail conduct; the second largest, insider dealing; and, the third, pensions advice. Given the FCA's stated focus on these issues over the past year, this comes as no surprise.

There has been little by way of interesting new enforcement notices published of late in the investment sector but that is not to say there is not plenty going on behind the scenes. As ever, those notices that are published – by the nature of enforcement action – often relate to conduct (and issues) some time ago.

More 'newsworthy' and current, but hardly revelatory in terms of the outcome, are the run of non-financial misconduct cases which involved the FCA banning financial advisers for child grooming, voyeurism, sexual assault and indecent images of children. There will, no doubt, be more controversial non-financial misconduct cases to follow.


Following the failure of the bondholders' judicial review of the Financial Services Compensation Scheme’s (FSCS's) decision to reject many of their claims, on 21 April, the government announced its LCF compensation scheme, a government-funded scheme designed to compensate bondholders for 80% of initial investment up to a maximum of £68,000, less interest payments from LCF or distributions from the administrators, Smith & Williamson. The scheme will be available to all LCF bondholders who have not already received compensation from the FSCS and represents 80% of the compensation they would have received had they been eligible for FSCS protection. Economic Secretary to the Treasury John Glen's statement to Parliament includes: "In these extraordinary circumstances, the government has decided to establish a compensation scheme. However, it is imperative to avoid creating the misconception that government will stand behind bad investments in future, even where FSCS protection does not apply."

The government introduced the necessary legislation on 12 May 2020 and has announced that the FSCS will administer the scheme. The FSCS is committed to ensuring that payments are made to all LCF bondholders eligible under the government scheme within six months of the legislation passing through Parliament.

For some, this sets a worrying precedent and creates moral hazard whereby government underpins the FSCS's compensation fund of last resort. Others may simply see it as a unique response to regulatory failure to protect the FCA from having to rely on its statutory immunity.

In related news, on 13 May, the FSCS announced its levy forecast of £833m which is a reduction of £206m from the alarming initial forecast that went over £1bn for the first time.

In a further attempt to protect the FSCS, on 17 May, the FCA published CP21/14: Preventing claims management phoenixing by financial services firms with plans to prevent those connected with firm failures from setting up CMCs and making claims against the FSCS about their own mis-selling.

Robbie Constance, partner, DWF

On 26 May 2021, the Financial Ombudsman Service (FOS) published its annual complaints data for 2020/21, together with an article analysing the data. Excluding payment protection insurance (PPI) complaints, there was a 58% increase in the volume of complaints received, with 235,993 new non-PPI complaints (compared with 149,315 in 2019/20). The FOS resolved 162,420 non-PPI complaints, with an uphold rate excluding PPI complaints of 40% (compared with 44% in 2019/20). In the investment and pensions categories, there was a 91% increase in complaints, with 20,854 complaints (compared with 10,920 in 2019/20).

Given the direction of travel, that 91% increase is the most ominous statistic.

DWF, Editors, CISI Regulatory Update

This update is published in the October 2021 print edition of The Review

The flipbook edition is now available online for all members. 

The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'. 

Views expressed in this update are those of the DWF editors alone and do not necessarily represent the views of the CISI.

Published: 08 Nov 2021
  • International regulation
  • Wealth Management
  • Training, Competence and Culture
  • Operations
  • Compliance
  • FOS
  • FSCS
  • Consumer Duty
  • D&I
  • diversity and inclusion
  • LCF scandal
  • Financial Promotion Requirement
  • DWF
  • Financial Services and Markets Act
  • FSMA
  • FCA Business Plan 2021

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