There's a lot of detail in the FCA's new plan to tackle investment harm and the accompanying consumer investments data review. Much of the data serves the FCA's key message that investment harm is an important and growing risk. Some of the detail relates to the FCA's likely future thematic work and potential future regulatory reform. Let's set these matters aside for present purposes and cut to the chase: what do these publications tell us about the types of enforcement and contentious supervisory interventions we may see going forward, and the areas in which they may be concentrated? This will help firms to calibrate and focus their risk mitigation efforts accordingly.
How might the FCA intervene?
The FCA lists various possible actions including consumer alerts, marketing restrictions and enforcement action against unauthorised business. These will continue to feature prominently.
- The FCA discloses that it has 31 live investigations or proceedings relating to the conduct of regulated firms and individuals involving potential scams or higher-risk investments, with multiple entities formally investigated in many cases, following cooperation with other agencies.
- The FCA heralds the potential benefits of its OIREQ/VREQ powers including to stop firms promoting and selling products, providing service or restricting the use of assets to ensure redress liabilities are met.
The FCA also identifies its ability to take down websites, take civil action to stop activity and freeze assets and launch insolvency proceedings or criminal prosecutions where it suspects fraud.
- In practice, any interventions involving formal court proceedings are resource-intensive for the FCA, so you would expect them to be used less frequently. They remain a significant risk in the most serious cases.
- The FCA discloses that it has several ongoing criminal investigations in which it expects to bring charges before the end of 2021, including into boiler rooms, online trading platform promotions on social media, the provision of advice and management of investments into online trading platforms, unauthorised CISs, and the promotion of high-risk investments.
The FCA indicates that for protagonists outside its jurisdiction it will work with other law enforcement agencies. In practice this depends not just upon the quality of the working relationships between the FCA and those agencies but also upon the level of expertise and resourcing within those agencies.
The FCA is adopting a "use it or lose it" approach to firms' permissions including expediting the process to remove unused permissions on the FCA's own initiative. (Here the FCA will leverage new powers, which will be exercised solely by FCA executives as part of the FCA's broader streamlining of its decision-making - see our post on this for more details.)
What may draw the FCA's attention (and therefore what should firms focus on)?
- Any situation where data, aggregated and analysed, reveals a systemic issue. To "spot harm sooner" the FCA is using or developing data dashboards on given firms, sectors or issues; automated rules-based alerts to prompt regulatory action; and advanced analytics to understand potential harm at a firm or sector level. On phoenixing, life-boating and policing of the regulatory perimeter generally, the FCA is developing network analytics tools to assist Supervision/Authorisations as well as provide insight for Enforcement investigations.
- High-risk investments promoted to consumers for whom mainstream investments may be more more suitable. The FCA is concerned that consumers are "straying (too heavily)" into high-risk investments. (As an aside: the FCA expresses concerns about any investment returning significantly more than the prevailing cash savings rates of 1 per cent or thereabouts!) The FCA foreshadows "assertive supervision and enforcement of SIPP providers and advisers"; making it harder to exploit financial promotions exemptions; strengthening requirements on firms when they approve financial promotions; and proactively restricting the marketing of high-risk investments where the FCA sees risk of harm. Firms should focus also on the adequacy of their customer suitability assessments.
- Communication of investment risks. A likely aim for the FCA is to improve the way that investment risks are communicated (commensurate, for example, with communications about expected returns). It foreshadows potential intervention to introduce friction into the newest investment channels such as trading apps - a possibility that will most greatly impact fintechs as they develop their products and customer UX/UI.
- Issues the subject of FCA thematic and guidance work to improve mass market outcomes. The FCA identifies its work on the proposed consumer duty proposals, behavioural interventions in pensions, vulnerability guidance and communications about which protections apply to financial products.
- Financial promotions. The FCA is clear that for high-risk investments "a good quality promotion is not enough to protect consumers". Firms should expect additional marketing restrictions to be imposed in future. Additionally, promotions on online platforms are "an important focus of [the FCA's] supervisory activities". In practice this likely means continued pressure from the FCA on online platforms to tighten their policies. The FCA threatens action against major online platforms if they are not compliant - this could be an area where the FCA tests the limits of its powers as promised when it launched its current business plan.
- Investment scams perpetrated or facilitated by a regulated firm. The FCA commits to taking proactive preventative action in these situations. Firms will want to bolster their internal capability to detect when they are being used as a conduit for scams.
- Products with the greatest engagement on the FCA's ScamSmart website. The leaders here are crypto, foreign exchange, pension transfers and bonds. Crypto in particular presents challenges because it sits largely outside the regulatory perimeter (except for AML purposes and as regards crypto derivatives).
- Products that are the most complained about. Here, non-workplace personal pensions, ISAs, platforms and investment bonds lead the pack.
- Use of the Appointed Representatives (ARs) regime. The FCA intends to afford greater scrutiny of firms when they appoint ARs including as to firms' capability to oversee their ARs.
We want to see a consumer investment market in which consumers can invest with confidence, understanding the risks they are taking and the regulatory protections provided.