FCA Enforcement Outlook for 2021 | Dechert LLP

Amid the uncertainty brought about by the end of the Brexit transition period and the ongoing COVID-19 pandemic, firms should be aware that the FCA will retain an active approach to financial crime and regulatory enforcement in 2021. This OnPoint sets out our views on likely enforcement trends and potential areas of focus for the FCA in 2021. We also cover immediate steps firms should be taking to ensure they are well prepared and that their systems and controls are up-to-date.

Last year’s OnPoint on enforcement risk noted that the FCA’s primary focus in its 2020/21 business plan was on mitigating the impact of COVID-19 on the markets and protecting consumers.¹ These issues will inevitably be a continuing theme for the FCA in 2021. For assets managers and banks, we anticipate that the FCA will take a particular interest in:

• Ensuring firms are continuing to operate effective compliance programmes (including systems and controls for countering financial crime) despite the disruptions caused by the ongoing pandemic. Indeed, a recent FCA Market Watch newsletter² reminded firms of the importance of effective controls for monitoring and recording communications and the role those controls play in deterring and detecting market abuse.
• Prioritising effective governance in the asset management industry through the application of the Senior Managers and Certification Regime (SM&CR).³

Taking stock: 2020 enforcement activity

In 2020, the total value of fines issued by the FCA was £192.5 million, less than half the value of fines issued in 2019 (£392.3 million). However, the value of fines is only one part of the picture and there were some particular areas of note in 2020 enforcement activity:

• The first fine under the EU Short Selling Regulation (SSR)⁴ – the FCA fined an asset management firm based in Hong Kong over its failures to make 155 notifications to the FCA and 153 disclosures to the public in connection with the net short position which it had built up in an oil company between 2017 and 2019. According to the Final Notice, the firm had not appreciated the requirements of the SSR as it had relied on third party materials regarding the regulatory position in the UK rather than obtaining formal legal advice.⁵ Given the recent attention on the trading of GameStop shares (which prompted the FCA to issue a statement),⁶ short selling is (indirectly) under scrutiny and firms employing short selling strategies should be particularly conscious of their obligations under short selling legislation.
• Significant fines were handed out to firms for weaknesses in anti-money laundering and risk management controls. For example, in June 2020, the FCA fined Commerzbank AG (London Branch) £37,805,400 for its failure to put in place adequate anti-money laundering systems and controls.⁷ The issues identified in the FCA’s Final Notice spanned almost five years (from October 2012 to September 2017) and included the lack of a comprehensive documented process for exiting customer relationships for financial crime risk, backlogs in refreshing KYC checks and significant weaknesses in the bank’s automated transaction monitoring systems.⁸ We have previously written an OnPoint on the compliance lessons learned from the Commerzbank case.⁹
• The FCA has recently taken action for failures in the adequate protection of client assets, even in circumstances where no actual client assets or money were lost. Client asset arrangements are a perennial focus for the FCA; in its 30 September 2020 ‘Dear CEO’ letter, the FCA set out that it is imperative to maintain adequate arrangements to safeguard client assets amid the uncertainty caused by COVID-19.¹⁰ The strength of firms’ governance and monitoring controls to identify material risks to client asset arrangements are critical in this respect.

The FCA’s open cases as at 31 March 2020 highlight the emphasis placed by the FCA on financial crime (71 open cases) and insider…