So 2020 is here – a new decade, a new way or same old? From a regulatory enforcement perspective events in 2019 offer clear sign posting as to the likely trends in the early part of the decade ahead. Two FCA enforcement levers have been applied at an increasing rate in 2019 and it does not appear that they will be used any less in the early part of the 2020s. These levers are:.
- The FCA website shows the level of fines in 2019. The figure, as updated by the FCA on 20 November 2019, stands at a shocking £391,773,187 which is significantly up from £60,467,212 in 2018 (although the 2017 figure was nearly as eyewatering as the 2018 figure at £229,515,303). Those numbers are net of early settlement discounts! The actual cost to businesses is substantially higher than ‘just’ the fine. The total cost needs to include the investigation costs, administration cost of putting things right, the cost of any redress which might include the addition of statutory interest and the cost of lost business as a result of tarnished reputations.
Any laissez-faire’ attitude to compliance and oversight belongs in previous decades
- At the same time the external investigation costs are also rocketing as regulators are ordering a higher number of ‘skilled person’ reviews [‘S166 reviews’]. In the 2018-2019 financial year 51 S166 reviews were required. This represents a 16% increase in the previous year. Such reviews do not come cheap as they are normally undertaken by top law or accountancy firms. Unlike the FSA before it, the FCA has the power to directly appoint the expert in order to control the scope and quality of such reports.
A review of the fines highlights some common themes. Rather surprisingly a large number of the fines are as a result of the unfair treatment of customers (even though TCF has been on regulators’ agendas since 2004), mis-selling, culture/governance and procedural failings. Consumers just don’t understand how firms can get it so wrong. Regulators don’t either, which is why regulators feel it is necessary to drive change via such high financial penalties. Any laissez-faire’ attitude to compliance and oversight belongs in previous decades and it looks like the fines will continue to grow, unless our industry fixes its compliance attitude.
So, where does this take us in the 2020s? Compliance managers must know what is required by now and they must also recognise the cost of compliance failure. Clearly there is a need for quick and effective change. The level and value of fines clearly shows that oversight of systems and processes is too often failing. So, what is the root cause of these failings? Most firms are familiar with, and adopt, to a greater or lesser extent, a ‘three lines of defence model. Three lines of defence is fine in theory and generally works well, but too frequently each line simply relies on colleagues in the other lines. Third lines are too often becoming part of the process which risks neutralising their independent and objective oversight. They have become too complacent and reliant on first and second lines. Forward looking businesses are more often seeking the security of a third line that provides a truly independent view that is not influenced by corporate thinking or objections. This is a trend that is likely to continue in the new decade as firms must radically change to protect their reputation and balance sheet. Firms know the regulators are coming, the least they can do is prepare!