FCA and PRA fines highlight key areas for concern

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The value of FCA and PRA fines never ceases to amaze me.  The end of year tally has never been anything but eyewatering and 2021 is no different.  Without taking into account any early settlement discount, FCA fines in 2021 exceeded half a billion pounds, with half that amount being levied in a criminal Court.  The total value of 2021 fines was up three-fold on the 2020 amount.  And these amounts do not include PRA fines, where a further £50m was added in December alone!

Companies large and small should learn from the information in the decision notices that accompany the fine announcements.  Common issues, and regulator themes, are clearly identifiable in these documents and such information should help firms focus on any matters that need addressing.

The fines in 2021 had a different feel to them than those in 2020.  Many of the fines in 2020 were because of failures in firms where the behaviours were seen as not treating customers fairly.  2021 has been dominated by governance, process and oversight issues, as evidenced by the high value of fines relating to failings in money laundering oversight and system/control failures.  Failures in the following statements of principle also featured in several of the decision notices:

I can see a renewed emphasis on the “personal characteristics” aspect of SYSC 27.2.5 as firms’ culture comes under the microscope again

Principle 1 – integrity

Principle 2 – skill, care and diligence

Principle 3 – management and control

Principle 6 – customers’ interests

Principle 7 – communications with clients.

Looking forward then, what is likely to attract the attention of regulators in 2022?

  • Governance, oversight and process issues will continue to be highlighted and I expect to see further fines where these issues are the root cause of identified problems. A number of ‘Dear CEO’, ‘Dear Board of Directors’ and ‘Dear Chair of’ letters were issued by the FCA and PRA in 2021.  While they covered a wide range of specific subjects, each one, albeit addressed to a different audience, highlighted the results of a specific thematic review and gave firms clear guidance in respect of future behaviours and required outcomes.  Regulators will expect that further improvements in governance, oversight and process are made in 2022.
  • Treating customers fairly [“TCF”] issues will see a resurgence as the FCA thinking on the new ‘customer duty’ requirements become more detailed. TCF is not new, and it still seems amazing that one of the larger fines in 2021 (£90m) was because a firm failed to ensure that the language in millions of home insurance renewals communications was clear, fair and not misleading.  The FCA has already issued two consultation papers on its new ‘consumer duty’ and we can expect new rules to be announced mid-way through 2022 along with further proposals on how they intend to supervise and embed the ‘consumer duty’ requirements.  While new obligations may evolve, a refocus on TCF is a must.  I am sure the home insurance renewals letter went through a ‘sign off’ process, but it is clear the wording was not challenged or if the wording was questioned, the challenge was overruled.
  • Culture. There is no doubt in my mind that the amended focus’ from TCF to ‘consumer duty’ will result in a further requirement in firms to rethink whether their ‘culture’ is fit for the world today.  Any culture review will also need to address the fitness of senior management function holders, material risk takers and certified staff.  I can see a renewed emphasis on the “personal characteristics” aspect of SYSC 27.2.5 as firms’ culture comes under the microscope again because of the 2022 regulatory initiatives.  While the FCA accepts, where culture is concerned, ‘one size does not fit all’ and while it also does not prescribe what any firm’s culture should be, it does state that improving culture in financial service firms should be a continuing priority.  The FCA expects leaders in firms to manage the drivers of behaviour in their firms to create and maintain cultures which reduce the potential for harm.  This couldn’t be clearer to me!

2022 is going to be eventful, strap yourselves in!

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