FINANCIAL SERVICES: An Introduction

The Outlook for the UK’s Financial Legal Framework

We have seen record levels of volatility over the past year. The UK economy and geopolitical environment are likely to remain uncertain over the coming year due to interest rates and inflation remaining volatile and the war in Ukraine continuing to pose risks to market instability. With consumers’ disposable incomes declining due to a rising cost of living and a heightened risk of firm failure, consumer protection remains a primary focus for the Financial Conduct Authority (FCA).

Reducing and preventing financial crime also remains high on the regulatory radar to ensure that consumers and market participants have confidence that the financial services industry is safe, and to help protect consumers who may become more susceptible to fraud.

The Financial Services and Markets Act 2023 (the “Act”) was enacted on 29 June 2023 and we will start to see the implementation of measures that will significantly overhaul and restructure the UK financial services and markets regime. The changes in the Act include repealing retained EU legislation with requirements in regulators’ rulebooks, new powers for the UK financial services and markets regulators, a new regime for the regulation of “designated activities” and for the approval of financial promotions, and a secondary objective for the FCA and Prudential Regulation Authority (PRA) requiring them to act in a manner which facilitates the international competitiveness of the UK economy and its growth.

Enforcement trends 

As of 31 March 2023, the FCA had 591 open enforcement cases relating to 224 investigations. Whilst the total number of open enforcement investigations remained similar to the previous year, there was a 48% reduction in the number of new enforcement cases being opened and a 33% reduction in the number of enforcement cases being closed.

Financial crime and AML continue to be a dominant area for FCA enforcement action. The fines issued to Bastion Capital London Limited, Al Rayan Bank PLC, and Guaranty Trust Bank (UK) Limited highlight the FCA’s continuing focus on enforcing weaknesses in financial crime systems and controls, and this is expected to continue into 2024.

FCA enforcement cases involving criminal allegations (either sole or dual track with civil or regulatory allegations) accounted for over half (51%) of the enforcement cases opened in 2022/23. Market abuse and fraud will continue to be high on the FCA’s agenda going into 2024, with the FCA keen to pursue criminal, civil, and regulatory sanctions against wrongdoers, so as to provide effective deterrents in these areas.

A final interesting trend to note is that since 2021/22, the number of FCA intervention cases opened in the early engagement stage (voluntary requirements) has increased by 11% and the number of cases opened where the FCA has used its own-initiative powers (OIREQs and OIVOPs) has increased by 45%. This is indicative of the FCA’s latest strategy to take assertive action against firms that do not meet the minimum standards and put consumers and markets at risk. We expect the number of intervention cases to further increase going into 2024.

ESG matters remain high on the agenda for regulators, both in the UK and globally, with “greenwashing” being a particular concern. The FCA’s sustainability disclosure requirements were due to be published in June 2023 but were delayed, and it is likely that these rules will only be published later this year. Once they take effect, we expect the FCA to immediately tackle potential misconduct using its powers of intervention and, in the most egregious cases, take enforcement action. In the meantime, firms should remain mindful when making sustainability-related claims in respect of their products and services.

Non-financial misconduct also remains an area of focus for the FCA and PRA. We expect the FCA, in conjunction with the Bank of England (BoE), to shortly publish guidance for firms and individuals, including how the FCA expects to deal with allegations of non-financial misconduct and how such misconduct fits within the regulatory framework for financial services employees.

Other key developments include the following.

1. Whether the FCA will be less inclined to pursue integrity cases against firms, particularly where a lack of integrity is attributed to a firm on the sole basis of the recklessness of its senior managers and employees, given the Upper Tribunal’s judgment in Seiler and others v FCA [2023].
2. The BoE’s consultation proposing changes to the PRA’s enforcement policies and procedures to help accelerate future PRA enforcement investigations. The BoE’s proposals include providing a route for early co-operation by subjects through the introduction of an “Early Account Scheme” and incentivising early admissions through an enhanced settlement discount. The BoE’s consultation closed on 4 August 2023 and we await the final outcome.

The Consumer Duty 

On 31 July 2023, the FCA’s new Consumer Duty (the “Duty”) came into force for new and existing products and services (with closed products and services due to take effect from 31 July 2024).

The Duty requires firms to ensure that their products and services are fit for purpose and offer fair value, and to help consumers make informed decisions. Firms will also need to focus on preventing harm before it arises, and where harm does appear to occur, address this quickly so any harm is reduced. The Duty introduces a new Principle for Business (Principle 12) and a new Individual Conduct Rule (Rule 6) which requires firms and individuals to deliver good outcomes for retail customers.

We expect all in-scope firms to remain under scrutiny throughout the rest of 2023 and into 2024, with the FCA wanting to ensure conformity to the new higher standards of consumer protection. The FCA has said that it will initially prioritise the most serious breaches and act assertively where it finds evidence of harm or risk of harm to consumers, including taking enforcement action.

Regulation of crypto-assets 

In February 2023, His Majesty’s Treasury (HMT) published its consultation on a future financial services regulatory regime for crypto-assets, which would bring the regulation of crypto-assets within the existing regulatory framework established by the Financial Services and Markets Act 2000.

HMT intends to pursue a phased approach for regulating crypto-assets, which is being prioritised according to the areas it considers are of greatest risk and opportunity.

Given the potential impact of crypto-assets on the financial services landscape, we expect to see further developments on HMT’s proposals later this year and into 2024. Indeed, the FCA’s 2023/24 Business Plan states that it has already started its preparations for the regulation of crypto-assets.

The digital pound 

In February 2023, the BoE and HMT released a consultation paper on the UK government’s vision for a digital pound, including its functionality and financial stability implications. The consultation suggests that the digital pound would likely take the form of a retail “Central Bank Digital Currency” (CBDC) issued by the BoE and used by businesses and households alike for everyday transactions.

The BoE has stressed that the digital pound would not replace cash. The BoE has not made a decision on whether to introduce the digital pound. At this stage, it is simply exploring possibilities. Any future CBDC would likely take several years to complete, but it is an interesting development that is likely to continue to be debated into 2024.