FCA say firms act without “foresight”, but principles attacked over lack of clarity

FCA director of enforcement and market oversight Mark Steward attacked firms for not fully considering the regulator’s principles, but event delegates demand clarity.

The FCA’s Mark Steward accused firms sanctioned in the last year of lacking any “reasonable planning or foresight” in decision-making as he addressed concerns that the rule maker’s Principles for Business lead to enforcement by hindsight.

Steward made the comments at the FCA Investigations and Enforcement summit, hosted by City and Financial Global in central London this week. Too often, the principles are being ignored, he said, while acknowledging the principles come under heavy criticism from market participants.

“The principles are sometimes criticised because it is said their generality makes it difficult for firms to determine the difference between compliance and non-compliance leading to concerns the enforcement principles leads to enforcement by hindsight,” he said.

The Principles for Business derive their authority from the FCA’s rule-making powers as set out in the Financial Services Act 2012, when the FCA was founded. They act as a general statement of the fundamental obligations for firms.

“It’s difficult to know whether this is in fact the case when on investigation, failures to comply with the principles reveal they were never really minded in the first place. And there was no evidence the principles were used to guide decision-making,” he said.

Steward said that in each of the cases in the past year, there had been “no evidence” that senior management or the firms had engaged with the principles whatsoever when making the decisions that led to breaches. As such, arguments of enforcement by hindsight were incorrect, he argued.

“Everything looks to be in hindsight when there is no reasonable planning or foresight,” he added.

However, a number of delegates at the summit maintained that the principles lack clarity and led to enforcement by hindsight.

“They are [unclear]. They are very, very high level,” said Sumitra Subramanian a principle associate at Eversheds Sutherland on the sidelines of the summit.

This wasn’t helpful in creating a healthy relationship between firms and the FCA, she said

“They give the FCA maximum flexibility and that’s why I think there can be this perception that sometimes the FCA can be like ‘Well, under the principle you are required to do this,’ but nowhere is that actually articulated in any detail – and I think that’s the issue.

“For example, principle one is firms must act with integrity, principle two is you must act with due skill, care and diligence. These are very, very high-level statements,” she added.

Sara Cody counsel PSL at Linklaters,  said the FCA was unclear when discussing how firms should interact with the regulator to reduce penalties.

Cody singled out principle 11 – which states that a firm “must deal with its regulators in an open and cooperative way, and must disclose to the FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice” – as a prime example of the problem.

“I still think there’s an immense lack of clarity as to what exactly firms need to do in order to go above what the FCA would expect in terms of corporations anyway, particularly in relation to principle 11,” she said on a panel.

“I don’t think it’s exactly clear what you have to do,” Cody added.