Latest annual report shows significant uptick in the FCA’s interventions in regard to authorised firms

The Financial Conduct Authority (FCA) has published its Annual Report and Accounts 2023/2024. The report is keen (laboured in places) to present the FCA as having had a strong year. In so doing, the FCA emphasises progress against predominantly qualitative developments, drawing on the new Consumer Duty, the FCA’s expanded remit to help support the UK’s international financial competitiveness, and a considerable escalation in actions against misleading adverts and unauthorised promotions.

At the granular level however, the report’s numbers paint a more varied picture: a lack of follow-through in some areas, and a regulatory and enforcement approach that is pushing-down costs onto regulated firms.

An aggressive approach to crypto AML supervision

Where the FCA can celebrate considerable success is in its approach to anti-money laundering (AML) supervision. Having been dragged (unwillingly) into supervision of the crypto space, the statistics (87%+ of registrations withdrawn, rejected or refused for weak AML controls) bear out a much more muscular attitude (preventing bad actors’ access to the perimeter ‘extension’) over the more relaxed approach that yielded the mini-bonds fiasco. That said, the FCA has not yet solved the wider complexities of crypto-asset regulation and it is yet to be seen whether the recent guidance on crypto-assets will satisfy the complexity and time-delays criticisms surrounding crypto authorisation (taking on average 459 days over the last 3 years).

Financial crime: throughput still lacking

The report is at pains to point out that the FCA has had an exceptional year in combatting financial crime:‘Since April 2023, we have decided to charge 21 individuals with financial crime offences; the highest number of charges we have achieved in a year. We also brought 9 successful prosecutions against fraudsters.’ However, these numbers do not appear particularly impressive when one remembers that there were 48 open financial crime investigations with the unauthorised business enforcement team in April 2023, with 212 individuals and entities under investigation. Coupled with only nine freezing orders (albeit a significant rise on three in the preceding year), totalling £21.1 million in assets, this lack of throughput underlines the fact that whilst the FCA’s criminal investigation and prosecution function remains burdensome on firms and individuals under investigation, it remains largely ineffective.

Skilled person report surprise

Tucked away in the Appendix 2 is an indicator of a significant uptick in the FCA’s interventions in regard to authorised firms. The use of section 166 reports by skilled persons had been on a gentle downward trajectory (58 in 2019/20, 67 in 2020/21, 37 in 2021/22 and 45 in 2022/23) but increased to 83 in 2023/24. The costs associated with the instruction of skilled persons are significant and can be an inadvertent method of cancelling authorised permissions: with firms left with little choice but to cancel permissions or face financial ruin. It is therefore not surprising that elsewhere the FCA reports that authorisation cancellations doubled to 1,261 in 2023/24.It is difficult to predict where this trend is headed. On one hand, given the noises the new government has made about a return to light-touch regulation, one wonders if this is the last hurrah of the ‘investigation is an outcome’ strategy that originated from the enforcement division but came to strongly influence supervision. But on the other, section 166 reviews present for the FCA a comparatively low-cost investigative and enforcement tool; a tool which may prove increasingly attractive in light of its significantly reduced funding reserves.

The Upper Tribunal: learning from mistakes

Perhaps most concerning for the FCA’s long-term enforcement effectiveness is its response to recent criticism from the Upper Tribunal (UT). Rather than embracing the UT’s comments as an opportunity for reflection and improvement, the report seeks to distance the relevance of the UT’s judgments by reference to the UT’s differing evidential processes and by focussing on the UT’s findings on points of black-letter law. What is conspicuous by its absence is reflection of the systemic investigative and prosecutorial failures raised by the UT in cases such as Seiler.