This speech, by Mark Steward (FCA Enforcement Director), rightly highlights the relationship between Enforcement and Supervision as pivotal to the effectiveness of regulation overall and, particularly given his intention to initiate more investigations, it’s worth examining this double act in a bit more depth.
If Enforcement is at the expensive end of the regulatory spectrum – lots of internal resource, external lawyers and often quite lengthy investigations – Supervision tools tend to be at the cheaper end of the scale, and can be much quicker to use. Even thematic reviews and redress schemes tend to be shorter and less expensive.
Obviously there are exceptions, and PPI in particular breaks all the norms. So far, it has encompassed multiple waves of thematic work, an 8 year redress programme, and in total has so far lasted some 13 years, and with the cost still rising for all and sundry.
In some respects, however, PPI is an excellent case study in the Enforcement/Supervision relationship. Here are some of the potential parallels:
- One driver of all those thematic reviews was to provide Enforcement with a large enough sample of evidence to take action against the large banks.
- It was deeply affected by internal changes. Enforcement was implementing the Strachan Review, followed by a major restructuring, that both reduced the number of cases Enforcement was able to take on and increased the length of investigations. Brexit and the move to Stratford could have a similarly disruptive impact today.
- Supervisors came to worry about the extent to which PPI was dominating their overall relationship with the large banks, crowding out other important issues.
- The essentially transactional nature of Enforcement also pulled attention away from the wider context of PPI, partly obscuring the extent to which PPI income was core to some of the banks’ profitability.
Due to the complexity and importance of the Enforcement/Supervision relationship, a series of liaison mechanisms has been put in place between the two divisions over the years. These have worked more or less well but are rarely straightforward, particularly in high profile cases. The RBS and HBoS Reports both provide fascinating windows on the nature of these decisions, while the Senior Managers Regime is likely to increase their complexity, as assessments are made around the extent of individual as opposed to firm culpability.
For firms who find themselves in an Enforcement investigation, there are good reasons to avoid becoming consumed by its prolonged but essentially transactional narrative. The FCA relationship is not one dimensional, even for small firms, and making clear-eyed choices about the best broader regulatory engagement strategy.
Mark Steward’s speech suggests the FCA wants to move towards a “more multi-faceted approach to regulation”. This makes sense - Enforcement will always be a key part of that mix but Supervision tools will be a better option in many instances - but it is hard to do.
Firms should think about what the FCA’s ambition means for them and how they should approach regulation.
There is much to be said for the effect of a mixture of regulatory interventions working strategically together, including enforcement, rather than a series of siloed responses.