Sunday, 1 February 2015

Is It FCA Supervision or Enforcement?


One of the observations in my latest post about enforcement (here) was that fines can become a relatively small component of the cost of regulatory enforcement.  This observation was made in a context where, in addition to the fine, the firm had agreed to a number of specific measures which included replacing its executive management team and a comprehensive review of its governance structure. 

This week I came across an even better example of the blurring line between formal enforcement and where a firm agrees with the supervisor to a set of measures.  The Times reports that the London office of Deutsche Bank has been put on ‘enhanced supervision’ (here). 

Enhanced supervision is a new power acquired by the FCA, the use of which is articulated in a paper from June 2014 (here).  It explains that the application of enhanced supervision is not enforcement, although that may follow.  Enhanced supervision requires the firm’s Board to formally commit to remediation measures.  The paper sets out a comprehensive list of indicators of the failures that would lead to enhanced supervision:  
  • “the observation of numerous or specially significant conduct failings or repeated failings that when examined individually might not be considered serious  
  • “occurrence of failings in several business areas, as this is an indicator of wider cultural issues within the firm 
  • “a poorly functioning Board, for example failing to challenge executives or take a lead in considering conduct  
  • “evidence of control areas such as Risk, Compliance and Internal Audit being poorly managed, under-resourced or unable to make their voices heard at Board level 
  • “evidence of weak risk management (we may consider the PRA’s findings in relation to prudential risk management), or 
  • “evidence of other weaknesses in the way in which the Board and senior management influence key cultural factors, for example ‘tone from the top’, pay and incentives and their adherence to the organisation’s values.” 

There has been no formal statement from the FCA about this case. 

Perhaps the main point arising from this development is the further recognition that formal enforcement may not necessarily be the most effective tool from the point of view of meeting supervisory objectives and that fines may not be the most effective deterrent.  

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This post has been added to the page FCA enforcement in this blog which links all the enforcement cases reviewed.

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