The era of tough regulatory compliance officially began in the UK when the 1979 Banking Act was passed by that country’s legislature. Before then, financial institutions were free to run their operations as they wished, and pertained to a “secretive gentleman’s club” style of understanding.
A financial sector implosion had struck the nation before the Act was passed, namely, the secondary banking crisis of 1973-75. This shock saw a number of small banks go bankrupt after they were unable to bounce back from failed investments in the UK’s commercial real estate sector.
Other financial sector failures eventually led to the Banking Act in 1987, which granted authority to the UK government to carry out and conduct inquisition-style investigations into banks and other financial institutions.
Two years earlier, in 1985, the Securities and Investments Board was founded by the UK Financial Services and Markets Act 2000. The name of this regulatory body was changed to the Financial Services Authority (FSA) in 1997.
The mission of this agency was to formally abolish self-regulation and implement a framework for regulatory measures meant to provide greater overall transparency to the UK financial sector.
Established as an independent agency of both government and financial entities, it was the paramount regulations authority force in the UK. It was responsible for regulating financial advisors, banks, insurance companies and intermediaries, as well as mortgage business entities.
UK Goals Behind Regulatory Compliance in the Financial Sector
Five primary goals—codified as principles of good regulation—were spelled out for the FSA by the Financial Services and Markets Act 2000. The Act then charged the agency with:
- Encouraging market confidence in the UK financial sector.
- Promoting public understanding and awareness of the same.
- Securing protections for the consumer.
- Limiting the impact and incidence of financial crime.
- Enhancing stability in the financial system.
The UK Parliament and Treasury oversaw the operations of the agency, which used to file annual reports on its performance achievements vis-a-vis the established objectives mentioned above.
Dissolved formally in 2013 by the Financial Services and Markets Act (FSMA) 2012, it had provided compliance counselling to financial companies and was deemed an aggressive enforcer of the rules and guidelines.
The FSA was split in 2013 into the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) of the Bank of England. The division of the former FSA stemmed from an official legislative response to the financial crisis of 2008.
Then, government officials sought to completely revamp the regulatory structure of UK financial markets into a tougher and more hardline entity.
The FCA and PRA
Above and beyond the goals previously outlined for the FSA, the FCA was established to further:
- Regulate financial markets.
- Foment market integrity in the UK financial sector.
- Facilitate competition that aids the end consumer.
Among the financial entities it governs, you will find brokers or dealers in commodities, currency exchange companies, credit card issuers, and funding/lender companies.
A public body that is wholly independent, the FCA is funded by fees collected from 58,000 financial firms the agency checks and controls.
In turn, the responsibility of the PRA is to regulate banks, insurance firms, credit unions, and investment firms. A division of the Bank of England, the PRA is a UK government-owned entity directly controlled by Parliament. The decision-making body for the PRA is the Prudential Regulation Committee, made up of several government entity representatives.
The two above entities work in tandem—along with FSMA—to guide, control and check regulatory compliance management departments in UK financial firms.
More About Compliance in the UK
All in all, the compliance process in the UK is designed to foster financial crime prevention and the protection of both companies and clients from irresponsible and high-risk financial management decisions.
In the UK, the business purpose, size, and revenue of a financial firm determines what kind of regulations apply to said company. These allow for their classification into different categories that each have specifically defined reporting requirements, regulatory obligations, and level of regulatory risk.
Beyond the FCA and PRA, other regulators in the UK financial services industry include:
- The Financial Action Task Force (FATF): A body responsible for Countering Financial Terrorism (CFT) and Anti-Money Laundering (AML) on a global level.
- The European Securities and Markets Authority (ESMA): An agency that implements a high-quality compliance programme that ensures standardisation across all European Union (EU) financial markets. This authority works alongside UK risk management and regulation agencies when UK consumers and financial institutions invest in EU financial assets.
UK financial firms will typically work with a compliance officer or team in order to assess financial risk and keep to regulatory rules and guidelines. Sometimes, the latter may lead the compliance team to issue the creation of a privacy notice, an internal audit, or data protection changes.
Consequences to those who violate UK compliance regulations include:
- Corporate punishment, such as the stripping of accreditations.
- Individual punishment, such as imprisonment.
Recent and Prominent Enforcement Cases in the UK
Stiff financial penalties have been levied by the FCA against banks for AML controls failures and manipulation. In May 2015, the FCA issued a fine of £284,432,000 on Barclays Bank for systems and controls failures linked to foreign exchange manipulation, one of the largest fines ever imposed by the agency in its history.
In January 2017, the FCA imposed a fine of £163,076,224 on Deutsche Bank AG for not maintaining a satisfactory AML control framework.
The corporate governance agency found that, between 2012 and 2015, Deutsche Bank:
- Had sub-par anti-money laundering policies and procedures.
- Did not perform adequate client due diligence (CDD).
- Had a poor anti-money laundering IT infrastructure.
- Did not sufficiently check UK trades by offshore traders.
FCA investigators found “serious and systemic weaknesses” in Deutsche Bank’s AML controls and systems, which “created a significant risk that financial crime would be facilitated, occasioned or otherwise occur”.
New, Emerging Trends for the Future
According to the Financier Worldwide, high profile enforcement cases like the above, and the depth of the 2008 financial crisis, has spurred a massive investment in compliance programmes, which have seen considerable maturation in certain UK industries, such as the financial and healthcare sectors.
UK tech companies, in particular, are markedly investing in compliance, in reaction to data privacy breaches and problems that have dogged the industry in recent years.
Technology may also revolutionise compliance. RegTech, or regulatory technology in the form of cloud computing or software-as-a-service (SaaS) applications, could significantly revamp the function of compliance in the UK by offering solutions to regulatory and compliance issues that simplify the programme process, from start to finish. They lower costs, speed up processes, and free up the schedules of employee teams, claim RegTech providers.
According to Martin Schofield, Director of the Financial Crime and Forensics Unit at the compliance leadership firm ComplyPort and an IGCA Fellow, the “world has become a much more litigious place… when the public thinks that a big firm has made money from them, they are prepared to fight to get it back, even if they do not have the proof that would ordinarily be required to make such a claim successful – enter the world of PPP (Paycheck Protection Programme)!”
In other words, the compliance function keeps changing and evolving in the UK. One of the posts coming up in March will look closer at the British identity when it comes to compliance.
Stay tuned for plenty more on this subject!