A tale of a not overly impressed FCA, intervention and s165s

The indie rock bank Arcade Fire have a song on their “Neon Bible” album titled “Intervention”. The song begins with crashing chords on a church organ, building up an ominous sense of dread. It may seem a little overdramatic, but it is the song that came immediately to my mind on hearing that the FCA’s Payments Supervision Department has now been renamed the Payments Market Intervention Department and again after hearing the FCA’s keynote speech at our Regulatory Forum we held at the beginning of November. The FCA are sending a clear message that they are, and will be, not just supervising the payment and E-money sector but actively intervening where they see things they don’t like. To quote Nicholas Webb in the FCA’s keynote speech at our Payment Services Regulatory Compliance Forum, “The FCA has been continuing to look very closely at the payments sector and the closer we look, the worse the picture becomes.” The FCA is clearly seeing things that it doesn’t like in our area. This is not a comfortable message for the sector, as many delegates said to me on the day, but it is clearly one that the FCA is keen to get out to all regulated firms in the sector. Nicholas also said that if any payments or E-money firm appears on the FCA’s radar for any reason at all; be it a notification, an error in regulatory returns, a complaint or a negative story in the media, the firm could be subject to a “holistic review”. This means that the FCA will be asking questions about the firm’s whole business – including governance, safeguarding AML/Financial Crime, prudential matters and liquidity. In undertaking the holistic review, the FCA has said it will be taking account of a wide range of intelligence including social media and online review sites such as Trustpilot. The FCA has powers under section 165 of the Financial Services and Markets Act 2000 to require information and documents from firms to support both its supervisory and its enforcement functions. The Enforcement Guide in the Handbook at EG3.2.2 says:“An officer with authorisation from the FCA may exercise the section 165 power to require information and documents from firms. This includes an FCA employee or an agent of the FCA.”And as the FCA confirmed at our regulatory forum, we are increasingly seeing the FCA using these powers to demand information from firms. What the FCA failed to mention was the requirement to respond to an s165 within a very short timescale, in some cases less than a week from the date of the letter in order to kick off such a review. The letters often also include the following paragraph:“In particular, please note that should you fail to comply with a requirement imposed under section 165 of FSMA without reasonable excuse, the FCA may certify that fact in writing to the court. The court may treat you as being in contempt of court if it is satisfied that you failed, without reasonable excuse, to comply with the requirement. In addition, such failure may result in disciplinary action for breach of Principle 11 of the FCA’s Principles for Businesses (PRIN).”While court action is an unlikely outcome, and would only be used in case of outright refusal to comply, if a firm is unable to provide the documentation required within the specified timescale, the FCA is likely to take the view that it does not have appropriate systems and controls in place and is therefore in breach of its regulatory obligations. This is not a good place to start a holistic review by the regulator from. As regular readers will know, a constant mantra of mine is that “if it’s not written down, as far as the FCA are concerned, it didn’t happen.” In order to be able to respond quickly to an FCA request for information, it is therefore vital that firms both understand what they are required to be doing to be compliant, and make sure that they have the evidence to prove to the regulator that they are doing it. The focus of the FCA on the sector and their view that it is a problem area means that the regulator is likely to have little compunction in intervening to take action where a firm cannot show that it is compliant. This may start with the FCA requiring a “voluntary” undertaking from the firm to stop doing business until the identified issue is rectified. If they come to the view that rectification is not possible within a reasonable time, they could ask the firm to “voluntarily” relinquish its permission, under threat of enforcement action to remove the firm’s permission if such voluntary action is not forthcoming. As Arcade Fire sing in “Intervention”

“We can't find you now

But they're gonna get their money back somehow

And when you finally disappear

We'll say you were never here”

To avoid your firm suffering such a fate, you need to be properly prepared and be able to show that you are taking all reasonable steps to be compliant. This includes having independent audits and reviews, proper minuting of Board discussions on key regulatory matters such as level of own funds, liquidity testing, safeguarding, wind down planning, complaints, operational resilience, consumer duty, etc. etc. These need to be proper discussions, rather than just “noting” and be supported by proper detailed documentation to evidence. Working on the basis that the FCA may, at any time, ask a firm to provide written proof of its compliance with its obligations this is the safest way to approach this, and as was repeatedly said on 1 November, this requires: “Evidence Evidence Evidence”