Using its initiative

The Financial Conduct Authority (“FCA”) publishes a short report each autumn covering its enforcement work over the previous year and has recently published one for 2023-24. The FCA has lately been highly focussed on testing the boundaries of its supervisory intervention powers under the Financial Services and Markets Act 2000, which it has had for many years, but has not yet used to their full extent. For Senior Management Function holders (“SMF holders”), there is one line (shown below) in the 2023-24 FCA Enforcement Report that is important to notice.

Table 3: Own initiative outcomes

The FCA references here a power that it (along with the Prudential Regulation Authority (“PRA”)) has had since 2016 under section 63ZB of the Financial Services and Markets Act 2000 to vary an SMF’s approval on its own initiative. The regulators can vary such approval by, for example, making an SMF holder’s approval subject to a condition, or by imposing a time-limit upon the approval. The threshold for exercising this power is very low – the regulator must simply consider that it is desirable to do so in order to advance one of more of its operational objectives (being consumer protection, protecting and enhancing the integrity of the UK financial system, and promoting effective competition in the interests of consumers in the financial services markets). In circumstances where the FCA feels it is warranted by the urgency or seriousness of the matter, it can impose the OIVAP immediately, on written notice to the affected parties. The right of recourse is to challenge the FCA’s decision in the Upper Tribunal, which unless a (rare) exception is made, is a public forum.

The FCA included guidance in its Decision Procedure and Penalties manual (“DEPP”) in 2016 describing the circumstances where it would use this power to vary an SMF holder’s approval on its own initiative, but until April 2023 (in the case of Lisa Maureen Campbell) appears not to have actually used it. However, use of this power is certainly consistent with the FCA’s stated strategy in its recent 2022-25 three year strategy paper  to make greater use of its statutory powers to achieve outcomes without launching fuller, longer enforcement investigations. Similarly, Steve Smart, Co-Director of the FCA’s Enforcement and Market Oversight Division, stated in a speech in June 2024 that:

 Across the FCA we are developing how the different strands of our organisation – enforcement, authorisations and supervision – work in a more integrated way to achieve this. We have a range of criminal and regulatory tools across the organisation, and we are looking to deploy the right tool to deal with the right issue quickly.

The FCA’s guidance in DEPP states that OIVAPs may be used, for example where:

• there is a fitness and propriety concern that is not severe enough to warrant prohibition; or
• a person’s role or the firm’s business has changed, with the result that the FCA considers that they need to complete additional training or mentoring; or
• the SMF holder is required to personally support supervisory action in relation to the firm. For example, where a firm is running a remedial programme, the FCA may impose a condition that the SMF holder take responsibility for managing or overseeing delivery of aspects of that programme.

What does this mean for SMF holders? On the face of it, the FCA’s decision to try out this supervisory tool instead of its more draconian powers that take longer to utilise (enforcement investigations that could lead to a prohibition order) looks like good news. However, if the FCA is to make widespread use of its OIVAP tool (which seems likely, in line with its strategic objectives and in view of the low threshold required for it to invoke the OIVAP power) there are significant risks for SMF holders.

When the FCA uses its supervisory intervention powers, it can take action very quickly and there are limited procedural protections for the individual’s protection (as opposed to the enforcement process, where the FCA’s Regulatory Decisions Committee serves as a check and balance on the power of the FCA Executive). Use of OIVAPs by the FCA as a formal method of allocating responsibility to SMF holders for overseeing remediation programmes (as envisaged in DEPP) will make the personal regulatory risk associated with challenges often experienced in delivering such remediation programmes to the regulators’ expected timeframes significantly greater, because shortcomings in the delivery of a remediation programme could then directly lead to the individual’s approval to perform their SMF lapsing, affecting both their ability to perform their role and their future employability. Further, the fact of having one’s regulatory approval made subject to a condition or time limit would be disclosable to any future employer, and depending on the circumstances may well make a change of employment more challenging to achieve. It is not difficult to envisage a wider use of OIVAPs, if this materialises, leading to SMF holders who are effectively trapped in their roles and facing personal regulatory accountability in respect of remediation programmes that may or may not be given the time and resources to deliver on time.

With this in mind and considering that the most talented senior executives in financial services are likely to have employment opportunities in jurisdictions outside the UK, it seems fair to wonder whether an increased use of OIVAPs supports the FCA’s new secondary statutory objective of facilitating the international competitiveness of the UK financial services sector and its broader economy. For an SMF holder finding themselves subject to an OIVAP, it will be important to understand fully the potential consequences of the measure and to take all possible steps to ensure that the necessary time, resources and advice are available to ensure removal of the condition or time limit in as short a time period as possible.