Financial firms should see enforcement actions as learning opportunities. The Financial Conduct Authority (FCA) and other regulatory bodies enforce steep fines and penalties to send a clear message and deter future violations. As a result? They expect firms within the industry to pay attention and adapt their compliance programs accordingly.
With that in mind, we’re continuing our blog series “what went wrong” in which we’ll cover enforcement actions and what your firm can do to avoid similar enforcement actions.
In our previous blog post, we talked about $51 million anti-money laundering and cryptocurrency compliance violations. Today, we’re focusing on an enforcement action regarding the FCA’s regulations regarding due diligence and conflict of interest and what firms can learn from this case of noncompliance.
The Case: A Violation of the FCA’s Regulatory Compliance Regulations
On Aug. 7, 2024, the FCA announced an enforcement action against an asset manager for regulatory compliance violations. The FCA alleges that the firm failed to carry out due diligence on investments.
The FCA alleges:
- The firm failed to conduct proper investigations into high-risk investments
- The firm had inadequate policies to manage conflicts of interest, with over 50 instances of employees receiving undisclosed hospitality, including the use of a superyacht and private jet
- The firm provided false and fabricated information to the FCA
- The firm did not manage its funds properly or protect investor interests.
The FCA would have imposed a substantial fine on the firm for its serious breaches. However, the FCA has agreed the firm will make €250 million available to all investors who were unable to access their funds. Additionally, the firm relinquished its rights to fees and investments totaling €320 million. The firm also agreed to apply to cancel its UK authorisation, effectively ending its regulated business in the UK.
While the firm faced significant financial penalties, was forced to exit the UK market, and investors received some compensation, it’s important to note that this does not fully recover all losses.
What Can Your Firm Do to Avoid Violating FCA Compliance Regulations?
Here are some steps your firm can take to avoid making costly mistakes regarding the FCA’s regulatory compliance regulations:
- Conduct rigorous due diligence on investments (assets, counterparties, market)
- Establish dynamic risk assessment to identify and mitigate high-risk investments
- Continuously refine due diligence processes for evolving market conditions
- Develop and enforce transparent conflict of interest policies
- Implement zero-tolerance for undisclosed gifts and hospitality
- Establish an independent compliance function to monitor conflicts
- Fortify internal controls and risk management frameworks
- Cultivate a strong culture of compliance which highlights ethical behavior
- Prioritise investor interests in business strategies and decisions
- Develop and implement robust investor protection policies and communication
FCA Compliance Management with COMPLY
The recent crackdown by the FCA on compliance management underscores the need for robust practises. With COMPLY, you can proactively build an effective and sustainable compliance program. Our comprehensive suite of consulting services is designed to help you:
- Conduct thorough risk assessments and tailor your program to your specific needs
- Design and implement effective customer due diligence procedures, including beneficial ownership identification
- Develop and test your compliance program to ensure its effectiveness
Don’t wait for the FCA to come knocking. Is your firm doing all it can to avoid a violation? Let’s find out.
