Themes from 2021

1. The new Consumer Duty

We start off with what might be the biggest change to "retail" regulation yet, as the FCA has now published its revised proposals for the new Consumer Duty. Following feedback, the FCA is set to adopt a new Consumer Principle that places emphasis on consumer outcomes. This new Principle, that a "firm must act to deliver good outcomes for retail clients" is intended to drive a change in culture that the FCA wishes to see in firms.

The FCA also proposes adding three "cross-cutting" rules into the PRIN sourcebook, which must be applied across all areas of firms' conduct towards consumers and which are intended to help firms interpret four new outcomes. The new outcomes provide more detail on the FCA's expectations for the "key elements of the firm-consumer relationship" (read more in our earlier briefing).

One key development is that the FCA is not proposing to provide a private right of action (to bring a civil claim under s. 138D of the Financial Services and Markets Act 2000 in relation to FCA rule breaches) for breaches of any part of the Consumer Duty at this time. However, it will keep this possibility under review, pending firms' implementation and compliance with the Consumer Duty.

Firms have until 15 February 2022 to respond to the consultation and the FCA expects to make the new rules by 31 July 2022, with an implementation period starting from the date of publication of the final rules, ending on 30 April 2023. During the implementation period, firms will be expected to review their existing and incoming products and services (including making updates to any customer-facing documents such as T&Cs) and take actions to fully implement the Consumer Duty.

2. Financial Crime

In another busy year within the financial crime space, the FCA's appetite to crack down on all forms of financial crime show no signs of abating.

The most significant example of this was the FCA's landmark prosecution of NatWest in respect of failures under the Money Laundering Regulations - the regulator's first criminal prosecution for money laundering failings. This follows a wider trend of criminalising systems and controls failures, as seen by the Bribery Act 2010 and the tax evasion offences under the Criminal Finances Act.

Another emerging theme in 2021 which we highlighted in our May webinar, is the anticipated increase in financial crime as a result of the pandemic. The FCA has warned firms that they must be alert to emerging risks – for example, criminal exploitation of government financial support schemes. The full range of risks have yet to crystallise. However, following FCA guidance issued in October, we now know that the FCA will be evaluating firms' home working arrangements to ensure that they do not increase the risk of financial crime. The FCA has also raised the prospect of visits, including enforcement visits to the homes of staff who work remotely. Such visits have real potential to create thorny problems for firms and their employees in 2022 and beyond. It may even lead to a reconsideration of whether regulated business should be conducted from home (see our earlier briefing).

3. ESG Litigation

Within the past year, ESG issues have continued to cement themselves at the top of the corporate agenda. Against this backdrop, the regulatory landscape around ESG continues to develop rapidly. For instance, from 10 March 2021, the Sustainable Finance Disclosure Regulation imposed mandatory ESG disclosure obligations for asset managers and other financial market participants (read more). For multi-jurisdiction financial institutions, novel legislation such as this heightens their need to establish how sustainable their 'green' investments are. Claims by shareholders regarding a financial institution's failure to meet its ESG commitments has so far been more prevalent outside the UK, however as we highlighted in our March webinar, we are likely going to see an increase in such claims from 2022 onwards.

Another continuing trend is attempts by claimants to hold UK parent companies accountable in the English court for the ESG impacts of their overseas operations. For example, in February, the Supreme Court handed down its judgment in Okpabi and others v Royal Dutch Shell plc and another (read more). During 2021, we have continued to see transnational tort law claims such as these, and a key commonality is the degree of control that a parent company exerts. If these type of claims continue into 2022, it is important for financial institutions to enhance their 'look-through' capabilities, including ensuring that there is appropriate oversight and systems in place across the entirety of its operations.

Looking ahead, we expect to see an increase in ESG-related claims against companies from a variety of sectors, as greater attention continues to be paid to companies’ sustainability credentials.

4. Non-financial misconduct

The FCA's increased focus on non-financial misconduct, which we highlighted towards the end of 2020, continued throughout 2021.

Cases included:

• the Upper Tribunal considering, for the first time, the FCA's decision to sanction an individual based on a criminal conviction that did not involve dishonesty and was unrelated to the individual's regulated activity (read more);

• a prohibition order against an independent financial advisor on fitness and proprietary grounds, as his conduct – understating his income for tax purposes – demonstrated a lack of honesty and integrity (read more); and

• a prohibition order against an individual as the FCA and PRA found that, by making arrangements in relation to "administrative support" from his wife that resulted in him paying less income tax than he should have done, he had acted without integrity for his own financial benefit. The Upper Tribunal disagreed, however, and refused to support any finding of a lack of integrity. It directed the FCA and PRA not to impose a financial penalty and remitted back to each of the regulators the question of whether a prohibition order should be imposed (read more).

Individuals are increasingly being prohibited from working in the financial services industry as a result of misconduct unrelated to financial dealings and/or the activity for which they are regulated. This is a key issue for the FCA, senior managers and regulated businesses (and their "fit and proper" assessments) and is set to resonate throughout 2022.

5. Diversity and Inclusion

And last, but definitely not least, diversity and inclusion was one of the most important themes of the year.

Clear momentum for change was seen in the UK and around the world. Social movements and increasing investor focus have led to global conversations, in particular about gender and race. These engaged the attention of regulators globally and the UK regulators (the Bank of England, PRA and FCA) published a Joint Discussion Paper on Diversity and Inclusion in Financial Services, which they saw as an important step towards making rapid and more substantive progress across the financial sector (see our earlier briefing).

The regulators are engaging financial firms and other stakeholders in a discussion on how to accelerate the pace of meaningful change, clarify expectations and set higher standards on diversity and inclusion, noting that change cannot be driven by regulatory requirements alone. It relies on the positive engagement of firms to achieve cultural change, driven by committed leadership across the sector. They want firms to think about how they can advance diversity and inclusion through improving their policies, governance arrangements, accountability, remuneration arrangements and disclosure.

They have also taken the first steps towards codifying firms' obligations on diversity and inclusion with a commitment in the Discussion Paper to explore the introduction of new rules and regulations to put diversity and inclusion at the heart of financial services firms' corporate governance and product design. We expect a Joint Consultation Paper in the first quarter of next year, with a Policy Statement following in Q3.

We will be keeping a close eye, and reporting, on these key areas throughout the next year. See you in 2022!

Authors: Lindsey Davies, Senior Expertise Lawyer, Andrew Sims, Solicitor, David Capps and Ruby Hamid, Partners