Regulatory enforcements in 2021: All change, or business as usual?

As 2022 opens, CUBE explores 2021's regulatory enforcements to see whether Covid-19 and a shift in focus for environmental, social and governance (ESG) factors has changed the landscape.

Following a brief period of pandemic-driven regulatory respite, many in the financial services industry, driven by regulatory messaging, predicted that 2021 would be a big year for regulatory activity. Not only would regulators be more demanding, but they would also turn their focus to new areas of compliance - from crypto to ESG. Or so we thought.

A recent report by CUBE has found that while the US has seen increased regulatory activity in new and emerging areas, the rest of the globe remains relatively unstirred in 2021. Despite some sizeable fines from regulators, the number of enforcements issued remains broadly the same year-on-year and regulators appear cautious in their approach to exploring new ground for enforcement.

The US Securities and Exchange Commission's recent enforcement results for fiscal year 2021 showed that there was a seven per cent increase in new regulatory actions over 2021. Regulatory penalties increased by 33 per cent. The regulator even covered new ground for enforcements - reaching out into areas such as alternative data, crypto and greenwashing.

Towards the middle of 2021, the picture painted by the UK's Financial Conduct Authority (FCA) suggested a quieter year for enforcements. In its July 2021 annual report (which covers Fiscal Year 2020/21) the Financial Conduct Authority (FCA) revealed it had issued a total of £189.8 million in financial penalties, a 15 per cent decrease from the £21.7 million issued in FY 2019/20.

However, as the year ended, December 2021 saw two regulatory enforcements that boosted the total amount issued by FCA in 2021 to £567,765,219 - up by £375,195,201 from the end of 2020. Of course, this was bolstered by NatWest's £264.8 million fine (it is worth highlighting that this fine will not appear in the FCA's statutory accounts as it was not levied by, or paid to, the FCA).

While the cumulative value of fines issued by the FCA increased sharply in 2021, the regulator focused on classic areas of compliance, including financial crime, AML, and regulatory reporting. Unlike its US counterparts, it did not branch out into new and emerging territories. Moreover, while individual accountability was set to be a hot topic for enforcement in 2021 following the introduction of the Senior Managers and Certification Regime (SM&CR), the FCA only issued two cases against individuals this year - down from eight in 2020.

The things to watch

  1. Emerging regulations and regulatory enforcement surrounding cryptocurrency

The US has undoubtedly led the way with regard to crypto enforcement in 2021, but that is not to say that it's not on the wider regulatory horizon for 2022. With increasing fluctuation in the crypto markets - as well as unpredictability and ?gameability? - it is highly likely that global regulators will move to act in 2022. The FCA in particular has set out plans to increase its crypto focus in a bid to protect the new wave of younger investors.

  1. Increased regulatory focus on culture and supervision, especially for individuals at the top

While the FCA has been relatively inactive in its enforcement action against individuals, the same is not true of other global regulators. The SEC, for instance, issued myriad cases against high profile chief executives in 2021.

Australia's ASIC similarly concluded 180 enforcements related to small businesses and individuals over the first six months of 2021, more than all of the other enforcements combined. Moving into 2022, it is likely that this will continue on an upward trend especially given the shifting focus towards environmental, social and governance (ESG) factors.

  1. Operational resilience across all new and current systems

Covid-19 - and the parallel shift towards digital in financial services - has put operational resilience at the top of the regulatory agenda. Investing in technology is one thing but ensuring that technology and the relevant processes are operationally sound is another.

Over the course of 2021, global regulators have issued enforcements in instances where firms had put systems in place but had failed to ensure those systems were working or able to stand up to environmental pressures. The US's FINRA, for example, issued eight enforcement actions in the first half of 2021 against firms who had ineffective systems, policies and controls in place. Regulators are likely to sharpen their focus in this area in 2022 and uncover gaps that might have appeared in the melee of hurried digitisation across 2020/21.

Read more about global enforcement trends for 2021 in CUBE's latest report.