Teamwork: A Smart way to tackle financial crime

Speaker: Steve Smart, joint executive director of enforcement and market oversight
Event: City and Financial Global – Financial Services Investigations and Enforcement Summit 
Delivered: 26 June 2024
Note: this is the speech as drafted and may differ from the delivered version

Key points: 

• The FCA is as much a law enforcement agency as a regulator
• Collaboration and teamwork are key to our success – both internally and with our external partners including industry
• We are focused on speeding up the pace of our investigations and making the different components of our organisation such as enforcement, supervision and authorisations work together more seamlessly 

Introduction

Collaboration and teamwork is one of the areas I want to talk to you about today. 

It is almost one year to the day since I joined the FCA as joint executive director of enforcement and market oversight, alongside my partner in crime fighting and misconduct tackling, Therese Chambers. 

I started my working life in one of the most sober professions: accountancy. The silver lining was that it was for a brewery. I didn’t stay long (partly for the sake of my liver), quickly moving into public service – initially as a government economist before building a career in intelligence and investigations, countering national security threats. 

My last role before the FCA was as the director of intelligence at the National Crime Agency (NCA). The Times once referred to it as a role befitting my surname (thankfully without passing comment on whether or not it’s a fitting surname for me). 

Fighting crime, preventing harm, enforcing law

On joining the FCA, some of the similarities with the NCA became clear. Over the last year, I have witnessed the breadth – often unseen by those on the outside – of the FCA’s work countering financial crime (alongside all the other work it does to protect consumers and the integrity of our financial markets) – and how committed and mission focused the organisation and the people who work there are.

The FCA approach to tackling harm also has parallels with the NCA – we look to prevent harm before it occurs and pursue those responsible for causing it. 

In enforcement, we take on many criminal as well as regulatory cases. And with all our work we are always mindful of the need to constantly improve and evolve, to identify potential harm sooner, prioritise our response and progress our cases at greater pace. 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.

When it comes to countering financial crime, we are in many respects a law enforcement agency as well as a regulator. We must stay a step ahead of the criminals, whether it is to pre-empt the way they use new technology such as AI and deep fakes or whether it is to work together with the firms we regulate, to ensure their systems and controls keep a step ahead of those seeking to exploit them.

Alongside prevention, we recognise the need for a strong enforcement response to maximise the deterrence impact of our work.

At the NCA, it was clear that a common thread for solving most serious and organised crime, almost irrespective of its nature, was to follow the money. This is particularly true in financial crime. And in the FCA too our dogged investigators and financial analysts pore over complex spider webs of transactions, designed to conceal money flows. When we get to the end of the trail, we use our asset-freezing and confiscation powers. We are determined to seize the profits of the crimes we investigate and work tirelessly to enforce confiscation orders to return money to victims.

Key to all our work is collaboration with partner agencies to strengthen our collective response to any issue. For financial crime and fraud this means working with a wide range of agencies as part of the National Fraud Strategy. And of course, industry is crucial in all this too. After all, firms stand to lose heavily to fraudsters, and it is in all our mutual interests to tackle this type of crime.

Our goal – as part of our commitment to reduce and prevent financial crime, is to fight the growth in APP (or Authorised Push Payment) fraud and investment fraud as well as to help tackle money laundering. And we are jointly, alongside partner agencies (including the Payments Systems Regulator), making an impact.

There were 3.1m reported incidents of fraud in 2023, still far too many. But this was a decrease of 16% compared to the previous year. 

There were 2.6 million adult victims of fraud in 2023, still far too many. But this is half a million fewer than in 2022. 

The total losses to fraud were down by 4% to £1.17bn according to the UK Finance annual fraud report. 

However, it is a mixed picture: fraud still accounts for nearly 40% of national crime. And fraud typologies continue to evolve; for example: pre-pandemic, the traditional age profile of victims reporting investment fraud to Action Fraud was 50 to 69 years old. Last year – partly driven by changes in technology and the rise in social media promulgated investment scams – you were just as likely to report being a victim of fraud if you were in the 20 to 39 age group. 

Never before has so much investment choice been so widely available to so many consumers at the push of a button. 

One of our campaigns InvestSmart[1] helps consumers cut through the hype as they navigate their way through the plethora of offers online, via trading apps, social media and recommendations from friends and influencers. 

If an offer seems too good to be true, it almost certainly is.

So, what are we doing specifically about financial crime? 

Preventing harm through awareness

Well, the first step – and ideal outcome – is always to prevent. We have done this by raising awareness through our ScamSmart[2] campaigns. These highlight the red flags of a scam and encourage consumers to check our online Warning List[3].

We also worked with big tech platforms such as Google, Bing and Meta to tackle illegal financial promotions and scam adverts.

We have invested heavily in a system that identifies promotions of unauthorised financial services. Last year we issued 2,286 warnings about potential unauthorised activity and scams.

We have issued guidance clarifying the obligations for firms and others, including ‘finfluencers’, when using social media to communicate financial promotions. It is worth remembering that promotions aren’t just about the likes, they’re about the law. 

Not all alleged breaches of regulation or the law are easy to spot. We cannot do our detective work alone. 

Criminals will always pivot to exploit the weakest firms and sectors, so sharing data and intelligence is a vital tool in strengthening our defences. 

We strongly encourage firms and cross-sector partners to participate in data sharing initiatives.

We work with the police, other law enforcement agencies and regulators to develop better intelligence sharing and prioritisation. This allows us to identify fraud networks whether they are home-grown and operating domestically or are part of a complex, cross-border web. 

As an example, last year we hosted a 3-day investment fraud tech sprint drawn from regulatory, intelligence and law enforcement agencies to design new ways to tackle this type of fraud. Going forward, industry engagement in this work will be crucial. 

Internationally, we continue to strengthen relationships to address cross-border financial crime risks. 

Authorisations are key to high standards

Another tool of prevention is the authorisation required for people to sell regulated financial services in the UK.

We ensure as a regulator that standards are high and that starts at the gateway.

Through a rigorous process, we check that firms have the right systems and controls in place, underpinned by sound business models, before they can be approved.

This is to prevent potential harm to the wider system. We make no apologies for high standards but we do recognise that our processes in the past have been slower than we would like. That is why we have worked hard to eliminate our operational backlog and are holding ourselves accountable to help reduce unnecessary delays at the gateway. 

As an example, some 86% of the initial crypto registrations we received were rejected, withdrawn or refused. This was because they often failed to meet the appropriate standards to satisfy the anti-money laundering control framework.

However, by working with potential entrants and supporting firms to navigate this process, we are seeing more crypto firms achieving registration under the Money Laundering Regulations, with a total of 44 firms now registered. 

Pursuing criminals and justice

As well as being focused on the ‘prevent’ part of our work, we are also, of course, very active in the pursue space. 

Financial crime cases can be particularly complex and difficult to investigate and prosecute, but last year we made decisions to charge 21 individuals with financial crime offences; from finfluencers to multi-million-pound unauthorised investment schemes. That is more charges than in any previous year. We have upcoming trials for offences including insider dealing, money laundering and fraud.

This year, in the month of May alone, we saw an individual sentenced to 18 months' imprisonment for perverting the course of justice in one of our investigations into a mortgage fraud scheme (others directly involved in the fraudulent scheme were sent to prison for between 7 and a half and 8 years). In separate cases, one individual was sentenced to 6 years in prison for running a fraudulent investment scheme – and an insider dealer received a suspended sentence. As you might expect we are pursuing confiscation against the fraudsters and the insider dealer. 

Obviously, as a regulator, financial crime is not the only thing we enforce against. We of course take our regulatory work seriously too, pursuing firms and individuals that breach the rules. For example – also in May, we reached a settlement with HSBC UK for significant failures relating to the treatment of customers in default, arrears, or financial difficulty, fining the bank nearly £6.3m. And we settled with Citigroup over a fat finger trade which had a severe impact on European exchanges. We fined them over £27m.

Whether it be crime or regulatory breaches, to be successful in proactively identifying harm and disrupting it early we need to be an intelligence led organisation.

I spoke earlier about data, and it is mind boggling to think that through our Market Oversight team, we received over 7bn transaction reports from over 1,300 UK firms last year. We receive over 500m order book records every day. 

Even ingesting this amount of data is a feat but this information is not just collected by us, it is analysed and developed to create tangible outcomes. We use this data to investigate regulatory breaches as well as to detect insider dealing and market abuse.

Using data analytics, our Market Oversight team was able to detect missing notifications and uncovered undisclosed trades in the shares of Bytes Technology Group by the serving CEO of the company.

The CEO resigned shortly after we approached the firm. 

This outcome, while not a fine or prohibition, shows the effect that the work we undertake across the FCA can have. To help strengthen deterrence, we then share the lessons we learn from this data with the industry through our regular Market Watch report. 

As well as data, the intelligence we receive from whistleblowers is a crucial element of our intelligence picture. We are continuing to develop and improve our whistleblowing processes to ensure we make effective use of the information whistleblowers provide. We implore anyone with any concerns to contact us[4] whether by phone, email or webform. 

Let me turn briefly to the elephant in the room, our recent consultation. We proposed that where it is in the public interest to do so, we would publicise the fact that we have an investigation open at an earlier stage.

This may not necessarily be at the outset.

Each investigation would be considered on a case-by-case basis and there would be no presumption of publication.

We have consulted very widely, and we are grateful for the many responses we have received. We will review the responses and will continue the engagement with industry and other interested parties – as Nikhil, our Chief Executive, said to Parliament recently – we will take our time to consider the right way forward over the next few months.

A degree of enhanced transparency is just one element of some of the proposed changes[5] to boost the deterrence effect of our enforcement activity. Therese and I are also focused on increasing the pace of our investigations. Pace is important as the deterrent impact of enforcement action is greater the closer it is to misconduct occurring. One of the ways we will achieve pace is by focusing our resources on a streamlined caseload of investigations which align to the FCA’s strategic priorities, in particular: putting consumers’ needs first, delivering assertive action on market abuse, and reducing and preventing financial crime. 

Conclusion

Finally, I am heartened that the issue of non-financial misconduct will be given a special focus during the conference today.

Conduct is our middle name at the FCA and too often, the non-financial type can be dismissed as being less significant.

Aside from the damaging impact on recruitment, retention and overall workplace culture, non-financial misconduct can undermine financial performance and confidence. It can also undermine the standards and reputation of the industry when you have the wrong people in positions of trust.

We have recently received responses from over 1,000 firms that operate in wholesale and insurance markets about their own experience of non-financial misconduct among their workforces. This is the first time that we have received such a comprehensive set of data on the subject. We will publish an update from this work in the autumn and look forward to working with industry to interpret and draw lessons from them.

That leads me back to the start and the importance of teamwork.

We must all invest in the capabilities and relationships that will prevent and pursue those who seek to undermine our hard-won reputation as one of the world’s leading financial services sectors.