Compliance and legal pros question UK regulator’s use of voluntary requirements

Compliance and legal professionals have questioned the UK Financial Conduct Authority’s (FCA) increased use of voluntary requirements (VREQs), which can have a draconian effect on firmsʼ ability to trade.

According to the Institute of Money Laundering Prevention Officers, though VREQs are seen as proportionate tools, there has been criticism about their discretionary nature and potential for inconsistency. “Some argue that firms face undue restrictions, particularly in severe cases where VREQs halt all trading activities, jeopardising financial stability,” it said in a briefing note.

While supervision staff were generally collaborative and constructive, sometimes the FCA could be overly rigid, said Adam Epstein, a partner at law firm Mishcon de Reya, adding it should be more uniform in its approach.

Variety of applications

VREQs can cover a range of systems and control failures, from financial crime to financial promotions, pensions advice, customer redress arrangements, and just about anything a firm might do or not do, that does not meet FCA expectations. For example, in 2024 final notices issued to Starling Bank and CB Payments described the FCA’s use of VREQs where it had concerns about onboarding high risk customers.

However, many VREQs target smaller firms such as City & Merchant, which repeatedly failed to report transactions required by the Markets in Financial Instruments Directive (MiFID II). The regulator then imposed an own initiative requirement (OIREQ) on City & Merchant for not being open and cooperative about its transaction activity. The firm has since gone into liquidation.

Complaint

The regulator has had some push back from one unnamed firm over a VREQ and the terms of its removal that prompted a complaint to the Complaints Commissioner, Rachel Kent. She found the FCA lacked policies for publishing VREQs on its register and did not let firms know they could object to such publication, or how they might go about having it removed.

“There appears to be a lack of consistency, transparency and due process in the way the FCA deals with VREQs. Additionally, such inconsistencies may give rise to new issues being incorrectly linked to old VREQs, the requirements and terms of which were satisfied, but which have not, for procedural reasons, been removed from the Register,” the commissioner said.

The FCA accepted her findings and has already changed the way it handles VREQs. It has given staff access to new process guidelines. It is also reviewing its approach to communicating with firms about VREQs. That work will conclude later this year.

Increase in voluntary outcomes

In October 2019 the FCA created the interventions team within its enforcement department. It advises the supervision, policy and competition team (SPC) on VREQs, which if refused by a firm, can be turned into own initiative requirements (OIREQs). With the interventions team’s involvement the FCA obtained 102 voluntary outcomes in the financial year 2023/24, up from 15 in 2019/20, data from a Freedom of Information Act (FOIA) request shows. Some firms may have more than one VREQ.

The interventions team was involved in 25 OIREQs in the financial year 2023/34, up from 12 in 2019/20, according to the FOIA data. Firms that refuse to apply for a VREQ often end up with an OIREQ, publicly available supervisory notices show.

“It is important to recognise signs in FCA communications that all may not be going well — such as more assertive language, more formal requests or tighter deadlines — and escalate concerns internally to senior management,” the Institute of Money Laundering Prevention Officers said.