FCA publishes Quarterly Consultation Paper on Critical Third Parties

On 1 March 2024, the Financial Conduct Authority (FCA) published a “Quarterly Consultation Paper (QCP) on Critical Third Parties – Statement of Policy relating to Disciplinary Measures”, seeking views on the FCA’s proposed approach to the use of enforcement powers against critical third parties (CTPs).

The QCP follows (but does not form part of) the existing consultation paper “Operational resilience: Critical third parties to the UK financial sector”, published by the Bank of England (BoE), Prudential Regulatory Authority (PRA) and the FCA (together, the “Regulators”) on 7 December 2023, setting out draft proposals for new rules for the governance of critical third parties to the UK’s financial services sector (read more on this here).

The Financial Services and Markets Act 2023 established a new regime under which the Regulators will oversee the services provided by CTPs to the UK’s financial services sector, including in relation to enforcement. The QCP deals exclusively with enforcement provisions (not otherwise dealt with in the Regulators’ current draft proposals) and relates only to the FCA’s enforcement powers. It is expected that the PRA and BoE will consult on their own enforcement proposals in due course.

The QCP proposes a new Statement of Policy (SoP) setting out the FCA’s approach to using these enforcement powers, which will form part of DEPP (the Decision Procedure and Penalties manual) in the FCA Handbook.

The FCA’s newly proposed “disciplinary measures” include:

• prohibiting CTPs from entering into arrangements or continuing to provide services to ‘authorised persons’ (i.e., those authorised to carry out regulated activities under section 31 of FSMA 2000), ‘relevant service providers’ (i.e., electronic money institutions and authorised payment institutions, as defined in section 312L of FSMA 2000) or Financial Market Infrastructure (FMI) entities;
• prohibiting authorised persons, relevant service providers or FMI entities from entering into arrangements or continuing to receive services from a particular CTP; and
• powers to impose conditions or limitations on the provision of any services by a CTP, or on the receipt of services by authorised persons, relevant service providers or FMI entities from a particular CTP.

In deciding whether to take action, the FCA has said that it may take enforcement action where a CTP has ignored a direction, contravened a particular requirement imposed on it, or breached any applicable rules imposing duties on CTPs, in connection with the provision of services to authorised persons.

When taking enforcement action, the FCA has said that it will apply its existing approach to enforcement as set out in DEPP, the FCA’s Enforcement Guide (EG), and on its website.

The FCA is asking for comments on the SoP by Monday, 8 April 2024. The FCA, BoE and PRA also intend to publish an approach document setting out how they will carry out their oversight roles in relation to CTPs in due course, though there is no indication yet as to when this will be published.