Enforcement Watch Issue 11 | September 2013

This edition of Enforcement Watch looks both at the messages of the enforcement cases in the last few months and at what changes on the horizon are likely to mean for firms and individuals in the shape of future enforcement.

Editor's Note

Approaching the end of the first six months of the new regulators, cases from the old FSA continue to work their way through the system. These range from the headline grabbing fine levied on JPMorgan to more familiar areas such as client money rule breaches and market abuse.

Perhaps more interesting are the signals of what may be to come. Here, we see the Parliamentary Commission on Banking Standards making some far reaching recommendations, and both Tracey McDermott and Martin Wheatley setting out enforcement themes and giving useful indications of what is in the pipeline.

As ever, I hope that you find this publication useful and insightful.

On the Horizon

Parliamentary Commission makes far reaching recommendations

In June this year, the Parliamentary Commission on Banking Standards published its voluminous report into the UK's banking sector. We provide below some extracted highlights relevant to the future of enforcement and to the treatment of individuals. Whilst the report is directed at banks only, it may be that the regulators look to take up the recommendations more widely.

The Approved Persons Regime

The current approved persons regime comes in for scathing criticism. It is described as a complex and confused mess which fails to perform any of its varied roles to the necessary standard.

The Commission recommends a system to allow the full range of enforcement tools to be used against a wider range of individuals. They recommend the replacement of the APER regime with:

  • a Senior Persons Regime ("SPR")
    • To cover a narrower range of individuals than covered by the current SIFs, as many of those holding current SIF functions cannot properly be categorised as senior decision makers.
    • Board and Executive members always to be within the scope of the SPR, with the primary responsibility for identifying who else falls within the SPR resting with banks themselves.
    • Regulators to set out guidelines as to how responsibilities are to be identified and assigned and should have power to take action where guidelines are not followed. Responsibilities should include all key activities and all key risks a business undertakes.
    • Assignment of responsibilities should be aligned with the realities of power and influence within a bank.
    • Allocation of responsibilities to take into account a procedure for changes in personnel. The Commission recommends that SPs prepare a handover certificate before relinquishing responsibilities outlining how they have handled them and any issue which the next person should be aware of. To be held by banks as a matter of record and made available to the regulator to assess SPRs and effectiveness.
  • Licensing Regime ("LR")
    • SPR to be supported by a system of licensing for more junior staff.
    • The LR to apply to a broader range of bank staff and expand the current narrow reach of the APER regime.
    • The LR to be administered by individual banks, who will be required to ensure that all those subject to the BSRs (see below) are aware of their obligations.
    • Banks should take a more active role in monitoring individuals and have primary responsibility for taking disciplinary action.
  • New Banking Standards Rules ("BSR")
    • To be drawn up by the regulator following consultation with banks, staff and unions.
    • Bank staff would be contractually obliged to adhere to the BSRs which regulators could enforce against and would replace existing statements of principle.
    • BSRs to draw on the existing statements of principle but to be wider, and less complex and legalistic. Also to be more prescriptive, capturing expectations of behaviours, eg treating customers fairly.

Enforcement against individuals

The Commission was supportive of the public clamour for senior bankers to be disciplined for mistakes on their watch. They found that a culture of collective decision making had insulated individuals against feeling any personal responsibility for their actions (what they refer to as an accountability firewall). Recommendations included:

  • Reversing the burden of proof
    • The Commission recommended in certain circumstances reversing the burden of proof, so that individuals have to show they took all reasonable steps to prevent or mitigate the effects of a specified failing.
    • The reversal of the burden would only be where two conditions are met (i) the relevant bank is the subject of successful enforcement action which has been settled or upheld by tribunal, and (ii) the regulator can demonstrate that the individual held responsibilities assigned under the SP regime which are directly relevant to the subject of the enforcement action.
    • Legislation to be introduced to accommodate this.
  • Changes to the limitation period
    • The Commission has recommended that the limitation period for bringing action against individuals should remain at three years from the date the regulator first becomes aware of it, but with provision for an extension in certain circumstances (eg as above, where the regulator has to wait for action against the relevant bank to come to fruition in reverse of burden of proof cases).
    • The Commission recognised that swift enforcement is preferable and that regulators should be required to retrospectively provide a full explanation for the need to go beyond three years.
  • New Criminal offence
    • The Commission found a strong case for a new criminal offence of reckless misconduct in the management of a bank.
    • The Commission recommends that the offence be limited to SPs and that it only be used in the most serious of failings, for example, where a bank has failed at the cost of the tax payer.
    • Recognises likely difficulties of securing a conviction.

Enforcement Decision Making

  • RDC not the right body to deal with the enforcement decisions of the banking sector.
  • The Commission recommends the creation of an autonomous body to assume the decision making role of the RDC. A lay majority, but also members with senior banking experience. Chaired by someone with judicial experience. Should have statutory authority within the FCA. Should be appointed by the boards of the FCA and PRA.

Enforcement Division

Although not a recommendation given the upheaval it would create after a major set of organisational changes, the Commission did suggest a far reaching change to the Enforcement and Financial Crime Division. In order to achieve a higher priority for the enforcement function more generally, it suggested that the Division could be replaced with a separate statutory body.

Next Steps

The regulators are expected to publish their responses to the Commission by the end of September. We shall have to see what they say, and what legislative and regulatory proposals may then result.

McDermott sets out Enforcement's direction of travel

In an address in June, Tracey McDermott (FCA Director of Enforcement and Financial Crime) gave a speech that is of some real interest ("Enforcement and Credible Deterrence in the FCA"). Whilst the speech covered such ground as the FCA's new approaches generally, we focus here on the enforcement message in particular.

One theme was the focus on individuals and senior management. Whilst this has for some time now been a theme of the regulator, it is no less important for its repetition. Additionally, McDermott also set out some observations that show clearly how the FCA is thinking:

  • Whilst there was a "public clamour" for action against individuals, that was not the FCA's driver. The issue was that repeated fines of firms for conduct failures were not enough in order to achieve the desired changes. In order to achieve credible deterrence, senior managers had to be held to account.
  • There was a need for cultural change at firms, and the responsibility for the overall culture of firms and their compliance sat at the top of organisations.
  • Investigations into individuals are not easy and they are hard fought. There are evidential difficulties in achieving sanction against senior individuals in large organisations, largely due to the complexity of such organisations. Such cases may take more time and resource to work through and may not always be successful, but that would not deter the FCA. In many ways, regulatory proceedings against approved persons can be harder than criminal prosecutions as they look at flawed judgments rather than deliberate dishonesty.

In terms of enforcement priorities:

  • on the wholesale side, there would be:
    • a continuing focus on LIBOR
    • a continuation of work on market abuse and insider dealing
    • further cases on failings in controls over financial crime
    • a maintaining of focus on protection of client money and assets
  • on the consumer protection side:
    • there would be a continued focus on mis-selling
    • the FCA would also look at drivers of behaviour, such as culture within firms and remuneration structures. They had a number of cases where such issues were live.
    • there were a number of cases on how firms treat customers when things go wrong, and more in the pipeline
    • there would be more cases concerning different product types, for example some were going through on the sale of low value insurance
    • pension liberation and pension transfer activity were matters that the regulator was concerned about.

Additionally, whilst not directly saying that the FCA were taking cases in these areas, McDermott pointed out that the wider messages of the LIBOR cases that firms should be considering were conflicts of interest, culture, and governance and risk management. If there are not currently cases in those areas, McDermott was firing a warning shot that Enforcement is likely to take a dim view of misconduct in those areas in future.

Wheatley outlines enforcement themes

In July, the Chief Executive of the FCA Martin Wheatley addressed the FCA Financial Crime Conference ("The changing face of financial crime"). His speech was fairly wide ranging, reinforcing and building on a number of themes for future activity. Those of most interest to those looking to future enforcement activity are as follows.

He paid some lip service to Europol's view that the uptick in financial crime is due to the effects of the global economic crisis. However, he said that, in actual fact, it was known that periods of economic growth are as likely to cultivate financial crime as periods of contraction. This seems a clear signal to avoid complacency as we stumble out of recession.

It is no surprise to those of us dealing with enforcement matters, that there is increasing co-operation between international bodies. This was another theme of Wheatley's speech. He talked of the amplified Butterfly Effect, said that the effect of global co-operation becomes more important by the day, and took the opportunity to thank all who contributed to this.

He spent some time talking of the successful prosecutions in the well-known insider dealing Blue Index matter, highlighting the sheer scale of the investigation itself. What was interesting here was his statement that this "new brand of enforcement work [ie vast operations] will continue", and his reference to what was in the line of fire. This was stated to be sanctions, investment fraud, bribery and corruption, and money laundering.

In terms of prevention, Wheatley spoke about the area of pension liberation that the FCA is investigating with the Pensions Regulator. The suggestion coming out of the speech is that we will see enforcement activity in this area in the future.

Finally, Wheatley spoke of a matter we have long been writing about, that is, the desire of the regulator not only to take more cases against executives, but also to crystallise the idea of personal accountability. By way of example:

  • He stated that the focus on individual culpability, particularly at a senior level, will underpin the work already started by the FSA. Wheatley noted that between 2010 and 2012, 67 applications for approval to senor bank executives were withdrawn prior to results being announced, compared to 21 in preceding years.
  • Going forward, there will be an increased use of attestations to "focus the minds" of senior executives by requiring them to sign and confirm that their firm is dealing with a regulatory issue, that they are responsible for it and that they will stake their reputation on the quality of the compliance processes in place. In our view, not only will this focus minds, but the FCA is likely to seek to use attestations as a disciplinary tool. That is, if an attestation is breached, or is shown to be wrong, the FCA is likely to use that itself as a ground of disciplinary action.
Enforcement Annual Performance Account 2012/13

As regular readers will recall, the purpose of the Performance Account is to communicate statistical data and information regarding the preceding year's enforcement activity. However, as explained elsewhere in this issue ("Greater transparency on Enforcement planned"), this is also the first Performance Account being used to further the FCA's objective of increased transparency.

Because much of the information contained in the Performance Accounts relates to past enforcement activity1 (and in the case of this Performance Account the activity is that of the FSA), it is of limited interest save for the purposes of benchmarking against future years. Subject to that, it is noteworthy that in the year to April 2013 the FSA achieved 79 Final Notices, £423.2m in financial penalties (up from £76m in the previous year) and 13 convictions (from four trials). It is assumed that of greater interest to readers of this publication will be what the Performance Account tell us about existing and future enforcement work.

First, as at March 2013 there were some 134 "open" cases being worked on by the FCA. Importantly, this data treats a case against multiple firms and/or individuals as being one case; therefore the number of firms and individuals subject to enforcement activity will in fact be considerably higher. Subject to that, the number of open cases is roughly the same as it was in March 2012 (132 open cases). It is reasonable to assume that we will see (as we have already) a continuation in the level of enforcement activity as a manifestation of the credible deterrence agenda.

Second, the Performance Account reports a thematic focus on the accountability of individuals, particularly holders of significant influence functions. In the year ending March 2013, £5m of fines were levied against individuals and 43 prohibitions were imposed (although no doubt in most cases the enforcement activity will have been commenced some time before 2012/13). The FCA notes that it has found cases against individuals to be particularly resource intensive, but that it hopes to make its handling of such cases more effective in the future. This is against the backdrop of a reported increase in the general complexity of all types of enforcement cases. All the indications, including the public clamour, are that this thematic focus will continue into 2013/14.

Third, the Performance Account includes data regarding the number of Warning Notices converted into Decision Notices. In 2012/13 only one in 26 cases where the Warning Notice was contested resulted in no Decision Notice being published. This is roughly the same rate as the previous year (to March 2012) (one in 25 cases). However, as the FCA notes, this data does not tell us what changes were made by the RDC between the respective Warning Notices and Decision Notices. This is often critical in enforcement cases.

Fourth, although the numbers are down from the previous year (855 as against 1085), the FCA reports a continuing trend of requests for assistance from overseas regulators. Co-operation with US regulators in the last year was apparently particularly noteworthy as a result of the investigations into allegations of LIBOR fixing (an issue on which the FCA anticipates it will continue to expend substantial resources in 2013/14). As we set out in Enforcement Watch 1 ("A boost in assisting Overseas Regulators" ), the steps that the regulator takes in responding to requests from overseas regulators are relatively unconstrained.

Finally, the average length of cases from the point that the case was referred to Enforcement to its conclusion makes for sobering reading for subjects of investigations. This information is being published for the first time, as part of the FCA's transparency agenda (See On the Horizon "Greater transparency on Enforcement planned"). Those cases that settled took on average 19.6 months to reach that outcome, whereas cases taken to the RDC or the Tribunal took on average 37.8months and 50.1 months respectively.



1 It covers the period to March 2013.

August 2013: Greater transparency on Enforcement planned

Under FSMA 2000 (as amended for the new FCA), the regulator is obliged to have regard in all its activities to the principle of transparency. Accordingly, in March this year, the FCA published a Discussion Paper regarding steps it proposes to take to improve its own transparency (said to be at the heart of the new organisation), which included a proposal in relation to enforcement activity. The proposal was to use the pre-existing Annual Enforcement Performance Accounts (the latest of which is covered elsewhere in this issue, "Enforcement Annual Performance Account 2012/13") to publish further additional information about enforcement activity. This included further information about:

  • why certain topics were being focussed on for thematic enforcement activity;
  • how resources were being allocated within enforcement and some of the delays; and
  • difficulties encountered by FCA Enforcement.

The FCA has now published its response to the Discussion Paper and the replies received, and its proposal remains unchanged. Unsurprisingly, most respondents were in favour of the proposed increase in transparency of FCA Enforcement activity. In particular, the FCA said that respondents were interested in the kind of information that would enable them to understand the FCA's Enforcement priorities and the reasons behind its decisions. However, consumer organisations felt that the proposals did not go far enough. They wanted the identities of firms and individuals subject to enforcement activity to be published. Whilst the FCA said that it would continue to consider all feedback when compiling future Annual Enforcement Performance Accounts, it seems highly unlikely that this response will be adopted (though on a similar theme see the FCA's new power to publish details relating to Warning Notices and the consultation regarding the process to be followed, covered in Enforcement Watch 9 "FCA consults on procedure for publishing information about Warning Notices").

The Enforcement Annual Performance Account 2012/13 has been prepared with the FCA's finalised policy in mind. The FCA says that it will continue to consider respondents' feedback when preparing future Performance Accounts. We shall have to see what additional types of information may be disclosed in the future.

Spotlight on the US

SEC Makes Additional Whistleblower Awards

The Securities and Exchange Commission (“SEC”) has made its second award to whistleblowers under the Dodd-Frank Act. The award was made to three individuals who aided the SEC in its investigation against Andrey C. Hicks and Locust Offshore Management, LLC (“Locust”), a fictitious entity that was represented to investors as a pooled investment fund incorporated in the British Virgin Islands. On March 20, 2012, the SEC obtained a final judgment against Mr Hicks and Locust for defrauding investors. A Massachusetts federal court ordered Mr Hicks and Locust to pay more than $2.5 million in disgorgement and interest, as well as civil penalties of more than $5 million. Mr Hicks was also sentenced to 40 months in prison.

Four individuals (whose identities have been withheld pursuant to the federal law) submitted whistleblower award claims to the SEC. The SEC Claims Review Staff determined that three of the individuals should receive awards for voluntarily providing original information that led to the successful prosecution of Locust.

According to the SEC, the first two whistleblowers provided information leading to the opening of the SEC investigation, while the third confirmed the information as well as identified additional material witnesses. Each of the three whistleblowers were awarded five percent (5%) of the amount of monetary sanctions collected from Mr Hicks and Locust, for a combined total of fifteen percent (15%) of the amount collected. The total award is expected to be $125,000. To date, $25,000 has been paid to the whistleblowers, who may also apply for an additional ward based on the $800,000 collected by the DOJ in a related action. The fourth whistleblower’s claim was denied because the information provided was not found to be “original information” that contributed to the success of the prosecution. For more information please click here, here and here.


In Enforcement Watch 8, we commented on the first award made under the legislation ("SEC makes its first award to a whistleblower under the Dodd-Frank Act").

Although a relatively small dollar amount, this second award under the Dodd-Frank whistleblower provisions indicates that the SEC is continuing to take advantage of its ability to reward tipsters who provide valuable, original information concerning misconduct in the financial industry. Indeed, SEC officials are reported to have stated that even more - and larger - whistleblower awards will soon be made. Of course, the denial of the fourth whistleblower's claim demonstrates that the SEC intends to reward only meaningful tips comprised of actionable "original" or unique information.

Bank of America and UBS Face New Charges from the SEC

In two separate actions, the SEC brought new charges against Bank of America and UBS for fraudulent behavior that enriched the banks at the expense of investors.

First, on August 6, the SEC charged UBS Securities with failing to disclose to investors that it withheld $23.6 million it received for a collateralized debt obligation known as ACA ABS 2007-2(“CDO”). As a result of UBS’ undisclosed retention of these sums, the SEC alleged UBS’ marketing materials were misleading and investors were consequently harmed. UBS agreed to settle the SEC's charges by disgorging the undisclosed $23.6 million, another $10.8 million it had disclosed as its fee, $9.7 million in prejudgment interest, and a penalty of $5.7 million. UBS did not admit or deny wrongdoing in the settlement. For more information click here.

Second, the SEC charged Bank of America and two of its subsidiaries, Banc of America Securities LLC (now Merrill Lynch, Pierce, Fenner & Smith) and Bank of America Mortgage Securities (BOAMS), with failing to disclose key risks and misrepresenting facts about mortgages in an offering called BOAMS 2008-A, an offering consisting of residential-backed securities. According to the SEC, Bank of America failed to disclose the fact that over 70% of the mortgages backing BOAMS 2008-A came from the bank’s wholesale channel of unaffiliated mortgage brokers, implying that the mortgages had a much higher risk of problems. The SEC further charged that the offering was misleadingly marketed as "prime", intending that it was suitable for conservative investors. The Department of Justice announced a parallel lawsuit against Bank of America, charging that the bank defrauded investors who purchased more than $850 million in residential backed securities in BOAMS 2008-A, and seeking civil penalties for violations of the Financial Institutions Reform, Recover, and Enforcement Act of 1989. For more information, click here and here.


These actions are indicative of the SEC's and DOJ's continued interest in prosecuting alleged malfeasance arising in connection with the financial crisis of 2007 and 2008. Barring any applicable statute of limitations, we believe the SEC and DOJ will continue to investigate alleged wrongdoing arising during this period.

SEC Changes Policy On Permitting Settlements Without Admissions of Liability

Under new Chairwoman Mary Jo White, the SEC has created a policy that requires defendants to admit wrongdoing in certain “egregious” cases. This marks a departure from the SEC’s previous practice of allowing defendants to settle without admitting wrongdoing or liability, and demonstrates a continued move towards requiring less than favorable terms for defendants in settlements. According to news reports, the SEC will now consider three criteria to determine whether a defendant should be required to admit wrongdoing in a settlement: (i) “misconduct that harmed large numbers of investors or placed investors or the market at risk of potentially serious harm”; (ii) “egregious intentional misconduct”; and (iii) “when the defendant engaged in unlawful obstruction of the commission’s investigative processes.” While the prior practice was seen as a way to encourage settlements and obtain relief for victims quickly, the new policy is designed to force accountability in certain cases. For more information, please click here and here.


The prior policy of permitting defendants to "neither admit nor deny" wrongdoing was beneficial to the SEC as well as defendants in that it permitted the SEC to avoid costly trials. Although the SEC’s new policy would appear to be harsher on defendants who wish to settle, in practice it may not turn out to be as far reaching as it may appear. Indeed, Chairwoman White has already stated that most defendants will still be able to settle without admitting liability. As the agency works to define and apply the three criteria it has laid out, it would not be surprising to see a high bar set for the application of the new policy. Instead, we expect the SEC to act prudently and preserve its ability to conserve resources while maintaining flexibility in settlements.

Lichtenstein Bank Agrees To Pay $23.8 Million To Resolve Tax Evasion Charges

On July 30, Liechtensteinische Landesbank AG, a bank based in Vaduz, Liechtenstein, agreed to enter a Non-Prosecution Agreement (“NPA”) with the U.S. Attorney’s Office for the Southern District of New York and pay a fine of $23.8 million to resolve charges that it knew U.S. taxpayers were keeping undeclared accounts at the bank to avoid U.S. taxes.

The fine includes a forfeiture of the gross revenue received between 2001 and 2011 from the services provided to the U.S. taxpayers. As part of the NPA, the bank admitted that by the end of 2006 it had more than 900 accounts with more than $340 million of undeclared assets of U.S. taxpayers, that it knew some of these accounts were being used to illegally hide assets from the U.S. taxing authorities, and that there was a high probability that other accounts were being similarly illegally used. The NPA, which is limited to the bank and does not include any subsidiaries, requires the bank to cooperate with the government for three years. A breach of the NPA permits the U.S. government to criminally prosecute the bank.

In connection with the NPA, the U.S. Attorney’s Office noted the bank’s voluntary cooperation with the government’s investigation, implementation of remedial measures even before the government’s investigation began, and certain other steps the bank had taken to enable the U.S. authorities to identify additionally improperly hidden assets. For more information please click here.


The NPA with Liechtensteinische Landesbank AG is significant for several reasons:

  • it shows that U.S. authorities are continuing to look abroad for entities that directly violate, enable or assist in the violation of United States law.
  • it demonstrates that the penalties for violating U.S. law can be significant - here, the Bank was forced to turn over the total amount of subject revenue, not just the profit it obtained from the illegal accounts.
  • it indicates that the U.S. government continues to recognize and reward companies that take affirmative steps to identify violations of U.S. law, take responsibility for those violations, and assist with the prevention of further illegal activity.
U.S. Department of Justice Announces New Program To Encourage Swiss Banks To Cooperate With Tax Evasion Investigations

On August 29, the DOJ announced a new program designed to encourage Swiss banks to cooperate with its ongoing tax evasion investigations. At the same time the DOJ released a joint statement with the Swiss Federal Department of Finance providing Switzerland's agreement to encourage banks to participate in the new program.

The program will offer participating banks Non-Prosecution Agreements in exchange for their agreement to provide information upon request, including information concerning transferred funds to non-participating bank's accounts in which U.S. taxpayers have an interest. Under the program, participating banks will also have to disclose their cross-border activities, close accounts of non-compliant account holders, and agree to pay substantial penalties. The penalties will be equal to 20% of the maximum aggregate dollar value of all non-disclosed U.S. accounts held on August 1, 2008, 30% for accounts opened between August 1, 2008 and the end of February 2009, and increases 50% for accounts opened in March 2009 or later. Banks are only eligible to participate in the new program if they are not currently under criminal investigation for their Swiss banking activities. Banks seeking to establish their status will be able to provide an internal investigation report by an independent examiner, or demonstrate that they meet a set of criteria for compliance under the Foreign Account Tax Compliance Act. In exchange for this information the DOJ will provide them with non-target letters.

For additional information, please click here and here.


This new program with Swiss authorities represents the latest efforts by US authorities to work with their international counterparts to secure compliance with United States law. Using atypical US enforcement strategy, the program relies heavily upon obtaining the cooperation from alleged offending institutions and in return offers rewards in the form of non-prosecution agreements and non-target letters. Although the penalties under the program are significant (ranging from 20% to 50% of the aggregate value of non-compliant accounts) the penalties issued to companies charged with offenses outside of this program have been even more severe.

CASS rule breaches fine for Xcap sets new tariff
31 May 2013:

Xcap Securities PLC has been fined £120,909 for failing adequately to protect client money and client assets. The fine was set by reference to its average client money and client asset balance, reduced by 20% to take account of early settlement.

Xcap provides retail stock broking and asset management services to its clients, and is authorised to handle client money. It started trading in June 2010. In October 2010, it self reported certain system errors which were leading to misstatements in client accounts and also causing potential issues for its daily client money calculation. Xcap also elected at this time to appoint a CASS auditor to review its systems. In fact, the deficiencies in Xcap's systems were considerably more significant than the original disclosure suggested. Over the course of the following 14 months, the FCA became aware of the extent of Xcap's breaches (including a failure to segregate) after receiving the reports of the CASS auditor, requiring the appointment of a s.166 skilled person and as a result of comments made during a presentation by Xcap to the FCA about its progress in dealing with its CASS breaches.

A copy of the Final Notice is available here.


As readers will be aware, (see Enforcement Watch 1 "Harsher penalty setting introduced"), the FCA deploys a 5 step process for calculating fines in respect of events after 6 March 2010. It is in the application of the 5 step process to CASS breaches that the main interest of this case lies. The Notice provide details of the FCA's reasoning at each of the 5 steps for penalty fixing set out in DEPP. The most interesting aspects relate to:

  • Step 2 (determining seriousness of the breach). DEPP provides a mechanism for quantifying the seriousness of a breach based upon the amount of revenue generated by the Firm during the period of the breach. However, the FCA may use another appropriate indicator of seriousness where there is no link between the breach and the revenue generated.
  • In this case, the FCA decided that the revenue generated by Xcap was not an appropriate indicator of seriousness. This was because the amount of client money and safe custody assets at risk might be unaffected by increased or decreased revenue. Instead, the FCA opted for the "appropriate alternative" of the daily averages of each of the safe custody assets balance and the client money balance. Having done so, it then set out the usual percentage levels that it intends to apply to CASS cases in future. These are at paragraph 42 of the Final Notice, and required reading for any firm faced with allegations of breach.
  • Step 3 (mitigation and aggravation). The FCA considered that there were aggravating factors, necessitating a 10% increase to the Step 2 amount. These included the fact that the importance of the CASS rules has been well publicised by the FCA and that the firm was not in a position to comply with CASS rules when it opened and continued to be deficient at a time when it was expanding. This is in contrast with many other cases where mitigation and aggravation have no impact on size of fine.

The approach adopted by the FCA to determining seriousness of CASS breaches makes more sense than that adopted in other cases. In CASS rule cases, the seriousness of the breach can be more readily judged by the amount of money put at risk by the failure than by the revenue generated by the firm.

An interesting postscript to this case is found in the Final Notice against Aberdeen Asset Management (AAM) from September this year. AAM was fined just over £7m in relation to CASS rule breaches (after discount for early settlement). When calculating the level of fine, at step 2 the FCA again determined that revenue was not an appropriate indicator and therefore again turned to average client money balances, and used the percentages in Xcap1. It looks as if the FCA believes that it has a very broad discretion to use the alternative indicator at step 2, and it may especially be keen to do so if it results in a large fine. Its decisions to do so in future may be the source of appeals to the Tribunal.



1 The reasons why revenue was not appropriate in the AAM case are not stated, but no doubt (as was the case in Xcap) it was determined that revenue bore no relation to the seriousness of a client money rule breach.

Sesame network receives significant fine for failings
5 June 2013:

The FCA has fined the network Sesame Limited just over £6m for advice failings, and for widespread systems and controls weaknesses. The fine would have been approximately £8.5m if Sesame had not settled early and qualified for a 30% discount.

Sesame is one of the largest networks in the UK, responsible for the oversight of approximately 1200 Appointed Representatives (ARs). There were two sets of failings for which it has been fined.

The first set of failings relate to suitability.

  • In a period spanning 2005-2009, 426 customers were advised to invest over £6.1m in corporate bonds sold by Keydata. The bonds were backed by Lifemark and SLS Capital SA, and their underlying assets were purchased life assurance policies. Around £200,000 of commissions were generated by these sales. Sesame advised its ARs of risks associated with these bonds, for example the absence of any guarantee that income would be generated or that invested capital would be returned, and of the illiquid underlying assets. Sesame also advised its ARs that the bonds should only form a comparatively small part of a diversified portfolio.
  • After conducting a sample review of 17 advised sales of the bonds, the FCA concluded that each was unsuitable and that there was a significant risk that the "vast majority" of the 426 sales were also unsuitable. For example, some 75% of customers were in fact seeking an investment which guaranteed a return of all or part of capital. 40% of customers were seeking guaranteed income or capital, and indeed 35% had been informed in their suitability letter that such guarantees were a feature of the bonds. 88% of customers were advised that the bonds were low risk, whereas in fact the FCA viewed the illiquidity of the underlying assets as making the bonds at least as risky as certain equity investments.
  • By reasons of these suitability failures, Sesame was found to be in breach of a number of COBS rules and of Principle 9 (relationship of trust) 1. The fine (calculated under the old regime ie for events prior to 6 March 2010) was £245,000. (This was reduced from £350,000, due to early settlement).

The second set of failings relates to systems and controls in a later period (July 2010 to September 2012) and which were in relation to the sale of designated investment products more generally.

  • In 2009 the FCA required Sesame to appoint a skilled person to report on a number of matters including suitability, compliance oversight and AR review frameworks. The skilled person found only limited instances of unsuitable advice, although it was unable to form a definitive view on the matter due to inadequate record keeping by the ARs. It also found Sesame's control oversight and AR review frameworks to be broadly fit for purpose.
  • It was not until the FCA required Sesame's internal risk and audit departments to review the adequacy of its suitability controls and record keeping that the deficiencies in the control environment became apparent. These included:
    • inadequate testing of AR's to see whether they had read internal compliance material;
    • an inadequate desk-based process for reviewing suitability of sales;
    • inadequate information being provided to management;
    • and a cultural view within Sesame that their customers were the ARs rather than the underlying clients.
  • By reason of these failures, Sesame was found to be in breach of Principle 3 (organisation and risk management). The fine of £5,786,200 was calculated under the new five step mechanism introduced for events since March 2010 (see Enforcement Watch 1 "Harsher Penalty Setting Introduced"). Without the 30% discount for early settlement the fine would have been £8.2m.

A copy of the Final Notice is available here.


This case has a number of features worthy of note.

  • it is very much in keeping with what we see as a real emphasis of the new regulator on consumer related failings;
  • interesting issues arise in relation to the need of principals to keep tight control over their ARs' activity. For example, it is noteable how Sesame specifically identified relevant risks and notified its ARs of them, yet failed to ensure that ARs properly took account of them in delivering their advice. The harm caused by this is magnified in this case by the fact that, as at June 2009, the advisers for which Sesame was responsible accounted for approximately 10% of the UK financial adviser population. What remains to be seen is how principals may redouble their efforts and what impact that may have on the costs of membership of networks. There may also be issues for ARs forced out of networks by reason of failures to act in ways approved by their principals;
  • it is a useful example of the application of the five step penalty process. One of the key aspects in that process is always what level of seriousness the FCA sets the breach at. In this case, we note that it set it at Level 3, that is the middle level of seriousness. Further, the Level 3 determination meant that the FCA necessarily applied 10%, in this case to the revenue generated by the designated investment business (£82m). It did not thereafter adjust the figure upwards or downwards. The trend has in recent years been towards higher fines. We believe that fines calculated under the five step process will frequently give rise to higher penalties than under the old penalty setting regime.



1 Principle 9 states "A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment."

Court of Appeal sets out Tribunal's wide public function
29 July 2013:

Following a rare appeal by the FCA against a decision of the Upper Tribunal, the Court of Appeal have remitted the matter back to the Upper Tribunal.

The case concerned David Hobbs, who the FCA alleged had engaged in market abuse whilst trading LIFFE coffee futures and then persistently lied about the true reasons for the trading in question, The FCA's Decision Notice imposed both a considerable financial penalty and a prohibition order on Mr Hobbs, who appealed to the Tribunal. Whilst the Tribunal found that Mr Hobbs had not committed market abuse, it was satisfied that he had lied both to the FCA and to the Tribunal itself. Despite that latter finding, on the basis of the failure of the case in market abuse, the Tribunal declined to find that Mr Hobbs lacked fitness and propriety and therefore overturned the prohibition order. The FCA appealed the Tribunal's determination on fitness and propriety only.

Delivering the judgment of the Court, Sir Stanley Burnton determined that the Tribunal had failed to consider whether the evidence given by Mr Hobbs (as distinct from the alleged market abuse) meant that he was not fit and proper. Instead, it had improperly conflated its finding on market abuse with its finding on fitness and propriety (or, at best, given the question of fitness and propriety proper consideration but then not given reasons for its finding). Sir Stanley Burton went on to comment that a reference to the Tribunal gave rise to a wide public interest. Accordingly, the Tribunal had to resist restricting the remit of its task to certain issues and, provided the applicant had a chance to address the FCA's case, had to avoid excluding relevant material from its overall assessment of the applicant. In a case such as the present, this ensured not only that the right decision was taken on fitness and propriety, but also that the FCA could rely upon actual findings made by the Tribunal in relation to any future applications for permission1.


Whilst the decision in Hobbs presents an unusual set of circumstances, the Court of Appeal's comments about the role of the Tribunal are interesting. Whilst the Tribunal provides an important independent judicial check on the decision making of the FCA, it performs that role against the backdrop of a wider public function shared with the FCA, which according to the Court of Appeal should inform how it discharges its function. This is relevant in terms of how Tribunal matters may be appealed. It is also relevant as Tribunal findings will provide the backdrop against which the FCA may make future regulatory decisions concerning the person who was the subject of the Tribunal decision.



1 As an interesting footnote to the issues addressed above, the Court of Appeal was also asked to consider whether a notice published by the FCA on its website after the Tribunal decision, stating that it was discontinuing its action against Mr Hobbs, prevented it from pursuing its case to the Court of Appeal. The Tribunal (on an application for permission to appeal) determined that the FCA had discontinued proceedings against Mr Hobbs. However, this was overturned by the Court of Appeal. It found that, despite the notice on the website (which appeared as a result of an error by a junior staff member), in fact no such decision had been taken by anyone with the requisite authority.

Sanctions for failures in relation to another person's intended market abuse
6 August 2013:

David Davis (senior partner and compliance officer of Paul E Schweder Miller & Co) has been fined £70,000 and Vandana Parikh (a broker at the same firm) has been fined £45,000, both for failing to act with due skill, care and diligence in respect of their involvement regarding Rameshkumar Goenka's abusive or intended abusive trading. Davis also had certain of his SIF functions withdrawn.

A third person, Tariq Carrimjee of Somerset Asset Management LLP has received a Decision Notice, suggesting a fine of £89,000 and a prohibition for recklessly assisting Goenka. Carrimjee has referred the Decision Notice to the Upper Tribunal to determine the appropriate action for the FCA to take. The Tribunal may uphold, vary or cancel the FCA’s decision.

Goenka's Actions:

Goenka manipulated the closing price of the securities referred to below that were traded on the LSE in October 2010. As a result he was fined $9.6m by the FSA for market abuse. It was the largest fine imposed by the FSA on an individual.

April 2010 – Parikh's Failings:

In April 2010, Goenka asked Parikh whether the closing price of Gazprom Global Depository Receipts (GDRs) could be raised by placing strategic orders. As a result of explaining the process of manipulation to Goenka, Parikh not only facilitated his intended course of action but also failed to recognise the risk that he might take the knowledge gained from her and use it to effect manipulation elsewhere. In addition, although Parikh speculated that Goenka had a related structured product, she did not discuss this possibility with her compliance officer. Indeed she discounted the possibility of market manipulation and continued to assist Goenka.

In the event, an unforeseen announcement about Gazprom caused the price to drop unexpectedly on the intended trading day and the proposed trading was abandoned. Nonetheless, by explaining the process of manipulation to him without recognising the risk that this posed and without proper challenge or enquiry as to Goenka's intentions, the FCA concluded that Parikh failed to act with due skill, care and diligence in breach of Principle 2. It imposed a fine on her of £45,673 following a contested RDC hearing.

October 2010 – Davis' Failings:

In October 2010, Goenka took the knowledge he gained during the above Gazprom preparations and used that information as the basis for a separate successful strategy of unlawful manipulation. This time he manipulated the closing price of Reliance Industries Ltd GDRs.

Davis was the senior partner of the firm and was the compliance officer amongst other SIF roles. Parikh informed him of her concerns, with the result that Davis became involved and monitored the Reliance trading. Even though Davis was not aware of Goenka’s desire to manipulate the price, nor for certain that Goenka held a linked structured product, he was aware of sufficient information to constitute clear warning signals of market abuse.

Yet, he failed to take preventative steps before authorising the trades in an unusually large amount of Reliance GDRs in the final seconds of the LSE closing auction for 18 October 2010. Further, he failed to report the trading as suspicious after the event, despite becoming aware of further relevant information that should have further prompted him to question Goenka’s orders.

The FCA has concluded that, in breach of Principle 6, Davis as a SIF failed to act with due skill, care and diligence by failing to challenge the Reliance instructions and by failing to refuse to accept the orders to trade.

The FCA withdrew Davis' compliance, CASS oversight and MLRO SIF functions and prohibited him from holding them in the future. It left intact his senior partner and his customer function. Davis received a 30% discount on his fine for settling at an early stage of the investigation. If he had not settled early, his fine would have been almost £95,000.

April and October 2010 - Carrimjee

The Decision Notice states that the FCA has decided to fine Carrimjee £89,000 and ban him from performing any role in regulated financial services for recklessly assisting Goenka in his plan to manipulate the Gazprom and Reliance securities. Carrimjee has referred the Decision Notice to the Upper Tribunal to determine the appropriate action for the FCA to take. The Tribunal may uphold, vary or cancel the FCA’s decision.

The Decision Notice states that Carrimjee introduced Goenka to a firm of brokers for the specific purpose of trading in the LSE closing auctions, that he then participated in discussions about trading and assisted with arrangements for the trading. It considers that Carrimjee did so despite suspecting that Goenka held structured products related to the trading and despite suspecting that the objective of Goenka’s plan was to secure the price of Gazprom and Reliance securities at a false or artificial level.

The Decision Notice states that Carrimjee's conduct is particularly serious because he held Significant Influence Function positions at Somerset and was responsible for compliance oversight.

The Final Notice for Mr David Thomas Davis
The Final Notice for Mrs Vandana Madhukar Parikh
The Decision Notice for Mr Tariq Carrimjee


The Notices throw up some interesting issues.

First, this is not the first time that the regulator has looked to punish those for failings in relation to the market abuse or intended market abuse of others. Market abuse remains on the FCA's enforcement agenda (see elsewhere in this edition "McDermott sets out Enforcement's direction of travel"). With market abuse still being perpetrated, the FCA is very keen to ensure that market professionals are alert to abusive action, that they do not facilitate it and that they report it to the FCA. These punishments send a strong message to professionals about how they should conduct themselves.

Second, in terms of the 5 step penalty process, the failings of Davis and of Parikh were assessed to be as high as Level 4 (of 5 levels) in terms of seriousness. This is another sign of how seriously the FCA takes this conduct. (Carrimjee's was Level 5).

Third, Parikh and Carrimjee plainly had different levels of knowledge from one another. In relation to Parikh, it was said that she ought to have been aware of the risks and that she failed to recognise them. In respect of Carrimjee, it was said that he lacked integrity because he turned a blind eye to them. Yet, it is clear that Parikh participated in conversations with Carrimjee and Goenka that had some quite arresting features.

We wonder whether FCA Enforcement argued in front of the RDC that Parikh was herself reckless, but failed to make good on that argument. Cases for individuals often turn on the distinction between competence findings (as Parikh's) and integrity findings (as Carrimjee's). Once Carrimjee's case has made its way through the Tribunal, we may obtain some greater transparency on how the Tribunal approaches the issue.

JPMorgan Chase Bank NA receives huge fine
18 September 2013:

JPMorgan Chase Bank NA (JPM) has been fined by the FCA the huge sum of £137,610,000 (net of a 30% stage 1 discount) for failings surrounding the so-called "London Whale" trades. These trades and some of the traders themselves received considerable publicity last year after JPM announced losses of around $6bn. JPM was at the same time hit by fines from 3 separate US agencies totalling some $700m.


The trading strategy was adopted by a small number of London based traders and their managers, who were trading in credit default swap indices in the JPM Synthetic Credit Portfolio ("SCP"). This SCP trading, together with the initial attempts to conceal their losses by increasingly aggressive mismarking, was compounded by inadequacies in information flows, management response and valuation systems. The failings identified went right through from portfolio level to senior management. The FCA found that JPM had breached the following Principles:

  • Principle 2 (due skill care and diligence)
    JPM was criticised for its failure to appropriately manage the SCP trading strategy, which resulted in the accumulation of massive positions that were extremely vulnerable to small credit market movements. Tracey McDermott1 said JPM failed to "get a grip" on the risk posed to the market by this high risk part of the business. Part of this failure was the result of the strategy of mismarking embarked on by SCP traders and managers, which JPM failed to detect in a timely way. However, there were also systemic failures. Even when the SCP crossed risk limits, confusion about the model used to calculate the Value at Risk (VaR) allowed the traders to continue to increase the position. In addition, a senior management review in April 2012 was found to be inadequate and defective, not least because of its reliance on the word of the SCP traders and managers themselves, but also because it failed to involve JPM compliance (a failure described by the FCA as a "disturbing weakness" and "significant").
  • Principle 3 (organising firm affairs responsibly and effectively)
    JPM breached Principle 3 as a result of defects in its systems for valuing positions and portfolio risk. There was over reliance on SCP traders marking their own positions manually. Additionally, the traders had no training in marking positions and were not made aware of the relevant Firm policies. The group responsible for oversight of the SCP valuations (the Valuation Control Group) was found to have inadequate policies and procedures to challenge traders' valuations and was under resourced (with only one staff member allocated to SCP). This meant that mismarking was not picked up sooner. The FCA commented that an effective month-end price verification process is critical to ensure that positions are being appropriately marked and to prevent mismarking.
  • Principle 5 (proper standards of market conduct)
    JPM breached Principle 5 as a result of SCP traders aggressively trading a particular credit derivative swap index. The price of that index had an impact on the valuation of the SCP. The FCA concluded that one of the purposes of part of the trading strategy was to "limit the damage" to the SCP and that the trading carried out in fact had the potential to affect the price of the index.
  • Principle 11 (dealing with regulator in an open and co-operative manner)
    The FCA found that JPM had, in the first half of 2012, failed to be open and co-operative regarding the extent of the SCP losses and the risks it posed. In May 2012, as the FCA became aware of the extent of the issues with the SCP, it told JPM that its "appetite for further surprises was close to zero". Despite this, JPM failed to keep the FCA properly informed in May and June 2012 regarding its internal conclusions about mismarking. JPM did not fully disclose the extent of its previous internal reviews of the SCP valuations. The FCA also found that, on one occasion, it had been deliberately misled.


Because of the time period involved, in calculating the penalty, the FCA looked at the regime in place both prior to and after 6 March 2010 (when the 5-step process was introduced).

The bulk of the fine (and misconduct) related to the latter period. In applying the steps, the FCA treated JPM's breaches as being of the most serious type (variously levels 4 and 5) and used the revenue of SCP itself as the basis for its calculation. In deciding on the level of seriousness, the FCA commented on the number of breaches, that many had persisted for a considerable period and that two (namely mismarking and seeking to manipulate the credit swap index) were instances of deliberate wrongdoing. They also noted that the breaches in 2012 involved failings throughout the firm, from the traders to senior management.

Also of interest were the so-called "aggravating factors" used by the FCA to increase the level of the fine. The FCA said the previous (significant) fines imposed on JPM and the FCA's previous published enforcement work on mismarking made JPM's conduct more egregious. As a result of these factors the penalty was increased by 15%. Finally, JPM2 benefited from an early settlement discount of 30%. If it were not for that discount, the fine would have been £196,586,000.


The Final Notice is long and detailed, and there are a number of aspects that are very interesting, and that will give firms pause for thought about how they conduct themselves. We pick out three aspects that our readers may find interesting.

First, what the size of the penalty betrays. Plainly, the fine is very high on its own terms. This, no doubt, reflects in part the desired increase in the size of fines brought about by the 5-stage penalty calculation process. However, beyond that, it is interesting as being higher than many fines have been in comparison to their counterpart US fines. The relative importance of the various agencies on either side of the Atlantic has to an extent been played out in the LIBOR cases. Whilst there is significant co-operation between regulators in large cross border investigations such as this, in our view, the fact that the fine is so relatively high in relation to the US fines demonstrates the FCA's desire to appear to be seen to be at least as muscular as its US counterparts. We believe that the FCA will act in such a way as to ensure that it is not seen as the poor relation.

Second, in relation to individuals. Although the failings were said to have been across a number of groups and individuals, no Final Notices have yet appeared for individuals. It is interesting to note that one specific Principle 11 failure that was highlighted was that JPM did not promptly tell the FCA when evidence of individual misconduct came to light. In the context of the push towards greater personal accountability (see for example elsewhere in this edition "Wheatley outlines enforcement themes"), that is an interesting finding. It is known that criminal action has been taken against two individuals in the US, and it remains to be seen what enforcement action there may be against individuals in the UK. There will no doubt be interesting issues to be argued about the extent to which any such individuals may have been prejudiced by the JPMorgan findings.

Third, when it comes to the lessons that the FCA says need to be learned, it points to firms ensuring they have "business practices, values and culture" to control the risk in their businesses. This emphasis on values and culture is one that the FCA is continuing to make (see for example elsewhere in this edition "McDermott sets out Enforcement's direction of travel").



1 FCA's director of enforcement and financial crime

2 See Enforcement Watch Issue 2 "The FSA Gets Tough on the Client Money Rules" and Issue 10 "JPMorgan Wealth Management Division Fined £3m for failures in suitability processes")

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