Enforcement Watch Issue 12 | January 2014

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

Libor is still hitting the headlines and forex has started to make the news. Meanwhile, the FCA has also made sanctions against firms and individuals in a fairly broad range of cases, as our Enforcement Case Highlights show.

As for the future, as readers will see in our On the Horizon section, the FCA is continuing very much to push the theme of personal accountability, especially at senior levels. The passing of the Financial Services (Banking Reform) Act 2013 is no doubt seen as a further weapon to help the regulators make good on that agenda. We shall have to see how they choose to exercise their powers.

On the Horizon

McDermott sets out enforcement thinking

In October 2013, Tracey McDermott (Director of Enforcement and Financial Crime), delivered a speech entitled "Financial services regulation and enforcement: recent developments and emerging issues". The speech covered a fair deal of ground, and we have extracted below those areas likely to be of most interest to those considering what enforcement looks like in the near future.

  • As we know, the FCA is adopting a quite different approach from its predecessor in a number of key respects. Nonetheless, McDermott made clear that Enforcement has lost none of its lustre. The FCA sees it as an area of strength in which it has a strong reputation, and its overall philosophy remains to pursue its agenda of credible deterrence.
  • What runs through the speech is a theme of culture, of trust and of individual responsibility. McDermott highlighted how, for example, a culture had developed in some parts of the retail financial services industry where the interests of customers "seem to have become an afterthought". Equally, in talking about wholesale conduct, which McDermott described as a priority area, she bemoaned the prevailing cultural values and pointed to examples of individuals not recognising their obligations to the markets and their clients and customers. This feeds into the personal accountability push below.
  • Over the course of recent years, as we have frequently commented on, there has been a push towards personal accountability as far as disciplinary action is concerned. This was a theme that McDermott developed in her speech.
    • McDermott said there would be a real focus on senior management, re-iterating that responsibility for the overall culture of the firm sits at the top, and saying that leaders and senior managers needed to be held to account where they shared responsibility for conduct failings.
    • We have seen how McDermott has previously talked of the difficulties in bringing action against senior management. In an attempt to redress this, she explained how steps had been taken across the FCA to improve the prospects of holding senior management to account, talking about a number of examples including by way of supervisory attention including attestations. We are already seeing how the FCA is looking to use these. Senior management accountability is a topic discussed elsewhere in this issue New Banking Reform Act strengthens actions against individuals and New Banking Reform Act introduces new senior management/significant harm regime.
    • McDermott was also keen to point to an increased emphasis on individuals at the investigation stage. She said that the FCA was increasing the number of investigation interviews it routinely conducted with senior people. She also pointed to the FCA refusing to settle cases where firms tried to make a clean sheet for individuals as part of the deal. In our experience, this is often an important aspect of enforcement cases.
  • As we have previously reported, the FCA has taken a string of client money cases. FCA focus will remain on client money.
  • The level of AML compliance remains a matter of concern to the FCA, and McDermott said that there would be thematic work in that area. No doubt, disciplinary cases are working their way through the system as McDermott also said that there would be enforcement work in that area. (Standard Bank was subsequently fined in January 2014 for AML failings. Whether McDermott was additionally referring to other AML cases remains to be seen.)
  • Early intervention is a feature of the FCA's new approach. That early intervention routinely involves members of the Enforcement team, even where there may be no investigation on foot. McDermott talked about the work of her Enforcement staff in that area. The FCA is plainly keen to let the industry know what it is doing in what is often under the radar quasi enforcement type work. McDermott explained that, although this work will not produce the same public enforcement outcomes, the FCA was looking at ways in which it could quantify and report on the number and type of such interventions. We shall have to see what it comes up with.


Policy Statement released on Warning Notice publication

We have previously reported in this publication on the controversial new ability of the FCA to publish details relating to Warning Notices at an early stage.

In short, the new power to publish allows the FCA to publish such information about the relevant type of Warning Notices as it considers appropriate. However, it may not do so where one of a number of factors apply, the main one being unfairness to the subject of the Warning Notice. Quite how the FCA would exercise this power was the subject of a consultation in March 2013, see Enforcement Watch 10 "Consultation on how the power to publish Warning Notice details will be used". The consultation having closed, the FCA published its Policy Statement in October 2013.

In our discussion, we were critical of the FCA's proposed restrictive approach; its default position was essentially that it would publish. Only very limited circumstances would suffice to prevent that. We are pleased to see that the FCA has now softened its position, at least in some respects. Whilst it could have gone further, the fact that it has softened its approach following a consultation is to be welcomed. The most interesting aspects of this are:

Anonymous publication.

Whilst its default position remains that it will usually publish, the FCA now recognises that publication may in some cases take place without identifying the subject of the Warning Notice. In short, it expects that it will normally be appropriate to identify a firm, but not an individual1. This is because it recognises how the potential harm to an individual from early publication will normally exceed the benefits of early transparency. Although it has not extended this prospective anonymity to firms in the same way, we regard this as a very welcome development.

Considering whether publication at all would be unfair.

"Unfairness" is one of the statutory grounds on which publication is prohibited. The issue though is what constitutes "unfairness". In its consultation, the FCA was looking to construe the concept very narrowly. In its policy statement, the FCA has softened its position, although only relatively modestly. Interesting aspects are:

  • The FCA expects that it will be more difficult for a firm to demonstrate unfairness than for an individual, and more difficult for a larger firm than for a smaller one.
  • The FCA would still require a person to provide clear and convincing evidence of how that unfairness may arise and how they could suffer a disproportionate level of damage. However, it has slightly lowered its threshold since the consultation, now considering for example that it is likely to be the case if publication could result in a significant loss of income, rather than a disproportionate loss of income. Further, its list of what constitutes disproportionate damage is now a list of examples, rather than an exhaustive list.
  • Whether reputational damage constitutes unfairness is relatively unchanged; unfairness is likely to need something more than mere reputational damage.

What the FCA will publish.

We were concerned that the mere fact of publication of a Notice of Discontinuance after publication of details of a Warning Notice would not be an adequate remedy for those who had suffered damage as a result of the initial publication. This risk has now been mitigated to an extent. First, it may well be (especially for an individual) that the Warning Notice details had been anonymised so that the issue does not arise in the first place. Second, the FCA now not only aims to publicise the Notice of Discontinuance in the same way as the Warning Notice, but also to amend the Warning Notice statement so that it includes a prominent message that a Notice of Discontinuance has been issued, and a link to that Notice.

The FCA's softening of its stance is a welcome development in the light of a draconian power. As ever, it remains to be seen how the FCA exercises its powers in practice. We suspect that the issue of whether the FCA will publish and, if so, whether it will anonymise, is likely to be a keenly contested issue in many cases.



1 The FCA has also set out circumstances where this may not apply. For example, where it is necessary to avoid other individuals being mistakenly believed to be the individuals in breach.

New Banking Reform Act strengthens actions against individuals

In our last issue of Enforcement Watch, we reported on the Parliamentary Commission on Banking Standards' ("the Commission") recommendations for improving the banking sector "Parliamentary Commission makes far reaching recommendations". Since then, there has been a great deal of debate on the topic, culminating in a new Act receiving royal assent on 18 December 2013. The Financial Services (Banking Reform) Act 2013 is perceived to be a significant piece of legislation, trying to correct some of the deficiencies of the existing framework. Much of the detail will be in the form of rules from the FCA and the PRA, due to be consulted on in the first half of this year. The Government has set out its intention to have all the necessary legislation in place by the end of this Parliament.

There are some interesting aspects designed to have an impact in enforcement terms, especially on those in senior positions.

Reckless mismanagement

Much of the noise has been about the new criminal offence of reckless mismanagement.

  • The provision relates to a decision causing a financial institution1 to fail and applies broadly as follows. Under the Act, a senior manager will commit a criminal offence if he or she takes a decision (or agrees to the taking of it, or fails to take steps to prevent it being taken) when, at the time of the decision, he or she was aware of a risk that its implementation may cause the failure of the institution. The offence bites if, in all the circumstances, the conduct of the senior manager in relation to the taking of the decision falls far below what could reasonably be expected of a person in that position and the implementation of the decision causes the failure of the group institution.
  • A person found guilty of this offence may be liable for up to seven years in prison or a fine, or both.
  • Such an offence is in our view very unlikely, if ever, actually to be prosecuted. In some respects, it is a sop to those who complain that those in senior positions have not been held to account for the collapses that occurred at the time of the banking crisis. In other respects, and despite the above, it may be that the main import of the offence is the impact that fear of prosecution will weigh heavily in senior managers' decision making and accordingly influence their behaviour for good.

Reversal of the burden of proof

In practice, this is likely to have a rather wider impact. The Commission recommended a reversal of the burden of proof in cases involving senior management where the relevant financial institution had already been the subject of successful enforcement action. This has in effect found its way into the new Act:

  • This applies where the person has been a senior manager in relation to a relevant authorised person and there has been a contravention of a relevant requirement by the authorised person. Whilst a "relevant requirement" is a very broad term under the Act, a "relevant authorised person" is essentially limited to deposit taking institutions and PRA regulated firms dealing as principal.
  • If the senior manager was at that time responsible for the management of any of the authorised person's activities in relation to which the contravention occurred, the senior manager will on the face of it be guilty of misconduct.
  • However, this will not apply if the senior manager satisfies the FCA that he or she has taken such steps as a person in that position could reasonably be expected to take to avoid the contravention.

This is a significant development. It is set against the backdrop of complaints both that the regulator has not brought enough cases against senior management and complaints by the regulator itself that such cases are difficult to bring. Together with the other suite of measures under the Act, see elsewhere in this edition "New Banking Reform Act introduces new senior management/significant harm regime", the regulators no doubt hope that the reversal of the burden of proof will make it easier for them to bring and win cases against senior managers.

Extension of Limitation Period for Imposing Sanctions

Another key change is the extension of the limitation period for imposing sanctions against those exercising controlled functions.

Having previously been extended from two to three years, this will be extended from three to six years2. The rationale for this change was initially to allow sufficient time for the institutional contraventions above first to be proved so that the "reversal of burden of proof" proceedings could take place without falling foul of limitation. However, its impact will extend to all cases, making it harder to defeat the regulators on limitation issues. It may also have the unwelcome effect of bringing long term uncertainly for potential subjects.



1 This is a term essentially encompassing deposit taking institutions and PRA regulated firms dealing as principal

2 This will not be retrospective

New Banking Reform Act introduces new senior management/significant harm regime

In our last issue of Enforcement Watch, we reported on the Parliamentary Commission on Banking Standards' ("the Commission") recommendations for improving the banking sector "Parliamentary Commission makes far reaching recommendations". Since then, there has been a great deal of debate on the topic, culminating in a new Act receiving royal assent on 18 December 2013. The Financial Services (Banking Reform) Act 2013 is perceived to be a significant piece of legislation, trying to correct some of the deficiencies of the existing framework. Much of the detail will be in the form of rules from the FCA and the PRA, due to be consulted on in the first half of this year. The Government has set out its intention to have all the necessary legislation in place by the end of this Parliament.

One aspect set to have far reaching consequences relates to the new approvals/certification provisions for certain individuals in senior roles or in functions known as "significant harm" functions.

The below only applies, broadly speaking, to deposit taking institutions and to PRA regulated firms dealing as principal. It is interesting to note that, in the course of answering questions of the Treasury Select Committee this month, Clive Adamson (Director of FCA Supervision) said that the FCA would have preferred that the new regime be applied to all financial services firms. That is a discussion which is set to play out in time.

New senior management regime

The Act brings in a new regime for senior management. Under the new regime, a senior management function, is broadly speaking one that involves or might involve a risk of serious consequences for the authorised person or for the business or other interests of the United Kingdom.

Applications for approval for senior management functions will be required to be accompanied by a statement setting out what the responsibilities of that person will be. Authorised persons must also notify the regulator where there are significant changes in their responsibilities. This follows the recommendation of the Commission. The regulators will also have the power to grant approval to applicants of senior management functions subject to conditions or for a limited period.

The regulators have complained about the difficulties of holding senior management to account, and it is no doubt this statement of responsibilities that the regulators are hoping will assist them in any enforcement action against senior management. In terms of senior management accountability, see also elsewhere in this issue "New Banking Reform Act strengthens actions against individuals".

Certification of Employees

The Act also introduces a certification scheme for employees whose roles may, in the regulators' view, be capable of causing significant harm to an authorised person or any of its customers.

Certificates will be required to be issued at least once a year to demonstrate that the authorised person is satisfied as to an individual's fitness and propriety, having reviewed and taken into account such matters as qualifications, training, level of competence and personal characteristics, and whether there are any grounds on which a regulator could withdraw the approval of that individual. These have been termed "health checks" in the press. Relevant firms will need to ensure that they have appropriately robust systems in place so that they can consider the relevant information and take appropriate decisions.

Cases working through the system

Announcements suggest some interesting matters being looked at by the FCA, and indicate that there may be some newsworthy cases working their way through the system. The matters of particular interest are:

  • The FCA and PRA announced at the start of January that there will be enforcement investigations into events at the Co-operative Bank. The press release states that they will look at "the decisions and events up to June 2013" and that the "independent review announced by the Chancellor will commence once it is clear that it will not prejudice any actions that the regulators may take."
  • The FCA has considered reports published by Sir Andrew Large into lending practices at the Royal Bank of Scotland and separately by Dr Lawrence Tomlinson into banks' treatment of customers in financial difficulty. It has been agreed that an independent skilled person will examine Royal Bank of Scotland's treatment of business customers in financial difficulty and consider allegations of poor practice at the bank. The review will also consider whether any poor practices identified are widespread and systematic.

    In tandem, the FCA has written to all other relevant banks asking them to confirm that they do not engage in any of the poor practices alleged in the reports.

    Commercial lending is of course not a regulated activity under FSMA. The FCA has said that if the findings reveal issues which come within its remit, it "will consider further regulatory measures." We shall have to see whether it ultimately acts on this.
  • The FCA has confirmed that it is conducting investigations alongside several other agencies into a number of firms relating to trading on the foreign exchange market. It says that it is gathering information from a wide range of sources including market participants, but that it will be some time before it concludes whether there has been any misconduct which will lead to enforcement action. The issue has received widespread attention, with predictions that it is another Libor.
  • The FCA continues to take steps in the criminal arena. In January, it announced that, with assistance from the police, it had made three arrests in connection with an investigation into boiler room activity. This followed a November announcement that it had an unlimited worldwide asset freezing order placed upon First Capital Wealth Limited after a High Court judge agreed that FCW posted a serious risk to consumers. The FCA also recently announced it had made one arrest in connection with an investigation into insider dealing and market abuse. The FCA, and previously the FSA, touted that it had secured 23 insider dealing convictions and that there were currently prosecuting seven other individuals for insider dealing.
  • The FCA supervises the London Metal Exchange as part of its oversight of recognised investment exchanges. Whilst the LME's warehousing arrangements are not directly regulated by the FCA, the FCA regards them as playing an important role in the functioning of the LME market. In November 2013, following a number of LME initiatives relating to its warehousing arrangements, the FCA announced that it had engaged with the LME to ensure that the changes were consistent with the LME's regulatory obligations. The warehousing issue received a fair deal of press attention at the time. The FCA stated that it would "continue to monitor the impact" of the various measures.

Spotlight on the US

U.S. Securities and Exchange Commission has record year for sanctions

The Securities and Exchange Commission (SEC) announced that for fiscal year 2013 it obtained a record $3.4 billion in sanctions orders arising from 686 enforcement actions. This amount is 10% more than the total for the previous fiscal year, and 22% more than for 2011. The SEC anticipates continuing its aggressive enforcement efforts into next year, and expects significant increases in investigations opened and formal orders of investigation obtained over the prior year.

Included in the year's enforcement actions were several relating to market structure and fair market access. These included one against NASDAQ, which agreed to pay $10 million for errors made during the Facebook IPO, see May 29, 2013 SEC Press Release, www.sec.gov/News/PressRelease/Detail/PressRelease/1365171575032, and a first-of-its-kind penalty against the Chicago Board Options Exchange for regulatory oversight violations, see June 11, 2013 SEC Press Release, www.sec.gov/News/PressRelease/Detail/PressRelease/1365171575348. The SEC also continued to take action against those responsible for the financial crisis, bringing the total number of individuals and entities facing sanctions for behavior related to the financial crisis to 169, including 70 senior executives.

Individuals remained a target of SEC actions, with both primary actors (such as those who trade on insider information like Rajarengan “Rengan” Rajaratnam and former S.A.C. Capital Advisors portfolio manager Richard Lee) and secondary actors (such as accountants, attorneys, and others with fiduciary duties like New York-based audit firm Sherb & Co. LLP and Bernard L. Madoff Investment Securities' accountant Paul Konigsberg) involved in many SEC actions.

The SEC also changed several of its policies during the last year. Perhaps the most notable change relates to permitting settlements without requiring an admission of guilt or liability. Please click here for more information. The SEC is now requiring admissions for egregious cases, such as those obtained during the past year against Philip A. Falcone and his firm Harbinger Capital Partners, and JPMorgan Chase & Co. (Aug. 19, 2013 SEC Press Release, www.sec.gov/News/PressRelease/Detail/PressRelease/1370539780222; Sept. 19, 2013 Press Release, www.sec.gov/News/PressRelease/Detail/PressRelease/1370539819965. Additionally, the Commission created a Financial Reporting and Audit Task Force to enhance the SEC's ability to detect and prevent financial and accounting frauds, and a Center for Risk and Quantitative Analytics to enhance the SEC's analytical abilities.

Additional information is available at www.sec.gov/News/PressRelease/Detail/PressRelease/1370540503617


These year-end totals come as no surprise given the SEC's highly visible enforcement actions and resulting awards over the past 12 months. A number of factors have combined to lead to this record total. One is the impact of Mary Jo White, who is just coming to the end of her first full year as SEC Chairman. With her at the SEC's helm, it should be expected that the agency will continue to aggressively investigate and prosecute any conduct it deems to violate U.S. law within its jurisdiction.

U.S. Securities and Exchange Commission continues to reward whistleblowers

In previous issues of Enforcement Watch, we have commented on the whistleblower program established by the 2010 Dodd-Frank Act. The SEC continues to reward individuals under the program, with recent awards being at record levels.

On October 1, the SEC announced that it was awarding more than $14 million to an individual who provided significant information concerning an investment fraud scheme. The SEC reports that, because of the information, it was able to bring an enforcement action and protect investors' funds less than six months after receiving the tip. The whistleblower requested to remain anonymous and under federal law the SEC cannot release any information that would enable the discovery of the whistleblower's identity. For additional information, please click here.

On October 30, the SEC announced that it was awarding more than $150,000 to an individual who provided information concerning another fraudulent investment scheme. According to the SEC, the individual - who also requested to remain anonymous - provided significant information that enabled the SEC to obtain emergency relief and prevent further harm to additional investors. The amount of the award represents 30% of the total amount the SEC collected through its enforcement action, the maximum percentage permitted under the law. This award was the sixth made under the whistleblower program. For additional information, please click here.


These recent awards demonstrate that the SEC continues to reward individuals who provide material, original information about financial wrongdoing. Indeed, the magnitude of these rewards - both by sheer amount ($14 million) and percentage (30%, the most ever permitted) - may be the SEC's way of showing it is not reluctant to make use of the large carrot given to it by the Dodd-Frank Act. Although the whistleblower program has only been operating a few years, it appears that both the SEC and general public have taken well to it, leading to the conclusion that we may expect more significant awards in the future.

JP Morgan Chase reaches two more settlements as banks brace for possible $50 billion in penalties

JP Morgan Chase recently resolved two more government investigations, one related to the bank's dealings with convicted Ponzi-schemer Bernard Madoff and the other to its role in the mortgage crisis.

On January 7, 2014, the United States Attorney for the Southern District of New York announced criminal charges against JP Morgan Chase Bank, N.A. stemming from its relationship with Bernard L. Madoff Investment Securities. The charges include violations of the Bank Secrecy Act for failing to alert authorities despite seeing red flags concerning Madoff Securities' activities. According to documents filed in federal court, as Madoff's primary bank, JP Morgan was in a unique position to recognize problems with Madoff Securities' activities. Despite recognizing problems - and even filing a report with British authorities concerning some of these suspicious activities - the bank remained silent in the United States.

At the same time as announcing the charges, the U.S. Attorney announced that to settle these criminal charges JP Morgan had agreed to a deferred prosecution agreement whereby the bank would waive indictment and the filing of the criminal Information which charges JP Morgan with failing to maintain an effective anti-money laundering program and failing to file a Suspicious Activity Report. As part of the settlement, JP Morgan also agreed to accept responsibility for its conduct by stipulating to the accuracy of a detailed Statement of Facts. In addition, the bank agreed to pay a non-tax deductible $1.7 billion to victims of Madoff's Ponzi scheme. This fine is the largest ever imposed for a violation of the Bank Secrecy Act. Finally, the bank has agreed to refrain from violating the Bank Secrecy Act in the future, and cooperate fully with the U.S. government. If JP Morgan complies with the terms of the agreement, the government will move to dismiss the charges against the bank in two years' time.

In related matters, JP Morgan also agreed to pay the United States Department of the Treasury, Office of the Comptroller of the Currency $350 million, and the court-appointed trustee seeking to recover money on behalf of Madoff victims another $543 million.

For more information, please click here and here.

This latest settlement with federal authorities comes on the heels of the November settlement whereby JP Morgan agreed to pay $13 billion for its involvement in the recent mortgage crisis. As a result of that agreement, the financial industry is reportedly bracing itself for up to $50 billion in additional fines and penalties for activities related to the crisis. According to a report prepared for an unnamed financial institution, based on JP Morgan's settlement, Bank of America may face penalties of nearly $12 billion, plus an additional $5 billion in relief to homeowners. Additional banks that may face penalties include Morgan Stanley at $3 billion, Goldman Sachs at $3.4 billion, Royal Bank of Scotland at $10 billion, and Citigroup at $1 billion.

For more information, please click here.


These recent settlements continue the trend of aggressive government actions seeking large penalties for alleged improper behavior in the banking industry occurring before and during the financial crisis. Notwithstanding the size of the penalties imposed, it is notable that JP Morgan was forced to admit wrongdoing and accept responsibility for its actions, rather than being permitted to deny liability. That requirement signals another way in which U.S. federal authorities are acting aggressively in an effort to require and publicize accountability. (See Enforcement Watch 11 "SEC Changes Policy on Permitting Settlements Without Admissions of Liability". All reasonable indicia appear to signal that the financial industry will continue to face aggressive U.S. government prosecutors and regulators, and that settlements will require substantial monetary penalties, among other things.

Rabobank fined £105m in relation to LIBOR
29 October 2013:

The FCA has fined the Dutch bank Rabobank £150m in relation to its LIBOR submissions over a six year period. The FCA found both manipulation of the Bank's own submissions and collusion with other submitting banks and inter-dealer brokers.

The FCA found that Rabobank had:

  • breached Principle 5 (proper standards of market conduct) by manipulating its own LIBOR submissions and attempting to manipulate those of other Banks;
  • breached Principle 3 (adequate risk management systems) by failing to have in place adequate systems and controls to prevent such conduct; and
  • breached Principle 2 (due skill care and diligence) as a result of an inaccurate attestation to the regulator in March 2011.

Efforts to manipulate submissions

The FCA investigation into Rabobank revealed a well-established practice of internal requests from traders (and their managers) to the rate submitters for Rabobank's submissions to be set at a level that would benefit its own positions. The FCA identified 508 documented requests to submitters, most of which were in relation to yen LIBOR.

The FCA also found numerous incidences of non-documented contact between traders and submitters. From 2009 to November 2010, certain managers in Rabobank instructed submitters to actively seek out "market colour" from certain designated traders. This increased the risk of traders seeking to inappropriately influence the submitters. Indeed, the FCA found that some submitters construed their managers' instruction as a requirement to set the submissions at the rates picked by the designated traders. There were also instances of submitters actively soliciting requests of certain traders.

In addition to internal efforts to manipulate Rabobank's own LIBOR submissions, the FCA found instances of collusion between Rabobank traders and traders at other banks. The FCA identified "at least" 12 requests being made by Rabobank traders and submitters to peers in other banks and "at least" 7 requests being made of Rabobank submitters and traders. There was also collusion between Rabobank traders and submitters and certain inter dealer brokers. Between May 2009 and January 2011 the FCA identified "at least" 12 requests of such brokers and "at least" 14 requests from such brokers.

Lack of systems and controls and inaccurate attestation to the regulator

Between May 2005 and 30 March 2011, Rabobank had no specific systems, controls or training in relation to LIBOR submissions. Consequently, there were failures to take appropriate precautions around LIBOR submissions.

These included:

  • allowing submitters to trade derivative products referenced to LIBOR despite the conflict of interest this created;
  • managers instructing submitters to seek colour from certain traders before their submissions were made; and
  • absence of management oversight of traders and submitters and indeed instances of one manager facilitating inappropriate communication between traders and submitters, which gave the impression that such conduct was endorsed by the bank.

An internal audit in March and April 2009 was provided with specific evidence of inappropriate communication between traders and submitters, but failed to alert senior management of the issue. That audit also failed to identify the inherent conflict created by submitters trading LIBOR-linked derivatives. In June 2010, as a result of the FSA's enquiries, Rabobank started to look at its LIBOR submission process.

In March 2011, at the regulator's request, Rabobank attested that its LIBOR submissions were "adequate and fit for purpose". The FCA found that whilst Rabobank had not intended to mislead the FCA, this attestation was wrong. The bank had not yet implemented its new policies on LIBOR submission, had not addressed the conflict of interest point and was not adequately documenting its submissions.


In setting the penalty, given the period spanned by the failures, the FCA used the regime in place before April 2010. It noted that the breaches were "extremely serious" and that there was a pervasive culture of manipulation at Rabobank, involving a large number of individuals (at least 26, of whom 7 were managers). It also noted "serious systemic weaknesses" in the Bank's systems and controls. Rabobank's failures risked harming the integrity of UK and international markets and could have harmed other market participants.

The penalty of £105m was net of a 30% stage 1 discount for early settlement. A copy of the Final Notice is available, please click here.


The Libor affair continues to give rise to enforcement action. The Rabobank fine is the fifth Libor related penalty.

The fine in this case was very significant. The FCA described the misconduct as among the most serious it had identified on Libor. At the time of the fine, it was the third largest fine either it or its predecessor had ever levied. The breaches took place over a number of years and across a number of currencies. Indeed, the Final Notice stated that "there was a culture where the manipulation of the Libor setting process was pervasive. Until the end of 2008, the manipulation …was considered normal…"

Libor of course continues to have ramifications more widely in the enforcement arena. Not only have we seen foreign regulators imposing fines, but in early December we also saw the European Commission featuring, with the imposition of a number of fines for cartel offences. The suggestion is that as many as 20 financial institutions are being investigated by at least 10 authorities around the world.

Interestingly, and as we have frequently commented in the past, there remains the question of how individuals will be treated, many of whom have of course been heavily criticised in the Libor affair generally. The press has covered the story of the first criminal trial, involving the likes of Tom Hayes and others. But, what there is as yet no public visibility on is how the FCA will treat the many individuals who it plainly believes were culpable and who form the backdrop to the many fines that have been levied on firms. The Libor affair has a long way yet to run.

Rahul Shah fined and banned for encouraging market abuse
13 November 2013:

The FCA has published a statement that Rahul Shah, a financial adviser, encouraged another person to engage in behaviour which, if engaged in by Mr Shah, would have amounted to market abuse. The FCA banned Mr Shah. Further, had he not been able to demonstrate serious financial hardship, he would have been required to pay a penalty of £125,000.

The facts of the case are relatively straightforward. Mr Shah was retained as an independent consultant by Investor A through the investment company of which Investor A was the sole shareholder and beneficial owner. He was required to find investment opportunities and would receive a share of any profits generated as a result of his recommended investments. In effect, the investment company was a two man proprietary trading company, comprising Investor A and Mr Shah; it was not authorised. Mr Shah had previously been an approved person, and had over 15 years' experience working as a broker.

The Investment Company had invested in an AIM listed company, Vyke Communications plc. Mr Shah was subsequently contacted by a financial adviser acting on Vyke's behalf and agreed to become an insider in respect of Vyke. Accordingly, there were prohibitions on him in relation to trading in Vyke shares. Mr Shah was told by the financial adviser that a joint venture agreement had been signed and that an announcement would be made in approximately two weeks. Two weeks later, following the announcement of its forthcoming AGM, the Vyke share price fell. The financial adviser told Mr Shah that the announcement of the joint venture was imminent and reminded him that he was an insider in relation to it. He said that the fall in the share price was a good opportunity for those not "on the inside" to invest in Vyke.

Shortly after his conversation with the financial adviser, Mr Shah spoke to Investor A and informed him that the financial adviser had told him that the fall in Vyke's share price presented an attractive investment opportunity. Investor A consequently placed two orders for Vyke shares, totalling over 2 million shares at an average price of 2.125 per share. After the order was placed, Mr Shah contacted the financial adviser and told him that Investor A had just placed an order. The price of the shares increased by approximately 11% when the joint venture was subsequently announced. When the financial adviser reminded Mr Shah that he was an insider (and therefore prohibited from trading in Vyke shares), Mr Shah replied "Yes…I know. Hey, we're all friends here".

At the time of placing the orders, Investor A did not possess inside information, and was not aware that Mr Shah did. On finding out that Mr Shah possessed inside information, Investor A decided not to sell the shares. Vyke went into administration and the shares became valueless. No profit was ever realised on the Vyke shares and Mr Shah never became entitled to any profits.

Mr Shah sought to argue, amongst other things, that he had told Investor A that they were insiders and that as a result, Investor A should not have traded in Vyke shares. He also claimed that he did not know that Investor A was purchasing Vyke shares. Mr Shah's representations were found to lack credibility and the FCA found against Mr Shah in the above terms.

A copy of the Final Notice is available, please click here.


This Final Notice is of interest for two principal reasons:

  • The level of fine is a good example in practice of the impact of the FCA penalty policy for individuals in market abuse cases. Mr Shah would have stood to earn approximately only the relatively modest sum of £2,000 from his conduct had Investor A sold the shares. Further, applying the appropriate percentage to his relevant income, would have produced a starting figure for calculation of the fine of some £26,000. However, because of the impact of the market abuse penalty policy, the headline fine was very much higher than that, starting at the default position of £100,000 (and then increasing by a further £25,000 to reflect an aggravating factor).
  • It suggests that, as part of its credible deterrence agenda, the FCA is keen to involve investment professionals in its fight against market abuse. In this case, the FCA placed emphasis on Mr Shah's experience and the fact that he had previously received a policing letter reminding him of the penalties for market abuse and insider dealing in relation to other, similar conduct. Putting this together with previous cases, the inference is that the FCA is looking to investment professionals and approved persons as gatekeepers against market abuse, providing front line protection against abusive activity.

Lloyds TSB and HBoS fined £28m in relation to their remuneration structure
10 December 2013:

The FCA has fined Lloyds and HBoS a cumulative £28m in relation to its sales-based remuneration of staff selling protection and investment products.

Lloyds and HBoS ("the Firms") are the leading providers of protection and investment products to retail customers in the UK. Between 1 January 2010 and 31 March 2012, the Firms sold over one million products to their customers. The FCA found that the Firms had breached Principle 3 (adequate risk management systems) in this period.

From 2010 Lloyds Banking Group, which owns the Firms, had a target by 2015 to double its customer base for Bancassurance1. From January 2010, the Firms therefore introduced changes to their staff incentive schemes. The Firms' advisers selling Bancassurance were incentivised by variable base salaries together with individual and team bonuses, one-off payments and prizes. The FCA determined that these were all higher risk features of the Firms' remuneration structure:

  • Variable basic salaries. All of the Firms' advisers' basic salaries were linked directly to their performance against certain targets. The Firms' staff members were allocated to a particular salary tier depending on the level of sales. Most staff occupied the middle tiers and needed to achieve approximately 138% of target in order to be eligible for a promotion and a higher salary. Those staff who failed to make target were demoted, and they were not eligible for a promotion for nine months. In the worst example the FCA saw, an adviser sold protection products to himself, his wife and a colleague in order to hit his target and prevent himself from being demoted. The FCA found that there was an acute risk to customers dealing with an adviser at risk of demotion.
  • Bonus thresholds. The Firms awarded bonuses (individual, additional and team) on a rolling three month basis (a so-called "Champagne bonus") if a set percentage of target was achieved. For example, it was possible for a middle tier Lloyds employee to achieve a monthly bonus of 38% (around £980 gross) by meeting target. Again, this posed a high risk to customers who were dealing with advisers on the threshold of meeting the specified percentage of target.
  • Uncapped bonuses. Even after meeting their specified percentage of monthly target, employees could earn yet higher marginal bonuses by selling more.
  • Product bias. Targets for selling protection products were set between 1.5 and 2 times higher than those for investments, reflecting the Firms' desire to sell more such products.
  • Prizes. In addition to the structures set out above, staff were eligible for one-off prizes if set targets were met. This included a "grand in your hand" and "Christmas cracker" prizes.

Whilst the Firms did have in place systems and controls to monitor suitability, the FCA determined that these were inadequately sophisticated and robust to counter the risks posed by the remuneration structure summarised above. The failures identified by the FCA included:

  • Selecting files for manual audit based on the characteristics of the customer and the sale, rather than the sales history of the adviser. This meant that some advisers never had any of their files manually checked.
  • Failing specifically to focus monitoring around sales of protection products in relation to which bonus thresholds were set at a higher level to encourage sales.
  • Inadequate assessment of those employees eligible for promotion. Whilst such employees were subject to a risk review process, this was heavily based on results of the manual audits (see above).
  • Local supervision of employees was carried out by local sales managers. However, the managers' bonuses were directly linked to the sales results of the staff they supervised. This created an obvious conflict of interest.
  • Senior management (including a specially convened Remuneration Committee) failed to engage properly with the remuneration structure and the risks it created. They failed to consider whether the systems and controls in place were robust enough to deal with the risks generated by the remuneration structure.

The penalty of £28,038,800 was net of a 20% stage 2 discount for early settlement. A copy of the Final Notice is available, please click here.


The FCA has trumpeted this fine as the largest ever imposed by it (or the FSA) for retail conduct failings. Certainly, reading the details of the remuneration structure and the effect it had on sales, it is clear that the interests of consumers were side-lined. A number of interesting aspects emerge.

In terms of penalty, the FCA followed its usual 5 stage process.

  • When it came to applying a percentage figure to the "relevant revenue" in order to reflect the seriousness of the conduct, it is to be noted that the FCA applied the level 4 percentage of 15%2. This reflected, amongst other things, serious weaknesses in the Firms' management systems and controls over a key strategic area, and the fact that the breaches caused a significant risk of loss to customers. This was plainly considered to be very much at the top end of seriousness.
  • The following step in its process is to adjust that figure by a certain percentage in order to reflect aggravation/mitigation. In this case, the figure was adjusted upwards by 10%. This was in part because the FCA said the FSA had for many years been warning firms of the need to manage and control risks to customers arising from financial incentives given to sales staff.

Incentives for sales staff has long been an area the regulator has looked at. The Firms' fine in this case partly reflects the historical emphasis on treating customers fairly, going back all the way to 2005. In Enforcement Watch 8, we reported on the FSA's consultation specifically on the topic of incentives in September 2012 "The FSA consults on incentives and mis-selling". This consultation then resulted in finalised Guidance in January 2013 in which the regulator detailed good and bad practice in sales incentives. Whilst this arrived rather too late to be taken account of in the current case, firms need to study carefully what the regulator has produced on the topic and ensure that they do not fall foul. As we said back in Enforcement Watch 8, this is a topic that the FCA appears very serious about dealing with.




1 a term used to refer to the selling of insurance and investments by the same channel

2 There are 5 levels of increasing seriousness. The highest level (level 5) results in a fine based on 20% of the relevant revenue.

Former Bradford & Bingley Finance Director Willford fined for failings ahead of 2008 rights issue
11 December 2013:

Christopher Willford previously held the CF1 Director Function as Group Finance Director at Bradford & Bingley Group (BBG). The FCA has fined him £30,000 for breaching Principle 6 (due skill, care and diligence) in the period 16-19 May 2008. The fine is for failing to identify and investigate potentially material risks or alert the Board in respect of matters in information brought to him shortly before the BBG rights issue in 2008.

BBG was a specialist retail mortgage and savings bank. On 21 April 2008, the Board approved a Three Year Plan, which was followed the next day by an Interim Management Statement. On 2 May 2008, it received advice that if it was to undertake a successful capital raising, it needed to announce a rights issue as soon as possible. The rights issue was announced on 14 May 2008.

Mr Willford received a draft April 2008 Group Results pack early on Friday 16 May 2008, which he discussed 15 minutes later with the finance team. Later that day, the team sent him a provisional full year impairment forecast.

The April 2008 pack and the provisional impairment forecast indicated a possible material change in BBG's financial outlook. A decision on whether a material deterioration had in fact occurred was one for BBG's board. Mr Willford failed formally and urgently to escalate the information available to him so that the Board could consider it before the Circular was formally approved on 19 May, which stated that there had been no material change in the trading outlook of the company since the Interim Management Statement. The Verification Notes accompanying the Circular for internal purposes only indicated that internally Mr Willford was responsible for confirming and providing evidence that there had been no material change.

Following a meeting of the Exco on 20 May, it was agreed that further work should be undertaken to assess the likely full year outturn and to assess the need for further information in the rights issue prospectus relevant to the above. Mr Willford was involved in the work undertaken. A trading update was announced on 2 June 2008.

The FCA found that Mr Willford failed to meet the required standards in the three day period 16-19 May:

  • He failed to appreciate that the April 2008 pack and the provisional impairment forecast indicated a possible material change in BBG's financial outlook.
  • Related to this, prior to authorising the release of the Circular, he did not adequately advise the Board of the deteriorating financial outlook of BBG, nor ensure the information he had received was available to them, nor ensure any follow up work was urgently carried out.

The FCA found no evidence that his failures were deliberate or reckless. It fined Mr Willford £30,000.

A copy of the Final Notice is available, please click here.


This is one of those cases where there is plainly much going on beneath the surface that has not been reported.

For example, the case is set against the backdrop of hard fought litigation in relation to it, which went all the way to the Court of Appeal in June last year. In that case report, it is made clear that the original proposed fine was £150,000 and that the RDC recommended a fine of £100,000 for failings wider than those that appear in the Final Notice. The Final Notice does not reflect an RDC or Tribunal termination. Instead, it is apparent that the Notice is a result of a settlement between the parties. The case was plainly hard fought, and it has all the hallmarks of a case where the subject has managed to make inroads into the FCA case, reducing the fine and having the FCA refer to a host of mitigating factors. Indeed, the fact that the FCA describes the matter as being "of a serious nature" whilst only fining the subject £30,000 smacks of a fudged settlement.

Whilst the fine was relatively modest (and that may well be for the reasons given in the preceding paragraph), it does nevertheless indicate that the FCA will hold individuals responsible for due skill, care and diligence failings, even where there is no deliberate failure.

Further, as will be seen from the mitigating factors below, Mr Willford was not alone in the conclusions he reached. In an era where the regulators are looking to push the personal accountability agenda, it is perhaps not surprising that the FCA apparently directed some real effort into finding against Mr Willford, who had documented personal responsibility for this aspect of the Circular. The case though is perhaps an illustration of the difficulties the FCA can face in making serious cases for senior management responsibility.

The mitigating factors in this case included that:

  • The failings were for three days only.
  • The events occurred during a time of wider financial crisis, and during a time of great pressure on BBG and on Mr Willford.
  • The degree of pressure on Mr Willford was exacerbated in May 2008 by the serious illness of BBG's CEO.
  • Mr Willford's role was not confined to the traditional finance function, and responsibility for financial reporting was held by the Group Financial Controller, who Mr Willford regarded as wholly trustworthy and reliable, and as such felt he could rely on his recommendations to him without further detailed enquiry
  • Other senior individuals with access to the same information on 16 May as Mr Willford also concluded that, without further investigation, the information did not indicate a significant deterioration in BBG's outlook.

An interesting footnote to this is the announcement on 21 January 2014 by the Financial Reporting Council3 into the conduct of Mr Willford. The FRC is becoming an increasingly muscular investigatory body, not uncommonly investigating matters in tandem with the FCA. It would be interesting to know how in prospect such an investigation was during the FCA process, and how any action it ultimately takes or does not take interacts with that taken by the FCA.




1 The FRC is the independent, investigative and disciplinary body for accountants and actuaries in the UK dealing with cases which raise important issues affecting the public interest.

Hobbs receives prohibition for lying in investigation and evidence
13 December 2013:

A former trader, cleared of market abuse, has nonetheless been prohibited for lying through the FSA investigatory process and in front of the Tribunal.

In Enforcement Watch 11, we reported on the Court of Appeal judgment in the case of David Hobbs, a former trader who the FSA alleged had engaged in market abuse. See Enforcement Watch 11, "Court of Appeal sets out Tribunal's wide public function". Following an FSA Decision Notice finding him guilty of market abuse, Mr Hobbs appealed to the Tribunal. The Tribunal found that there had been no market abuse. However, it found that, in the course of the investigation, and in his evidence to the Tribunal, Mr Hobbs had lied persistently about his conversations with the broker in question to the effect that his trade was to manipulate the price of coffee futures as a "strategy of confusion". When the Tribunal declined to find that Mr Hobbs lacked fitness and propriety, the FCA appealed the decision to the Court of Appeal. As we reported, in a judgment handed down on 29 July 2013, the Court of Appeal agreed that the Tribunal had wrongly conflated the market abuse allegation and the finding in relation to Mr Hobbs’ honesty. The Court of Appeal found it incumbent on the Tribunal to address the question whether, even if Mr Hobbs was not guilty of market abuse, his lying, which it found as a fact, demonstrated that he was not a fit and proper person. The matter was remitted back to the Tribunal to decide, and it is this decision that forms the subject of this article.

The Tribunal had previously found that Mr Hobbs had lied in the case about the conversation he had had that underpinned the market abuse case. That lying had started when he wrote to the FSA early on in the investigation, and it had continued through the RDC stage and in the evidence he gave to the Tribunal. When the case was remitted back to the Tribunal, Mr Hobbs was given the opportunity to answer the findings that he lacked fitness and propriety by reason of his lying alone, and the Tribunal was in a position to rule on the issue.

The Tribunal had “no doubt” that “lying repeatedly to the Authority and in evidence before the Tribunal” demonstrated that Mr Hobbs lacked integrity and that consequently, he was not fit and proper to perform functions in relation to a regulated activity. The Tribunal was not satisfied by arguments put forward on behalf of Mr Hobbs suggesting that the prohibition order should be limited in any way, or that a lesser sanction was appropriate.

A copy of the Upper Tribunal's decision is available, please click here.


The Hobbs' cases are potentially very significant.

First, they provide some useful commentary on how the regulator assesses fitness and propriety. Yet again, the Tribunal referred back to the oft quoted Financial Services and Markets Tribunal case of Hoodless on the question of "integrity."1 Faced with arguments about the lack of threat posed by Mr Hobbs, it went on to say that it did not consider it appropriate to seek to set a threshold for the application of a prohibition order by reference to the level of danger posed by an individual. The test was simply one of fitness and propriety and a lack of fitness and propriety was a serious matter. The relevant factors to be taken into account in reaching its consideration were (i) the need to maintain soundness of the UK financial system, (ii) the need to protect consumers from the activities of unfit and improper persons in relation to regulated activities and (iii) achieving credible deterrence against conduct which is improper.

Second, as well as pointing to a sustained period of lying, the Tribunal repeatedly stated that Mr Hobbs still failed to recognise that what he had done was wrong. He continued to disagree with certain of the Tribunal's findings. It would have been interesting to see what the Tribunal's attitude would have been had Mr Hobbs recognised that what he had done was wrong, accepted what the Tribunal said and shown some real contrition for what he had done. We shall see what attitude the Tribunal takes if, with similar cases in the future, an individual exhibits some real regret for his actions.

Third, whilst a case such as Hobbs may have been clear cut in terms of lying to the Tribunal, there will no doubt be somewhat less clear cut cases in the future. There are often cases where individuals put forward a version of events that is not accepted, even though the individual is not found to be lying. Often, subjects are asked to reflect on matters significantly after the event and without access to the level of context which might best assist them to give a proper account – there is a clear difference between poor but best recollection/ best reconstruction and a dishonest intention to mislead the regulator. It would be very regrettable if individuals were dissuaded from putting forward their version of events for fear that, if not accepted, they may for that reason alone be found not to be fit and proper. We shall have to see what impact this may have on subjects putting forward their defences.



1 One of the elements of fitness and propriety

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