28 May 2014

Enforcement Watch Issue 13 | May 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

This is the first issue of Enforcement Watch since the first anniversary of the FCA. Whilst enforcement still dominates the agenda and the news, one particularly interesting feature has been the issue of culture. Readers will see culture and its attendant conduct featuring heavily as messages both in enforcement cases completed by the FCA and in our "On the Horizon" section. We shall have to see what impact that has on firms and how the FCA comes down on cultural failings in future.

With thanks to the Enforcement Watch team

On the Horizon

Martin Wheatley's Speech on Ethics

The FCA has for some period now been emphasising the importance of culture. In a speech delivered to the trade guild of international bankers in London on 4 March, Martin Wheatley (Chief Executive of the FCA) contributed further to that message. The most relevant of his comments to those in enforcement are below.

Wheatley noted that there were a number of instances of firms taking steps to implement a culture of customer focus over profits. However, he said that he had a serious concern that economic recovery would bring so much investor pressure for growth that questions of culture would become second or even third order issues. As he put it the challenge for the FCA was to "make the cultural change stick before memories of the financial crisis fade".

The FCA's approach to this issue had two aspects. First, ensuring that the FCA focused more on anticipating problems before they occurred, rather than reacting to failures in firm culture after the event. The FCA's task was "to prevent culture going south as profits head north."

Second, and of more tangible interest to those dealing with the working edge of FCA rules, he said that the FCA is prioritising a reassessment of the balance between ethics and rules. Experience, he said, showed that "red tape is more easily hurdled than principles". Accordingly, firms should expect to see themselves "up against stricter ethical standards" and will be expected to better self-regulate in line with those standards. One concrete example he gave related to sales incentive schemes. Wheatley applauded the fact that most of the major banks have now abolished or substantially reformed such schemes.

Finally of interest to those in the enforcement arena, Wheatley spoke of the results of a survey by the Economist Intelligence Unit. 53% of surveyed financial services executives said that career progression would be difficult without a "flexible" approach to ethical standards. 71% of surveyed investment bankers said the same. Whether or not truly indicative of the sector as a whole, these figures point to an uncomfortable reality that the FCA needs to make its ethical standards "stick" not just in the board rooms of the big banks but amongst individual financial services professionals at all levels.

The emphasis on culture by the FCA is now widely seen. Indeed, the message on culture can be seen in Final Notices (see for example elsewhere in this issue: 30 January 2014: State Street £22.9m fine for transition management failings). This emphasis is set to continue. As illustrated by the comments above, we expect to see firms and individuals judged against those principles and standards in the enforcement cases of the future.

Complaints Commissioner finds that FCA unfair in continuing publication of a Final Notice

The Office of the Complaints Commissioner1 has found that the FSA (as it then was) failed to exercise fairness in accordance with its statutory obligations when publishing a final notice relating to a complainant. It recommended amongst other things that the FCA consider withdrawing the publication of the final notice on the grounds of unfairness. On 27 March 2014, the FCA published its response.

The background to this matter is that the FCA must publish such information about a final notice as it considers appropriate. However, it may not do so if the publication would, in its opinion, be unfair to the person with respect to whom the action was taken or prejudicial to the interests of consumers. The complainant in this case alleged that, since he was named in a final notice, he had lost his job, had been unable to find work and his health deteriorated and, as such, it was unfair for the FCA to continue to publish the final notice of the Upper Tribunal decision.

Of the many allegations brought by the complainant, the Commissioner focussed on (i) why the FSA's (as it then was) complaints team took eight months to review the complaint raised and (ii) why the FCA believed that it was fair that the final notice should continue to be published even though the complainant had, since publication of the final notice, been unemployed for nine months and was receiving treatment for depression and anxiety.

The Commissioner found that the complainant had provided sufficient evidence to show that the decision to continue to publish the final notice was continuing to have a significant adverse effect upon his health and financial position. He also found that the FSA was guilty of an unreasonable delay in the investigation of the complainant's conduct.

The Commissioner made a number of recommendations, including that the FCA:

  1. Apologise for the unreasonable delay inflicted upon the complainant in carrying out its investigation;
  2. Pay £500 for its failure to correctly consider its statutory responsibilities regarding publication of a final notice under FSMA;
  3. Review its procedures to ensure that, where appropriate, an assessment of the fairness of the publication of final notices is undertaken and fully documented before a decision to publish is taken in accordance with section 391;
  4. Consider withdrawing the publication of the complainant's final notice on the grounds of fairness.

The FCA responded by saying that it had apologised to the complainant for the delay and would deduct £500 from the amount owed by the complainant following the penalty imposed by the Upper Tribunal. However, the FCA did not consider it unfair to publish the final notice, nor was it appropriate to remove it from its website. It said that it had reached the conclusion "reluctantly" as it respected the value and role of the Complaints Scheme.

The FCA's response was a robust one. It was based on its "different view on the interpretation of the statutory provisions concerning the publication of final notices and what constitutes unfairness". The FCA stated that "[p]ublishing enforcement outcomes raises awareness of our standards, and is an important way of deterring future breaches; it is a core component of our strategy". The FCA pointed to sections of its Enforcement Guide to support its view that publication of final notices is consistent with its policy and practice over many years and stated that the goal of raising standards by making the consequences of non-compliance clear was at the heart of its credible deterrence agenda. The FCA acknowledged that publication of its findings "will have an impact on people but that does not make it unfair".

Interestingly, in an Addendum, the Commissioner stated that it found the FCA's conclusion "disappointing" and noted that it "has no idea, what aspects of fairness and the rationale for reporting them is, even now".

Publication is a hot topic. Indeed, there was much debate previously on the topic of publishing information relating to warning notices. Whilst there was some pull back from the brink by the FCA on that topic (see more on this Enforcement Watch 12 Policy Statement released on Warning Notice publication), the direction of travel by the regulator more generally is in favour of publication. In the above case, the FCA plainly believed that its credible deterrence strategy justified it in continuing to publish. However, it did make clear that, in accordance with the recommendation at 3 above, it had undertaken a review of its procedures to ensure it had due regard to the requirement before a decision to publish was taken and that this was documented.

The issue now will be what impact this finding has on publication of notices in the future. Given the refusal to remove the final notice in this case and the guidance given in the FCA's Enforcement Guide which is heavily in favour of publication, we suspect that the FCA is unlikely in future to be cowed into not publishing a final notice in circumstances where it would previously have done.



1 The body that investigates complaints about the regulator

FCA publishes its 2014 Business Plan and Risk Outlook

On 31 March, the FCA published its second Business Plan and its Risk Outlook. These documents give an inside view into how the FCA sees the world and what it is planning to focus on in the coming year. In general terms, the need to bring about and maintain a cultural shift within firms towards a focus on customers forms the overarching theme of the Business Plan and Risk Outlook. (Culture was the subject of a recent speech by the Chief Executive covered elsewhere in this publication Martin Wheatley's Speech on Ethics).

We have isolated some particular points of interest for enforcement practitioners:

  • The FCA has identified some general "forward-looking areas of focus", which will inform its work in the coming year and beyond. These include:
    • Firms' existing controls for consumer protection not being able to adapt to its use of new technologies.
    • Poor culture and controls threatening market integrity.
    • Large "back-books" (stock of existing customers) leading firms to act against existing customers' best interests e.g. by exploiting existing customers' lack of impetus to change firms, in order to offer more favourable terms to new customers.
    • Terms and conditions becoming excessively complex.
  • Some approaches for the FCA's work in the coming year are familiar. The concept of "credible deterrence" (a familiar one to readers of this publication and those who watch FCA enforcement trends) returns, with the FCA promising "tough and meaningful" action against firms and individuals in order to raise standards. Similarly, the FCA intends to continue with its approach to supervision, combining thematic reviews with work with specific firms and existing problems.
  • Thematic reviews often lead to enforcement action, and we think three of the planned thematic reviews are of particular interest. We shall have to see what they produce. These are:
    • conflicts of interest in investment banks.
    • controls over flows of information in investment banks.
    • market abuse controls in asset managers.
  • FCA's enforcement priorities for 2014/15 look to ensure that firms put customers at the heart of their businesses and to deal with areas that pose a high risk to its statutory objectives. Specific areas include:
    • Removing from the industry firms and individuals that fail to meet FCA standards.
    • Action against firms who target consumers with unauthorised products.
    • Continuing investigations into LIBOR and FX.
  • Other (non-enforcement) areas for the FCA's work will include:
    • The suitability of incentive schemes.
    • The effectiveness of the listing regime to protect the interests of minority shareholders.
    • Delivering a robust framework for the supervision of LIBOR.
    • Assessing the adequacy of anti-money laundering controls in major banks and smaller institutions and assessing the adequacy of those individuals that administer the controls.
FOI responses: a sign of enforcement activity to come?

On 4 April, the FCA published its responses to the most recent Freedom of Information Requests. We report below on those of most interest in the enforcement sphere as indicating possible future action.

Suspicious Transaction Reporting

Whilst the FCA cautions that the quality of leads from Suspicious Transaction Reports (STRs) varies significantly, the figures published by the FCA nevertheless make interesting reading. They show that the numbers of STRs are continuing to increase:

  • in 2011, there were 584 reports;
  • this almost doubled in 2012 with 1018 reports; and
  • in the first eight months of 2013, 797 reports had already been made.

The STRs are split into three categories. What is interesting is that, whereas reports falling into the categories of "misuse of information" and "distortion/manipulation" have remained fairly constant, the category of "false/misleading" has seen the bulk of the increased reports.

Suspicious Transaction Reporting has been a feature of the regulator's annual business plans for the last three years and this year is no different. Possibly fuelled in part by this sharp increase in STRs, the FCA has included in its proposed thematic reviews for this year, one that looks at controls over flows of information within investment banks (see elsewhere in this issue FCA publishes its 2014 Business Plan and Risk Outlook)


In early 2012, Tracy McDermott, told us "where people put their colleagues, employers, sources of income, etc, above their obligations as approved persons we will take action. Because of your relationship to the wrongdoer you become the dog that doesn't bark, and we will pursue you." Based on figures published by the FCA, it appears that this message has got through.

Since 2008, whistleblowing reports have risen by over 300%. There were 1,297 reports in 2008/2009 compared to 4,467 in the first seven months of the 2013/2014 financial year.

From March 2012, the regulator divided these reports into case types. Of the 1,118 reports since then, included in the top five reported case types, were reports about unauthorised activity (9%) and fitness and propriety (4.2%). However, at just over 60%, by far the majority of the reports were categorised as "other regulatory concerns". It is difficult to establish any trends in whistleblowing from this high level data, but what seems clear is that the industry has heeded the regulator's warning. Whistleblowing is a focus for the regulator and is likely to become an ever more important tool in its enforcement arsenal.

Data loss

Although only a relatively small number of reports, the number of firms reporting data losses has dramatically increased. In 2012, just three incidents were reported, with approximately 16,600 customers affected. In the first ten months of 2013 alone, 11 incidents were reported, impacting at least 100,000 customers (although, in five cases, the extent of those affected was unknown). Incidents included customers' information being sent to incorrect addresses or to other customers and cyber-attacks.

Whilst these figures are restricted to the Financial Crime Operations area and do not include reports made by firms within the FCA's wider Supervision area, they nevertheless show a significant increase in the number of incidents reported and also in the scale of those affected. Whether this reflects the increasing threat of cyber-crime or a new openness between firms and the regulators when it comes to disclosure of data loss, it is not clear. Data loss has historically been the subject of enforcement interest to the regulator (see for example Enforcement Watch 2: Zurich fined for data loss in South Africa). Data loss looks set to be a subject of continued interest.

Treasury launches review of enforcement process

On 6 May 2014, the government launched a review of enforcement decision making at the FCA and the PRA (see here).

The consultation is billed as part of the government's policy to improve the regulation of the financial sector and to protect customers and the economy. This comes hot on the heels of the Financial Services (Banking Reform) Act 2013. Whilst that Act was in some respects a significant piece of legislation, it received criticism for only applying to certain types of firms.

The consultation covers a number of areas in the enforcement process. We cover below three of the most interesting topics for enforcement watchers.

The RDC / Tribunal

The Parliamentary Commission on Banking Standards had previously recommended that an autonomous body replace the current Regulatory Decisions Committee (the RDC). Andrew Tyrie (the Chairman of the Banking Standards Commission) said the consultation was "a step in the right direction. It can pave the way for implementing an important recommendation of the Banking Commission, providing greater autonomy for the FCA's Regulatory Decisions Committee in taking enforcement decisions."

The consultation points out that 40% of cases considered by the RDC are subsequently referred to the Upper Tribunal and, no doubt as a result, it asks whether the RDC process duplicates work and what could be done to make the process more efficient. The consultation also asks whether the composition of the RDC should be changed. The Banking Standards Commission had suggested, in the context of what it was looking at, that the body should be chaired by someone with senior judicial experience and should contain both lay members as well as members with extensive and senior banking experience.

Making representations

The consultation asks whether the time allotted for making representations strikes the right balance between fairness and speed, and whether there are sufficient opportunities for subjects to make representations1. The review also asks whether the regulators should publish factors that they will take into account when considering whether to grant extra time.


The current system has built in discounts on financial penalties, the amount of which depends on the stage at which the case is settled. The consultation asks whether discount for early settlement is appropriate and whether, in certain cases, discounts should be given at all.

As a general point, some of the questions in the consultation are very broad and may result in diverse responses that are difficult to analyse and draw sensible conclusions from. For example, the very first question asks "Do current enforcement processes and supporting institutional arrangements provided credible deterrence across the spectrum of firms and individuals potentially subject to the exercise of enforcement powers by the regulators? If not, what is the impediment to credible deterrence and where does it arise?" Another question, simply asks "What more could the UK learn from international practice?" Nevertheless, they may well produce interesting responses and we will be watching developments closely.

We will have to wait and see where this whole debate ends up. For example, prior to the creation of the FCA/PRA, there had been speculation amongst those in enforcement about whether the RDC would survive the transition at all. There had been those who felt that, because the RDC was not playing a quasi-judicial role, it was not the type of body that was particularly suited to hearing certain types of cases. Yet there were others who felt that, it was precisely because it was the type of body that it was, that it gave the industry a less formalised and preferred way of reaching outcomes. It will be interesting to monitor what comes of the consultation, both in respect of the RDC and various other elements of the process.

The Treasury proposes to host roundtable discussions in June this year with a final call for evidence by 4 July 2014. A report is to be presented to the Chancellor in the Autumn.



1 The formal opportunities for making representations are post Preliminary Investigation Report (PIR) and post Warning Notice.

Adamson speech drives home the conduct and culture agendas

Clive Adamson (FCA Director of Supervision) delivered a speech to the Building Societies Association on 12 May 2014. Whilst a fair amount of that speech was building society specific, there were some aspects of more general interest to those in the enforcement world. Those that we consider the most interesting are:

  • Adamson considered that one of the FCA's main achievements in the last year was the fact that he had seen a "sea change in attention being paid to the conduct agenda". He noted that two or three years ago, conduct was considered a "compliance issue" and "delegated…to compliance functions". These days, he thought conduct was "very firmly on the agenda of executive management and boards", something he welcomed. Perhaps unsurprisingly, he thought that the "sea change" was due in part to the potential of high regulatory fines, redress, and litigation costs and reputational damage.
  • Adamson explained that in order to achieve its goal of "making markets work so that retail consumers achieve fair outcomes and wholesale markets operate with integrity", the FCA would be a "judgment-based regulator" which is "pre-emptive" and "pro-competitive" and "prepared to be tough when things go wrong". Adamson added that these characteristics were founded in the FCA's outcome focused approach i.e. that its fundamental interests are in "what consumers actually experience as outcomes" and fixing "the causes of which is leading to outcomes that are not, or may in the future may not be, fair".
  • Picking up on the same theme as Martin Wheatley's recent speech on ethics, Adamson expressed his view that having the right culture was essential for achieving good conduct performance. Engendering the right culture was something the FCA expected firms to be doing. He said that there was a need for a "more hard-edged embedding of business practices that define how decisions will be made through the firm at critical points of engagement with customers or dealing in markets". On-going leadership from the top of the organisation, constant re-enforcement, incentive structures, effective performance management and penalties for "not doing the right thing" were all drawn out by Adamson as key drivers that would re-enforce a conduct-focused culture.
  • His comments on what "good" governance looked like demonstrated that the conduct of senior executives remains central to the FCA's agenda. Adamson explained that the FCA's expectations of boards were "high", adding that the FCA thought that boards should understand "how and where the firm makes money, what the conduct implications of that are, how customer outcomes are tracked across the product life-cycle as well as the more transitional oversight over control functions".

Spotlight on the US

Requirements of The Dodd-Frank Whistleblower Program continue to be clarified and applied

As the Dodd-Frank Whistleblower Program continues to be used, both the Securities and Exchange Commission and the courts are having the opportunity to interpret and apply the requirements of the statute. In particular, the Supreme Court recently issued its first decision concerning a term of the Whistleblower Program.

In Lawson v. FMR LLC, 134 S. Ct. 1158 (2014), the Supreme Court faced the question of whether 18 U.S.C. § 1514A, which prohibits retaliation against whistleblowers, protects only those employed by public companies, or covers employees of privately held contractors that work for a public company as well. Petitioners in the case were former employees of contractors that performed services for mutual funds, public companies that had no employees. They alleged that they lost their jobs after raising concerns with their employers about the operations of mutual funds for which their companies performed work. After filing separate suits in Massachusetts federal court, their employers moved to dismiss, arguing that the anti-retaliation rule contained in Section 1514A only pertained to employees of “public” companies. Although the district court found in the petitioners’ favor, a divided panel of the First Circuit Court of Appeals reversed the district court’s decision, agreeing with the employers. Reversing the decision of the First Circuit Court of Appeals, in a 6-3 decision the Supreme Court held that “based on the text of §1514A, the mischief to which Congress was responding, and earlier legislation Congress drew upon, that the provision shelters employees of private contractors and subcontractors, just as it shel¬ters employees of the public company served by the con¬tractors and subcontractors.” Lawson, 134 S. Ct. at 1161.

In addition to the Supreme Court’s decision, the Securities and Exchange Commission has continued to release determinations of requests for awards under the Whistleblower Program, providing insight into how the Commission is interpreting the governing statutory provisions. Specifically, the SEC has recently released five more Preliminary Determinations of the Claims Review Staff, each recommending that requests for awards be denied. In each of the Determinations the Claims Review Staff premised its decision on the fact that the request for an award was untimely (outside the 90-day window from release of the Notice of Covered Action), that the information provided was not “original information” because it was provided prior to July 21, 2010 (the date the Dodd-Frank Act was enacted) or both. One of the decisions involved the provision of information to other federal agencies, which purportedly was then passed onto the SEC. The Claims Review Staff determined that the information purportedly provided either was not “original information” under the law, or had not been provided in writing to the SEC as required.

For more information, please click here, here and here.


As the provisions of the Dodd-Frank Whistleblower Program continue to be used, the interpretation of the statutes governing the Program continue to develop. While the SEC appears to construe certain terms of the Program strictly, declining to employ discretionary authority where it could do so, the U.S. Supreme Court appears to have taken a broader view to ensure that the purpose of the Whistleblower Program is achieved. That said, the SEC continues to provide awards under the Whistleblower Program where it finds such awards to be warranted, as evidenced by its recent award of an additional $150,000 to the first award recipient under the Program. On balance it is necessary to continue to monitor the decisions of the SEC and federal courts in order to determine the limits of the Whistleblower Program.

SEC announces additional program to obtain cooperation in self-reporting

The Securities and Exchange Commission’s Enforcement Division recently announced a new program designed to encourage self-reporting by issuers and underwriters of municipal securities. Designated the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, the new program focuses on the continuing disclosure obligations contained in Rule 15c2-12.

Under the program, a self-reporting issuer or underwriter that discloses materially inaccurate statements made in final official statements regarding their prior compliance with Rule 15c2-12 may receive a recommendation for more favorable settlement terms. The favorable terms include a recommendation to the Commission that it accept a settlement including a cease-and-desist proceeding and that does not require the admission of the findings of the Commission. Issuers will also have to undertake to establish remedial training and disclosure programs, as well as fully cooperate with any future investigation by the Enforcement Division. Underwriters will need to retain an approved, independent consultant who will review and provide recommendations to improve the underwriter’s due diligence process and procedures, and then implement the consultant’s recommendations. Perhaps most importantly, the settlement terms will include substantially reduced civil penalties: the Enforcement Division will recommend that eligible issuers receive a settlement that includes no monetary penalty, and that underwriters receive a settlement that includes a civil penalty of between $20,000 and $60,000 for each offering containing a materially false statement, with a cap of $500,000.

To take part in the program, an issuer or underwriter must complete a questionnaire and submit it to the SEC no later than September 10, 2014. The questionnaire requires disclosure of:

  • the identity and contact information of the self-reporting entity;
  • the identity of the municipal securities offerings containing the potentially inaccurate statements;
  • the identities of the lead underwriter, municipal advisor, bond counsel, underwriter’s counsel and disclosure counsel, if any, and the primary contact person at each entity, for each such offering;
  • additional information explaining the circumstances that led to the potentially inaccurate statement(s); and
  • a statement that the self-reporting entity intends to consent to the applicable settlement terms under the MCDC Initiative.

The program is open to issuers and underwriters who have not been contacted by the SEC, as well as those that have been contacted about possible past inaccurate statements, as long as no enforcement action has yet been taken.

For more information, please click here and here.


While the Securities and Exchange Commission has issued more aggressive policies in recent months such as, for example, requiring the admission of wrong-doing in settlements (see Enforcement Watch 11 SEC Changes Policy on Permitting Settlements Without Admissions of Liability), this new initiative demonstrates that the SEC is still willing to be lenient with entities that take responsibility for their actions and self-report their wrong-doing. Indeed, each time the SEC has been willing to accept a lower civil penalty in a settlement it has come as a result of a company’s voluntary disclosures and cooperation with the investigation. The message that the SEC continues to convey is clear -- entities that self-report will be rewarded (or punished less), while those that attempt to hide will face greater sanction.

U.S. DOJ continues to seek and obtain large settlements with banks for wrongdoing, but rewards cooperation

The U.S. Department of Justice has continued to aggressively target wrongdoing by large financial institutions, leading to large settlements for misbehavior in the recent mortgage crisis, violating U.S. sanctions laws, as well as enabling tax evasion. At the same time, though, the Department of Justice recognizes and rewards self-reporting and cooperation with favorable settlement terms.

According to a recent report from the New York Times, the U.S. Department of Justice is currently negotiating a settlement agreement with Bank of America for the bank’s involvement with the recent mortgage crisis. The report revealed that the Justice Department’s opening settlement offer was approximately $20 billion, though that number included an amount for the Federal Housing Finance Authority, which subsequently reached a $6.3 billion settlement with Bank of America. In total, the report stated, Bank of America may ultimately pay $16 billion to resolve all of the various mortgage-related investigations it is facing.

Meanwhile, French bank BNP Paribas revealed that it may face more than $1.1 billion in penalties for activities between 2002 and 2009 involving countries under U.S. sanctions, including Iran. Such a sanction may come with a guilty plea, representing another situation where U.S. authorities refuse to permit a large financial company to settle without admitting or denying wrongdoing.

With respect to the government’s ongoing investigation into foreign companies that are enabling Americans to avoid taxes, it has recently been reported that Credit Suisse pled guilty, see elsewhere in this issue "After Guilty Plea, Credit Suisse Allowed To Continue Operating” for its role in enabling Americans to hide assets from tax authorities overseas, rather than being permitted to settle without admitting or denying liability. Conversely, no such liability was forced upon Swiss asset management firm Swisspartners Group, which recently settled a Department of Justice investigation for only $4.4 million. According to the U.S. Attorney for the Southern District of New York, Swisspartners’ decision to self-report its misconduct and extensively cooperate with government investigators is the reason it avoided criminal charges.

For more information, please see here, here and here.


The government’s continued focus on holding large financial institutions accountable for the recent financial crisis appears to remain strong. It will not be surprising to see continued large penalties paid by banks for their roles in the various recent scandals that have made the news. Nor is the government only focusing on the past. In what may be an indication of its next area of focus, Goldman Sachs, Credit Suisse, and Barclays all recently disclosed that they have received letters from government officials concerning their high-speed trading operations. Please see here.

After guilty plea, Credit Suisse allowed to continue operating

Credit Suisse pled guilty to criminal charges brought by the U.S. Department of Justice for aiding and abetting tax evasion. Before Credit Suisse, the last prominent bank to plead guilty to a criminal act was the now-defunct investment banking and brokerage house, Drexel Burnham Lambert, in 1989. With the Credit Suisse prosecution, the Department of Justice appears to be strictly enforcing its stated policy that no bank is “too big to jail.” Nevertheless, despite its guilty plea, Credit Suisse has been shown some “leniency” -- the New York State Department of Financial Services has agreed to allow the bank to continue operating once it pays a $2.6 billion (USD) penalty and engages an independent monitor for up to two years. The $2.6 billion penalty includes payments to both state and federal authorities. Credit Suisse will pay $1.8 billion to the U.S. Department of Justice, $175 million to the New York State Department of Financial Services, and $100 million to the Federal Reserve.

According to allegations made by the Department of Justice, Credit Suisse customers would set up sham entities, and Credit Suisse falsely stated that the sham entities owned assets in Credit Suisse accounts. The Department of Justice proffered that Credit Suisse further aided and abetted customers’ tax evasion by facilitating access to these accounts and maintaining their secrecy. Credit Suisse admitted to acting in both the United States and Switzerland.

For more information, please click here and here.


Though the first major bank to plead guilty since 1989, Credit Suisse may not be the last major bank to be prosecuted by the DOJ for criminal activity. This case seems intended to serve as a “template for prosecuting other financial misdeeds,” including the recent sanctions violations alleged against French bank BNP Paribas. It is reported that DOJ prosecutors are now targeting US banking giants JP Morgan Chase and Citigroup as well. Both are currently under criminal investigation, but, it is too early to ascertain if criminal charges will be lodged against them.

Court of Appeal Swift Trade case clarifies market abuse provisions
19 December 2013:

On 19 December 2013, the Court of Appeal handed down its judgment in the long-running appeal by Canadian company, Swift Trade Inc, against a Decision Notice published by the FSA (as it then was) back in December 2011 (Canada Inc (formerly Swift Trade) v FCA [2013] EWCA Civ 1662).

The Decision Notice, which imposed a fine of £8 million on the firm, found that Swift Trade had engaged in a form of manipulative trading activity known as "layering". This involved the placing of large orders for contracts for differences (“CFDs”) via direct market access providers (“DMA providers”) just above or below the best quotes on the order book. The DMA providers would then place automatic trades in the underlying share, which would have an effect on its market price. The CFD orders remained live for a matter of seconds before being retracted. During this time, Swift Trade’s traders would capitalise on the resultant movement in the share price by selling or purchasing as relevant.

On appeal to the Upper Tribunal (Tax & Chancery Chamber) against the Decision Notice, Swift Trade (in the form of its successor company Canada Inc) advanced eight arguments, all of which were rejected. Two were subsequently pursued to the Court of Appeal:

First, Swift Trade argued that the FCA did not have jurisdiction over Swift Trade given that, by the time the Decision Notice had been issued, Swift Trade had been dissolved ("the Dissolution Ground").

  • The Tribunal had accepted the FCA’s argument that the relevant Canadian statute stated that any “civil, criminal or administrative action or proceeding commenced…against a body corporate before its dissolution may be continued as if the body corporate had not been dissolved” and that (on the basis of expert evidence) the FCA action constituted “administrative proceedings” and thus could be continued. The Court of Appeal found (by a majority) that the Upper Tribunal had not erred in law in reaching the factual view it did as to the proper interpretation of the relevant Canadian statute. The FCA had adduced expert evidence on the question. Swift Trade had not. The Court found that it was “not surprising” that the Tribunal accepted the evidence of the FCA's expert.

Second, Swift Trade argued that the CFD trades (being a form of derivative) were not “qualifying investments” and thus did not fall with s.118 FSMA ("the CFD Ground"). Further, that the trades that actually led to the movement of the market were carried out by the DMA providers.

  • Whilst it was common ground that CFDs were themselves not qualifying investments, the Tribunal had noted that s.118(5) FSMA included “behaviour which occurs…in relation to” qualifying investments. It found that this covered the “reality” of Swift Trade’s trading, which was that Swift Trade knew (and relied upon) the fact that their trading in CFDs would result in the DMA providers placing automatic hedging trades in the underlying share. Such shares were qualifying investments.
  • In the Court of Appeal, Longmore LJ found:
    • Given that the DMA providers' transactions or orders to trade in the relevant shares were automatically effected by computer without any human intervention, "it seems to me that Swift Trade effected the transactions or orders to trade just as much as [the DMA providers] did.”
    • Further, it was not necessary for the behaviour contravening section 118(5) to be solely the behaviour of Swift Trade. That is because section 118(1) states that the behaviour can be that of “one person alone or two or more persons acting jointly or in concert”. “Jointly” means no more than “together with another” and does not require that both parties act with the same ulterior purpose or intention". So, the Court concluded that Swift Trade did effect transactions or orders to trade in shares, even though that was in fact done through intermediaries such as the DMA providers.
    • Even if Swift Trade did not “effect” transactions or orders to trade in shares, its behaviour nevertheless occurred “in relation to" the shares. The orders for CFDs that Swift Trade did effect were contracts for differences in particular shares. Once the orders for CFDs had been made, automatic hedging transactions in shares were made by the DMA providers as a consequence. Swift Trade's behaviour was “in relation to” those shares, the words “in relation to” being words "of great width and.. no doubt deliberately used in the statute for that purpose.”

A copy of the judgment is available here


The Swift Trade appeals have given rise to a number of interesting legal issues.

The case was the subject of the first interpretation of the FCA's then new powers to publish Decision Notices, even though there was an on-going appeal to the Upper Tribunal (see Enforcement Watch 5 Court allows publication of Decision Notice concerning £8m Market Abuse Fine).

Although the finding on the Dissolution Ground may be of relatively limited application, it is nonetheless of some interest. In Swift Trade, the problem that this would otherwise have caused the FSA was avoided by the fact that it just so happened that Canadian law permitted such actions against a company to remain "live" despite the company’s dissolution. In other circumstances, where other jurisdictions are involved for example, it may be that a dead company remains dead and no proceedings may be brought or continued in respect of it. The fact that a target company has dissolved may thus provide a substantial barrier to enforcement action by the FCA, particularly where no concurrent proceedings have been instigated against senior executives of the relevant firm.

Of more general interest is the Court of Appeal’s wide reading of s118 in relation to the CFD Ground. Its finding has significantly weakened any potential technical arguments that subjects may seek to raise about the precise reach of the market abuse provisions. It is now clear that activities only indirectly concerned with qualifying investments may still potentially come under the auspices of market abuse.

More widely, there is no doubt that the Swift Trade Decision Notice, which imposed the largest ever fine issued for market manipulation, was intended to send a message to the market that HFT will be the subject of close scrutiny by the FCA. Indeed, pressure on the regulator to pursue such a hard-line will likely only increase given the recent public interest in the world of HFT. Michael Lewis’ book, “Flash Boys”, an expose of what Lewis sees as the unfair rigging of the market by HFT on Wall Street, sold 130,000 copies in its first week of publication in the US, and is set to be made into a film. It is inevitable that the focus of the FCA’s push to restore faith in the financial services industry will be guided, at least to some extent, by public perception, even if it is formed over popcorn.

State Street £22.9m fine for transition management failings
30 January 2014:

State Street Bank Europe Limited and State Street Global Markets International Limited (together “State Street UK”) have been fined £22.9 million1. The sanction relates to circumstances surrounding a deliberate strategy of charging undisclosed mark-ups in respect of transition management services.

One of State Street UK's services is Transition Management (TM)2. To earn revenue, the UK TM business typically agreed to charge a client a commission when trading in equities and took a disclosed spread or mark-up on any fixed income transitions. On occasion, a fixed management fee would be charged instead. In 2010, market pressures caused a drop in its revenue and, in late 2010/early 2011, senior managers in the relevant business line decided to impose mark-ups on trade prices that had not been disclosed to clients. The new charging model was subsequently deployed in respect of six clients, which were mainly large investment management firms and pension funds. These clients were subsequently overcharged a total of some US$20 million.

One client subsequently challenged how it had been charged. State Street UK falsely responded by stating that it had been the result of an inadvertent error and made a rebate in respect of that customer. In addition, it failed to disclose further undisclosed mark-ups that had been charged to the client in respect of the same transition. After the client appointed a third party analyst to conduct a full review, the matter was escalated to State Street UK’s senior management, who commenced an internal investigation and promptly notified the FSA (as it then was). State Street UK notified those clients it understood had been overcharged and notified all UK TM clients of the charging issues that had arisen. It implemented a comprehensive remediation programme.

The FCA found that State Street UK's TM business had “initiated and executed a deliberate and targeted strategy to overcharge certain UK TM clients and to conceal those charges from such clients". The FCA found that State Street UK's TM business overcharged six of its clients approx. $20.1m in the relevant period. While overcharging occurred on only 3.5% of the transitions in the relevant period, these generated approximately 25% of the total revenue earned by State Street UK's TM business in that period.

The FCA further found that systemic weaknesses allowed the overcharging to go undetected until identified by a client.

State Street UK agreed to settle at an early stage of the FCA investigation and therefore qualified for a 30% discount on the £32.6 million fine.

A copy of the Final Notice is available here.


This action is a wake-up call for firms employing the services of transition managers. Given the potentially opaque and complex nature of the commissions, mark-ups and spreads that are part and parcel of transition management, it is important for those who engage such services to ensure that they are fully aware of the detail of such transactions and the contractual basis on which any fees or mark-ups are calculated. On 10 February 2014, the FCA published the results of its thematic review into Transition Management which found deficiencies in transparency and communication at some firms.

From an enforcement point of view, the matter has a number of points of interest.

  • One of the FCA's significant concerns was that the controls in place meant that the conduct went undetected until raised by a client. The FCA found that the failure to manage or identify the risk that overcharging would occur arose "because of the serious deficiencies in its business controls and control functions in relation to the UK TM business, and the inherent weaknesses in its governance and matrix management oversight framework…" Firms would do well to read the details surrounding this, with particular emphasis on the comments about matrix management and how this meant in this case that there was ineffective challenge of the TM business by State Street's UK senior management.
  • Culture has increasingly been a part of the FCA's message (see for example Enforcement Watch 12 "McDermott sets out enforcement thinking" and various pieces in this issue in "On the Horizon"). The State Street UK matter shows how very much part of the FCA's thinking it is. The Final Notice states that State Street UK allowed “a culture to develop in the UK TM business which prioritised revenue generation over the interests of customer”.
  • In relation to the culture of compliance, it is of note that, although the relevant compliance function was on the same floor as TM, it was not considered "particularly visible… and was not embedded into the business." The FCA considered that "the lack of a compliance culture within the UK TM business was a key factor in why staff did not escalate any concerns to Compliance."
  • When it came to assessing penalty, the adjustment for deterrence at Stage 4 in this case was particularly interesting. The mathematical calculation using relevant revenue produced a Stage 3 figure (before 30% discount) of approx. £10.9m. The FCA considered that this would not be a real credible deterrent. "Given the size and stature of State Street UK, and the egregious nature of the misconduct", the FCA applied a multiplier of 3 in order to achieve credible deterrence. Accordingly, the Stage 4 figure (before 30% discount) was £32.7m.
  • In its press release, the FCA warned "Firms should be in no doubt that the spotlight will remain on wholesale conduct."



1 The punishment is for breaches of Principle 3 (Systems and controls), Principle 6 (treating customers fairly) and Principle 7 (client communications).

2 TM is a service provided to clients to support structural changes to asset portfolios with the intention of managing risk and increasing portfolio returns. The services may be required when a client needs a large portfolio of securities to be restructured, or when a client decides to remove or replace asset managers.

Significant fine and ban for market abuse during quantitative easing
20 March 2014:

The FCA imposed a fine of £662,700 and a prohibition order against Mark Stevenson, a former Credit Suisse trader. The sanction was for engaging in market abuse by manipulating the price of certain UK government bonds (commonly referred to as "gilts") to be purchased by the Bank of England as part of its quantitative easing (QE) programme.

The market manipulation took place on 10 October 2011. On 6 October 2011, the Bank of England had announced that it would be purchasing a further tranche of gilts as part of QE. The gilts would be purchased through a competitive reverse auction process on 10 October 2011.

Since July 2011, Mr Stevenson had been gradually increasing his holding of the relevant gilt. Over the course of five and a half hours on 10 October, he purchased a further £331 million of the relevant gilt, amounting to 92% of its daily turnover. This had the effect of significantly increasing the gilt’s price.

Mr Stevenson then offered to sell £850 million of the gilt to the Bank (which included the £331 million he had acquired that day). This was based on the prevailing rate for the gilt, which had been heavily influenced upwards by his trading on that day.

Having identified this unusual trading, the Bank announced (for the first time ever) that it would be rejecting all offers of the gilt. Had the trade gone ahead, Mr Stevenson’s holding would have made up 70% of the £1.7 billion to be purchased by the Bank on that day.

The FCA found that Mr Stevenson’s trading on 10 October was designed to move the price of the bond in an attempt to sell it to the Bank at an abnormal and artificial level. It concluded that his behaviour amounted to market abuse within the meaning of section 118(5) of FSMA “in that it gave a false or misleading impression as to the price of the Bond and secured the price at an abnormal or artificial level”.

Mr Stevenson settled at an early stage and thus qualified for a 30% discount on the financial penalty of £946,800. He was also prohibited as a result of his actions.

A copy of the Final Notice is available here.


This is the FCA’s first enforcement action for manipulation of the gilt market.

The Final Notice underlines how seriously the FCA considers attempts to manipulate the market. However, it is difficult to escape the conclusion that one reason that the FCA treated Mr Stevenson so harshly was because the Bank of England, and thus ultimately the taxpayer, stood to be the "victim" of Mr Stevenson’s abuse (an indemnity had been provided by the government to indemnify against losses arising from the purchase of the gilts).

It is also notable that the FCA took the unusual step of stating expressly in the Final Notice that neither Credit Suisse, nor any of its other employees, were subject to criticism as a result of Mr Stevenson’s actions. It is quite possible that the reason that he alone was in the frame was because “Given his significant market experience, Mr Stevenson was able to trade with a large degree of autonomy, designing and implementing his own trading strategies”.

Santander fined £12m for investment advice failings
24 March 2014:

The FCA has fined Santander UK £12.4 million for failures relating to advice and financial promotions in respect of certain of its retail investment products. Without the 30% discount for early settlement, the fine would have been some £17.7m.

The FCA found that there were significant deficiencies in Santander's processes for ensuring that:

  • Customers received suitable advice.
  • In relation to its Premium Investments1, regular reviews were carried out to check investments still met customers' needs and that the service promised to customers was actually provided.
  • Financial promotions and communications with customers were fair, clear and not misleading.

The FCA found that Santander had breached Principle 92 as it:

  • Did not have adequate processes in place to ensure advisers sought and considered adequate information from the customer to ensure investment recommendations were suitable. The FCA found for example that the online tool used by Santander’s advisers to gather relevant information failed to include requests for certain key information such as a customer’s knowledge of investments, investment objectives and expected changes in circumstances.
  • Did not have adequate processes in place to ensure advisers understood customers’ attitude to risk. For example, the "Risk Profiling Questionnaires" employed by Santander’s advisers included insufficient questions and questions that were either too open to interpretation or too complex requiring, for example, customers to make calculations.
  • Failed to ensure that customers received adequate explanations of why investment recommendations were suitable for them. Suitability reports were criticised for being overly "standardised", lacking "reasons why" information and indicating insufficient rationale for why products had been selected.
  • Failed to take adequate steps to provide an ongoing review service (promoted as a feature of its Premium Investment products) in order to check that the investments continued to meet customers' needs.
  • Failed to ensure that new advisers received adequate training before advising customers. In particular, there was a disproportionate emphasis on pre-course learning and the advisors were not trained on the systems they would use prior to their first meeting with customers.

The FCA also found that Santander had breached Principle 73 as it failed to ensure that its financial promotions were fair, clear and not misleading and that investors were given sufficient disclosure about the products and services. Specifically, the FCA found that matters such as the scope of FSCS protection, the terms of "cooling off" periods, the meaning of certain key documentation and the nature of the products were insufficiently clear and failed to comply with Santander’s own processes. The FCA also found that a number of statements made verbally by the advisers were inaccurate and that insufficient accurate information was provided to the customer in a durable medium.

The FCA’s reasons for concluding that Santander’s breaches were particularly serious included:

  • That the failings were systemic, resulting in large numbers of customers being affected.
  • That the failings had occurred despite the fact that the FCA had “repeatedly stressed” in its publications the importance of matters the subject of the Final Notice.
  • That Santander had responded to a "Dear CEO" letter dated 14 June 2011 (which related to the FSA’s Wealth Management Thematic Review) in a way which was deemed “too positive and misleading” in its description of the bank’s processes and the quality of outcomes produced for its customers;
  • The bank’s regulatory history, including on 16 February 2012 that the bank had been fined £1.5 million by the FSA for misleading customers as to the scope of cover for certain structured products under the Financial Services Compensation Scheme (see Enforcement Watch 7 Santander fined £1.5m for FSCS customer communication failures)

A copy of the Final Notice is available here.


The Santander penalty is one of the largest penalties levied by the FCA in respect of retail banking. It is also worth noting that Santander agreed to contact all affected customers and to pay redress where appropriate (although, because of the rise in stock markets in the relevant period, redress is likely to be low).

The action is evidently part of the continued push by the regulator to restore trust in the financial services sector, particularly in the provision of "frontline" retail banking services. The topic of trust was one referred to by the Director of Enforcement, Tracey McDermott in describing the action.

The Final Notice is also further evidence of the FCA’s willingness to rely on a firm’s response to a "Dear CEO" letter in any subsequent enforcement action. In Santander’s case, prior to responding to the letter, the bank had engaged external consultants to review a sample of client files. The consultants uncovered a number of shortcomings in those files. The problem came when Santander’s response to the letter included reference to the review, stating that it “has supported that our tools and processes work well delivering appropriate outcomes for the great majority of customers”. This did not fully reflect the shortcomings identified by the external consultants and was found to be “too positive and misleading”. In a way not altogether dissimilar from its use of attestations, the FCA will no doubt continue to use "Dear CEO" letters as a tool to ensure that firms are complying with their obligations and hold them to account if their responses are inaccurate (or insufficient). It is not difficult to see, in perhaps starker circumstances, a Principle 11 breach (misleading the regulator) being brought on the basis of a misleading response.

The matter also stands as a further reminder to firms to keep abreast of the FCA’s publications, guidance and reviews. Interestingly, specific reference was made to Final Notices that were published during the relevant period of which, the FCA noted, the firm should have been aware.



1 Similar to a traditional wealth management service involving active management of funds in return for a charge.

2 Principle 9: 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.

3 Principle 7: A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.

Upper Tribunal London Whale finding on identification of an individual
10 April 2014:

The Upper Tribunal has developed the case law on when an individual is identified in a relevant Notice and is therefore entitled to make representations as a third party.

Under s393 of FSMA, an individual who is identified in a third party's Warning Notice or Decision Notice and, in the opinion of the regulator is prejudiced, is given certain rights in relation to such Notices.

In September 2013, the FCA published a Final Notice against JPMorgan Chase Bank NA relating to the "London Whale" affair, imposing a penalty of some £137m (see Enforcement Watch 11 "JPMorgan Chase NA receives huge fine".

Achilles Macris contended that the Final Notice identified him and that he had been prejudiced, yet he had been given no third party rights in relation to the preceding Warning Notice or Decision Notice. Mr Macris referred the matter to the Tribunal. It was common ground that, if he had been identified, Mr Macris was prejudiced. The issue in the case, however, was whether Mr Macris had been identified. Mr Macris argued that the reference in the Notice to "CIO London management" had been used by the FCA to refer to him specifically and uniquely and did so consistently throughout the Notice.

There had been two previous cases in front of the Tribunal on the identification point, the most well-known being the case of Sir Philip Watts in relation to the Shell Notice.

In Watts, the FSA had accepted that a person could be identified other than just by a name eg by use of a title such as "Chairman of the company". The dispute in the Macris case was the extent to which a "decoding" process by reference to external material was properly part of the process of establishing whether a person had been identified in the Notice if that person was not expressly named. Macris decided that the reference in Watts to not being permitted to look at external sources meant that it was not permissible to look at external sources in order to determine whether it was the company that was being criticised in a particular instance rather than an individual being criticised.

Accordingly, in Macris, it was held that:

  • The true purpose of s393 was to give third parties whom the FCA was proposing to criticise the opportunity to answer those criticisms before they were published. It was not acceptable to say that because the individual referred to could not be easily established by reference to external sources, his rights could therefore be dispensed with.
  • In essence, one looks at the Notice to see if an individual has been "singled out", rather than simply the firm being referred to.
  • If an individual has been singled out, it is then permissible to look at external material in order to determine incontrovertibly who that individual is.
  • In the Macris case, the references to "CIO London management" must for a variety of reasons of drafting in the Notice have been a reference to an individual. External public sources confirmed that the individual was Mr Macris. The preliminary issue therefore succeeded.

A copy of the judgment is available here


Questions relating to s393 issues frequently crop up in practice. In our experience, whilst the regulator frequently looks to draft its Notices in such a way as not to give rise to third party rights, it often comes close to the line. The fact that the Tribunal has considered the matter and given additional guidance on interpretation is very much to be welcomed. The FCA has appealed the case and we shall have to see whether it stands. A number of consequences may follow from the Macris case:

  • Regardless of the outcome of the appeal, the FCA will no doubt look more carefully at how it drafts its Notices in future so as to avoid inadvertently giving rise to third party rights.
  • In some cases, it may simply be impossible for it to avoid that consequence. Whilst we do not expect an avalanche of third party rights to arise in future, we suspect that there will be at least some more rights than are currently given should Macris stand.
  • If the appeal succeeds, there may well be consequences for the JPMorgan case in particular. The FCA will be left in some mess if Mr Macris makes representations on the Notice and manages to convince the FCA that the criticisms of him were unwarranted. In that case, the detail of the Notice would no doubt need to be changed.
  • Further, a successful appeal could easily give rise to similar issues in other cases. For example, although it remains to be seen whether such people would in fact want to refer the Notices to the Tribunal, those identified in the Libor cases (Trader A, Trader B etc) may well have good grounds to do so.

Martins fined for Libor failings
15 May 2014:

Martin Brokers (UK) Limited (“Martins”) has become the second inter-dealer broker and the sixth firm overall to be fined by the FCA in respect of the manipulation of LIBOR.

The FCA found that between January 2007 and December 2010, Martins sought to manipulate the JPY LIBOR rate by influencing Panel Banks to make JPY LIBOR submissions at levels requested by one of its significant clients, a trader at UBS. In addition to instances where Martins simply requested that Panel Banks make submissions at certain levels, the FCA found that the firm also sought to influence submissions by:

  • Creating “spoof orders” in order to manipulate the Panel Bank’s understanding of the cash market; and
  • Providing the Panel Banks with “run-throughs” (assessments of the correct level of JPY LIBOR purportedly based on a broker’s understanding of the market) which were not based on Martins' independent assessment but rather on a wish to achieve the rate sought by the UBS trader.

In return, the UBS Trader entered into “wash trades” (risk free trades which cancelled each other out) which generated brokerage payments to Martins and bonus payments to individual brokers.

The FCA found that this action breached Principle 51.

The FCA further found that Martins breached Principle 32 in failing to put in place adequate systems and controls to prevent such activity. In damning terms, the FCA found a “near complete absence of basic policies and practices designed to meet regulatory standards; there was no compliance monitoring programme; there were no risk reviews to assess the adequacy of Martins’ systems and controls and there was no staff training and competence programme in place”. Areas of particular criticism included:

  • The “poor compliance culture“ which “gave undue weight to revenue generation at the expense of promoting a culture of regulatory compliance”;
  • The lack of any compliance training at all (save for “training on anti-money laundering”);
  • The lack of any transaction monitoring, and in particular the lack of a system by which daily revenue spikes or unusual trading patterns were monitored (either of which would almost certainly have detected the wash trades);
  • The lack of clear reporting lines, which included the fact that “managerial responsibilities were…poorly defined”, the brokers were not under any “upward reporting obligation” and there was insufficient “monitoring of their managerial performance”; and
  • The failure to implement recommendations made by compliance consultants in 2005 and 2006.

The FCA assessed the appropriate fine in respect of these failings at £3.6 million. However, given the fact that Martins would be unable to pay a penalty of this amount in addition to other regulatory fines it faced, the fine was reduced by 75% to £900,000, and reduced again by way of a 30% settlement discount to £630,000, to be paid in instalments over three years.

A copy of the judgment is available here


There were a relatively small number of individuals involved in the wrongdoing. Indeed, the FCA found that Martins as a firm did not engage in deliberate misconduct. Accordingly, the systems and controls breaches identified are particularly interesting. For example:

  • Singled out in particular as an example of “poor compliance culture” was the fact that, while employees enjoyed incentives based on revenue creation, “there were no incentives to reward for adherence to internal controls or to penalise for non-compliance“. The design of incentive schemes is an area which has received increased scrutiny from the regulator in recent years and firms should be aware of the need to ensure that those schemes which are based on profit are either balanced by or incorporate incentives based on adherence to regulatory standards.
  • Martins' failure to monitor for unusual trading patters is also of interest. While Martins did have an electronic monitoring system which was capable of producing reports that would have highlighted the unusual activity, they “failed to ensure that these daily desk reports were regularly produced and monitored”. Whilst the Martins' failings in this respect were plainly very serious, it does at least highlight the need for firms to take proactive steps to ensure that trading patterns are within normal bounds. Failure to do so provides the FCA with a ready route from which the actions of a rogue trader or broker can underpin a finding of systemic failings in respect of the firm.

The reference to Martins’ failure to implement the recommendations of independent compliance consultants acts as a further reminder to firms that engage external compliance consultants that they must be willing to take reasonable steps to address any failings identified (and in certain cases to report those failings to the FCA). If not, as has been noted in 24 March 2014: Santander fined £12m for investment advice failings, the ostensibly conscientious step of seeking external guidance can come back to haunt firms subsequently subject to enforcement action.

The FCA's message is heavily focused on culture. It said that the culture was that "profit came first" and that "compliance was seen as a hindrance." The FCA expressly found that the "compliance culture" was "complacent" and that managers close to the broking business felt that "good common sense could apply and, as and when issues arose, this would be raised with the appropriate people." It was no doubt that culture that contributed to the finding that senior managers at Martins relied on “anecdotal information”, the fact that brokers “knew what they were doing” and information gleaned by interacting with the brokers “socially after work”. These findings dovetail with the culture and conduct messages that the FCA has recently been so keen to emphasise (see elsewhere in this issue Martin Wheatley's Speech on Ethics and Adamson speech drives home the conduct and culture agendas) and that looks increasingly set to be a theme of its agenda.

On a separate theme, we note that there is anonymised reference throughout the final notice to specific brokers and to one trader at UBS. In light of the Macris case reported on elsewhere in this issue 10 April 2014: Upper Tribunal London Whale finding on identification of an individual), it will be interesting to see whether the FCA chooses in future to "identify" individuals in this way and, if so, what third party rights it gives to them.



1 Principle 5 states "A firm must observe proper standards of market conduct".

2 Principle 3 states: "A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems."