Enforcement actions continue apace - in this edition, we cover both huge fines and a clamping down on individuals. As to future enforcement actions, quite how the regulator may conduct itself is a topic of some great interest to the industry, particularly in this environment of spiralling sanctions. As the FCA's processes and communications come under scrutiny, this is one of the themes we explore in articles in "On the Horizon". We hope you find the publication useful.
With thanks to the Enforcement Watch team.
On the Horizon
Market monitoring and market abuse: the FCA warns the industry
In a speech to the British Bankers' Association Market Abuse Conference published on 7 October 2014, Patrick Spens (head of Market Monitoring) commented on the work his department does. He said that market abuse remained a high priority for the FCA and he described some of the activities of his department in tackling it. What will be most interesting to readers of this publication, however, were his warnings about making notifications, and his description of possible problem areas.
Transaction reporting was a vital part of his department's efforts. He reported that, on average, the FCA receives some 13 million transaction reports each day. He said that the accuracy of the data was critical to enable the FCA to make judgment calls on market abuse cases and to take appropriate supervisory action. Whilst readers of this publication will no doubt know that there have been a number of enforcement cases in recent years in respect of transaction reporting, it is worth noting that Spens was keen to reference the £4.7m fine imposed on Deutsche Bank for reporting errors.
His warnings about suspicious transaction reports (STRs) were more interesting. He described these as a crucial intelligence asset in the detection of market abuse and said that they contributed significantly to potential enforcement actions. Spens reported that the FCA receives around 1500 STRs per year. He warned that the FCA takes STR failings seriously and, as if to warn firms that they may be discovered for not making appropriate STRs, he made a point that the FCA reconciled notifications from a wide variety of sources. In this context, it was also interesting that he noted that the level of reporting was still lower than anticipated from certain quarters, identifying in particular the surprisingly low levels of STRs submitted by inter-dealer brokers. He stressed that, consistent with its importance to the FCA's work, enforcement action will be taken where firms and individuals fail in their reporting duties in relation to STRs. In almost the same breath, he explained that he would be writing to all firms engaged in fixed income trading to provide him with their three near "misses" for fixed income STRs, and their reasons for not sending them. We shall have to see whether further enforcement actions emerge in the area of STRs.
In a similar vein to his comments about reconciling notifications from different sources, Spens was at pains to show the reach of his team in other respects too. In a reference to how his technology team can help prove market abuse cases, he talked also of the FCA's bespoke software (called "Zen"). In that context, he told the audience of how the technology team were able to show the anomalous trading in the gilts market abuse case (see Enforcement Watch 13 "20 March 2014: Significant fine and ban for market abuse during quantitative easing"). Finally, Spens also noted that in addition to the public outcomes for abusive behaviour since the start of the FCA, there had been around 100 unreported private outcomes.
Treasury Committee reports on implementation of PCBS recommendations
We have previously reported on the work of the Parliamentary Commission on Banking Standards (the "PCBS").
In late November 2014, the Treasury Committee published a report containing an assessment of whether and how the government and the regulators had to date implemented the PCBS' recommendations. In one sense, this contains nothing new as it simply reports on what has taken place. So, for example, it reports on the implementation of:
- Its recommendations to: (i) change the civil law to bring about a reversal of the burden of proof against individuals in certain circumstances, (ii) extend the limitation period, and (iii) change the criminal law to introduce a new offence of "reckless misconduct in the management of a Bank".
- Its proposal that the senior management changes applied to all banks operating in the UK, including branches of foreign banks.
- Its proposals in respect of whistleblowing. For example, amongst the package of measures it recommended was the allocation of specific responsibility for a Bank's whistleblowing framework to a board member of the Bank. More controversially, it also recommended that research be conducted into whether whistle-blowers should be financially incentivised.
In all of these, as we know, the recommendations have generally been followed or, in some aspects, exceeded. In addition, as readers will know, there have been consultations going through on other fairly fundamental changes recommended by the PCBS (for example, on the enforcement process – see Enforcement Watch 11 "Parliamentary commission makes far reaching recommendations"). The Treasury Committee's review is overall fairly positive about the steps taken so far by regulators and the government in response to its recommendations. In this respect, the recent report is unsurprising, but useful nonetheless as a reminder of where we have got to.
There is one aspect, however, that the report is keen to point out as "unfinished business". This relates to the Approved Persons Regime ("APR"): As reported in EW 11, the PCBS found the existing APR (as it applies to the Banking Sector) to be a "complex and confused mess". It recommended it be replaced by a Senior Persons Regime for those with key responsibilities and a Certification Regime for those whose conduct might impact the Bank, which has since been legislated on. The Treasury Committee's verdict is that broadly speaking the proposed reforms to the APR have been implemented. However, what is noteworthy is that its report repeats the words of its Chairman (Andrew Tyrie) who in Parliament expressed serious concerns around the continuing application of the APR:
This is unfinished business. The Banking Commission had the remit to look only at banking. It would be absurd to retain a system for one part of financial services that has so clearly failed in another. The Government and Parliament both need to encourage the regulator to look at this and do what is necessary to extend the coverage of the new regime and to remove the APR from other parts of financial services. To rely on the APR is asking for trouble.
It may well be that those parts of the regulated community who have not yet seen a change in the APR will in the future do so. If so, it would equally be a revolutionary step, one aimed at ensuring greater person accountability, with an impact on enforcement actions for some period to come.
Director of Enforcement and Chief Executive of the FCA emphasise culture
In recent speeches to the FCA Enforcement Conference, both Tracey McDermott, director of enforcement and financial crime at the time, and Martin Wheatley, Chief Executive, spoke on the themes of individual accountability and changing firms' cultures.
We regard the following parts of McDermott's speech as particularly worthy of note:
According to McDermott, the Forex investigations suggested that lessons were not being learned and that this spoke negatively both about the future of the UK market and the regulator itself. (The Forex Final Notices are covered elsewhere in this issue "11 November 2014: huge forex fines for 5 banks").
- Culture featured heavily in her comments, and she talked of a culture in some quarters where misconduct would be forgiven and might even be rewarded. McDermott recognised that changing culture was not easy and that it takes time.
- She did say that lessons were being learned, albeit slowly, and from the top down.
- Enforcement was just one "blunt tool", albeit an important one, to bring about this much needed change in behaviour. She urged firms and individuals to distil lessons of general application from all FCA Enforcement action. She also rejected criticism of the level of fines, saying the publicity that enforcement actions bring helps to focus minds, particularly at the top of firms.
- McDermott emphasised the need for individual accountability. She said that there was now an even greater determination at the FCA to make clear to those at the top of firms that, by accepting their jobs, and the rewards that come with them, they take on personal accountability. She went on to say that enforcement would be used where merited, where the FCA found executives who failed to understand and live up to the standards they had signed up to. (In that context, see elsewhere in this edition, 5 November 2014: Former Swinton executives agree serious sanctions).
As for Wheatley, his speech also developed the themes of culture and individual responsibility:
- Interestingly, he noted that increasingly firms subject to enforcement action were suffering from what he called "demand-side discipline", with customers losing trust and confidence and taking their business elsewhere. He explored the theme essentially of market forces helping dictate conduct.
- In relation to Enforcement, Wheatley said that it will always be the case that it is a key FCA tool. However, he pointed out that Enforcement works increasingly with other parts of the FCA, such as Supervision, to bring about "rehabilitation" allowing Firms to improve in the future.
- He bemoaned the fact that, six years on from an economic crisis accelerated by poor conduct, more than half of financial services executives were still insisting that "ethical flexibility" was important for career progression within their firms. Like McDermott, he made plain that firms and individuals had to abide not just by the letter of the law, but also to think more generally about the impact of their actions.
It is plain that the culture and individual accountability agendas still have a long way to run.
Treasury Committee questions Clive Adamson
On 16 December 2014, the Treasury Committee questioned Clive Adamson (Former Director of Supervision) regarding the FCA's controversial press briefing about an aspect of its 2014/15 Business Plan. In the course of giving evidence, Mr Adamson commented on a range of issues, many of which were interesting. However, the issue of most interest to those who keenly watch enforcement matters related to the FCA's communication strategy and its use as a tool of regulation.
The industry remembers well that, prior to its launch, Martin Wheatley (Chief Executive of the FCA) caused some real consternation by proclaiming that the new regulator would have powers to “shoot first and ask questions later”. Whilst this comment was made in reference to new product intervention powers, the messaging was clear; the birth of the FCA would herald a new, and far more aggressive, regulatory regime.
The aggressive tone of Mr Wheatley's comment, and other of the FCA's communications, was called into question when Mr Adamson appeared before the Treasury Committee. In his evidence, Mr Adamson said that he had “…some reservations about some of [the FCA's] tone …” He went a step further, and said that there was recognition within the FCA that “perhaps [it] went too far in the early days…” Mr Adamson also suggested that the aggressive tone of FCA communications could in some cases “inflame" problems rather than solve them. He was however clear that in terms of the work that came from his area, he had “been very careful to get the balance right" and to make sure that it was not "overtly aggressive.”
Mr Adamson emphasised the importance of the FCA getting its messages into the public domain and out to the industry. However, he recognised the potential for conflict between the tone of the messaging expected by the public in the wake of the financial crisis and the tone of the messaging to the industry. That is, whilst consumers might welcome the aggressive tone, Mr Adamson considered that it was unhelpful in rebuilding trust within the industry and that the vilification of the financial services industry could also contribute to loss of confidence by consumers, an outcome contrary to the FCA's objectives. It was “incredibly important that the FCA is seen as part of the solution to the industry’s difficulties, not part of the problem…”
Mr Adamson also compared the FCA's communication approach with that of the FSA, noting that the FSA had been “more under the radar” and that his view was that “the regulator should not be the story. It is the contents and substance…that should be...”. Martin Wheatley's view, as referenced by Mr Adamson, and set out in the Davis Report, was that communication and, in particular, use of the media, was a necessary “tool of regulation”. Zitah McMillan (the then Director of Communications1) who gave evidence to the Treasury Committee immediately following Mr Adamson also spoke about communication being part of a regulatory toolkit. It is interesting to note that she disagreed with the FCA Practitioner Panel who had argued that there was an “inherent danger in the FCA’s desire to court headlines to raise the profile of its work.”
Whilst his comments were directed towards the FCA's communication strategy more generally, Mr Adamson noted that enforcement notices had created "more noise" than other of its publications. Reporting on its enforcement activities is of course a key part of the FCA's strategy, not only to demonstrate the consequences of misconduct but also to educate the industry of potential risks through the reprimanding of its peers. Mr Adamson was of course Director of Supervision, not of Enforcement, and he is in any case no longer in situ. Nevertheless, it will be interesting to see how much, if at all, the FCA may tone down the message that it is looking to send in its comments on enforcement activity. We suspect that the tone of enforcement communications may not in reality change much, if at all.
1 Her departure from the FCA was announced at the same time as Clive Adamson's
Treasury publishes report on its review of enforcement decision making
In Enforcement Watch 13, we reported on the Government launch of a consultation focusing on enforcement decision making at the FCA and the PRA (see "Treasury launches review of enforcement process"). Following the consultation, on 18 December 2014, the Government published its final report. Whilst it reported that "Respondents expressed a reasonable level of satisfaction with current decision making processes and arrangements, and there seems to be no desire for fundamental reform",it nevertheless made 39 recommendations in respect of the FCA, the PRA or both. We focus below on some of the recommendations in respect of the FCA that we regard as the most significant.
A consistent theme of the report is the need for greater transparency. Whilst it was acknowledged that the FCA already publishes a good deal of information about its enforcement work, the Government recommended that the FCA explores ways in which it can provide better information. If implemented, these strike us as being helpful to those potentially facing enforcement. They include:
- Publishing referral criteria which explicitly consider whether an enforcement investigation, rather than another regulatory response, is the right course of action.
- Publishing details (without identifying subjects) explaining why certain cases were referred for investigation and others were not.
- Providing examples of cases where the firm's response to a breach has been a factor in deciding not to take enforcement action.
The report also makes recommendations designed to equip subjects with a better understanding of the case against them at an early stage. If implemented, we consider that a number of these (although not all) are likely to be a positive step for subjects of action. The recommendations include:
- Providing more information within Memoranda of Appointment as to the basis for a subject's referral to enforcement; these should be linked to the FCA's published referral criteria referred to above.
- Scoping meetings should only take place once investigators are in a position to share their indicative plans on the direction of the investigation.
- Subjects to be expressly invited at scoping meetings (or otherwise at an early stage), to provide an indication as to whether they accept the suspected misconduct or any aspects of it.
- In the context of the FCA's forthcoming review of its penalty setting policy, it should consider whether it is appropriate to incentivise early admissions.
- Providing periodic updates to subjects about progress at least on a quarterly basis, with subjects being able to request a face to face meeting.
It is surprising that respondents did not consider that the deadlines for responding to PIRs and Warning Notices should be extended. (They are currently 28 days and 14 days respectively.) In relation to the deadlines, the Government recommends that the regulator sets out the factors that it might consider relevant to an application extending the period for responding to either. Whether or not this would give the comfort needed, especially in complex cases, rather depends on suggested factors and how the regulator would apply them in practice. We shall have to see how the FCA responds to this.
The RDC / Upper Tribunal
Over the years, there has been much debate by practitioners about whether the RDC would continue to exist. There are those who considered that, on the creation of the FCA, the RDC may even have been disbanded. This of course is not what happened. The report states that the general view from the consultation was that the current framework offers "an appropriate level of objectivity, independence, legal expertise and industry experience". It also states that, in the form of the Upper Tribunal, "an independent, autonomous tribunal…already exists" and that it provides "a critical safeguard on FCA and PRA decision-making in all enforcement cases."
Whilst the RDC looks set to stay, the Government has recommended that:
- the RDC reviews and reports annually on its performance, including consideration of its composition and expertise, its operational performance and the sufficiency of its resources to deal with cases efficiently.
- a clearly signposted expedited procedure is articulated to deal with circumstances where a subject wishes to refer its case direct to the Upper Tribunal, so circumventing engagement with the RDC. This should include an expedited procedure to issue Decision Notices without reconvening the RDC.
One of the significant recommendations of the report is in relation to discounts for early settlement. The Government proposes a continuation of the Stage 1 discount, but the removal of the discounts currently available at Stages 2 and 3. The stated rationale is that this will assist in demarcating between those cases that can be settled and those that must be contested. However, it says that the regulator may wish to retain the ability to apply a discretionary discount in cases which settle beyond Stage 1. Whilst anecdotally most cases that settle, do so in Stage 1 in any case, we regard such a recommendation as a retrograde step.
However, we welcome the recommendations that:
- Without prejudice preliminary meetings in the period between notice of the date on which Stage 1 will begin and its commencement will be helpful in most cases. In most cases, the Head of Department or an appropriately senior substitute should attend the settlement meeting during Stage 1.
- To enhance transparency, the FCA should set out factors it will consider relevant to an application to extend Stage 1.
You can review the Government's full report here.
Further serious sanctions for failings around client money
9 October 2014:
Pritchard Stockbrokers Ltd has received a censure and two of its directors, David Welsby and David Gillespie, have been fined and banned for integrity failings.
Pritchard provided stock broking and wealth management services to around 11,000 clients and was responsible for managing around £26m of clients' assets. Mr Gillespie was the Managing Director and latterly its CF10(a) (CASS rules operational oversight). Mr Welsby was the Finance Director with responsibility for the accounts and internal reconciliations.
Pritchard was found by the FCA to have breached a number of key client money protections and to have conducted its business with a lack of integrity, due skill, care and diligence and to have failed to provide adequate protections for client assets. On its administration, there was a client money deficit of £3m. The following findings of the FCA are particularly interesting.
- The client money rules require that a firm authorised to handle client money (as Pritchard was) conduct a daily reconciliation to check that its client money resource is adequate to repay what it owes its clients. Shortfalls are to be made up from the firm's own assets and notified immediately to the FCA. Pritchard had been experiencing financial problems, which resulted in it using client money to meet business expenses. With the exception of two days, between 1 July 2010 and 8 February 2012, Pritchard's accounts had client money shortfalls every day. Whilst these were recorded internally, the FCA was not informed. The FCA determined that these failures were reckless and breached Principle 1 of the FCA's Principles for Businesses (Integrity). They also breached Principle 10 (protection for client assets).
- Both Mr Gillespie and Mr Welsby told the FCA that Pritchard's client money shortfall could be covered by a £2m offshore facility. However, no evidence was provided that such a facility existed and it appears that only oral assurances were in place from the facility provider. Pritchard, and Mr Gillespie and Mr Welsby personally, were found to have recklessly relied on the existence of the undocumented facility, which would not in any event have counted for the purpose of client money reconciliations.
- Bolstering the FCA's case on recklessness was the fact that Pritchard was well aware of the FSA and FCA's position on the crucial importance of CASS compliance. On 10 December 2007, Pritchard had been the subject of a private warning from the FSA in relation to CASS issues. In addition, Pritchard had received generic letters from the FSA stressing the importance of CASS compliance and had written to the FSA in June 2010 stating its confidence that client assets were adequately protected.
- In November 2011, Pritchard designated Mr Gillespie as its CF10(a). However, it conducted no assessment of his knowledge and suitability for the role and, when interviewed, Mr Gillespie denied any knowledge of the special responsibilities for CASS compliance. The failure to appoint an appropriate CF10(a) was found to be a breach of Principle 2 of the Principles for Businesses (skill, care and diligence).
Pritchard received a censure from the FCA. Pritchard is in administration with a view to being wound up, and it would have been fined £4.9m were it not for its financial position.
The Final Notices against Messrs Welsby and Gillespie also contain a few interesting points:
Mr Gillespie was the primary contact in relation to the offshore facility. However, the FCA found that as the Finance Director, Mr Welsby was reckless in relying upon undocumented assurances from his co-director regarding the facility.
The FCA also found that Mr Gillespie had been reckless in relying upon an undocumented facility and in providing assurances to Mr Welsby. Mr Gillespie became aware that the facility was in fact only conditionally available to Pritchard. Despite this, he continued to assure Mr Welsby that the facility could be used as client money and failed to tell the FCA about the conditional nature of the facility during interview.
The FCA also criticised Mr Gillespie for accepting the role of CF10(a) without attempting to understand the duties associated with that role and for failure in that role to ensure that Pritchard's systems and controls were compliant with regulatory requirements.
The FCA found that both Mr Welsby and Mr Gillespie had acted recklessly such that they lacked integrity. Both were banned. They were fined £14,000 and £10,500 respectively, reduced from £72,000 and £100,800 after applications for financial hardship, and after applying the 30% discount for early settlement.
The Final Notices can be found here: Pritchard Stockbrokers, David Welsby, David Gillespie.
We have commented before that the FCA intended to take tough action and impose fines on those firms that still do not have adequate client money arrangements in place (see Enforcement Watch 10 "FCA Enforcement in Business Plan 2013/14") and the failings in this case are obviously of a very serious nature warranting sanction. Client money breaches have the potential to cause real customer detriment and the FCA confirmed that some Pritchard clients are still out of pocket despite claims to the FSCS.
Readers will note from the Welsby Final Notice that he was found to be reckless for relying on assurances from his CF10a, who was also his Managing Director, regarding client money matters, without seeking evidence or verification to support those assurances. On one reading, this might appear to be harsh, even in the current environment. However, he was the Finance Director and plainly had relevant responsibilities. Beyond this, it looks as if the FCA took the view that the use of an undocumented facility to comply with key client money rules was such a red flag that it ought to have put Mr Welsby on high alert and under a duty of enquiry beyond the assurances he had received.
Former Swinton executives agree serious sanctions
5 November 2014:
The FCA fined three former directors of Swinton Group Limited and made prohibition orders against them for various management failings.
The facts that give rise to the findings are relatively detailed, but the essence of them is as follows: Swinton is a large general insurance broker. The policies at the centre of these cases are the monthly add on products (personal accident, breakdown and home emergency insurance) it looked to sell to existing customers with home or motor insurance. It started to sell the first of these in 2010 and the additional two in 2011. The additional background to the Notices is that Swinton had been fined £7.4m (following a 30% reduction for early settlement) in 2013 for an aggressive sales strategy that resulted in the mis-selling of the monthly add on products.
The three former directors are:
- Peter Halpin, CEO. He was also Chair of the Compliance Board, and had oversight responsibility for compliance issues and measuring the performance of treating customers fairly (TCF).
- Anthony Clare, Finance Director. He had particular responsibility in the corporate governance structure for TCF, and had oversight of the Compliance Department.
- Nicholas Bowyer, Marketing Director. He had particular responsibility for the design of the monthly add on products.
Sales were especially valuable in the year they were made as they were accounted for with a lifetime value on day one. During the relevant period (April 2010-December 2011), approx. 1.9m of the add on products were sold. This had a very significant impact on the Swinton profits; for example, the add on products were due by September 2011 to account between them for £43.5m of an anticipated 2011 operating profit of £110.4m. There was also a Directors Share Scheme that was due to hand very significant value to the directors based on 2011 operating profit.
The Notices go into some considerable detail about the management information (MI) received. Essentially, the MI that was received was deficient for a number of reasons. In some cases, this was recognised, although changes that were implemented were in some cases not sufficient or not timely enough.
The three directors were found to have competence failings, as opposed to integrity failings:
- Breach of Principle 71, a fine of £412,700 after a 30% discount for early settlement and prohibition as a CEO. The fine was of a level 3 seriousness (level 5 being the most serious).
- In essence, he did not recognise and respond sufficiently to indications of the problems and risks. For example, he failed to deal with compliance risks and warnings, failed to ensure MI was accurate, reliable and fit for purpose, and failed to ensure that there were controls in place to monitor TCF. Additionally, he failed to recognise the risk that the Directors Share Scheme might give rise to a culture in which delivery of profit might negatively impact on TCF.
- Breach of Principles 62 and 7, a fine of £208,600 after 30% discount for early settlement, and a prohibition on performing any significant influence function. His fine was of a level 4 seriousness.
- His Principle 6 failings related broadly to his missing of indications that there were compliance and TCF problems. In addition, he set the strategy and failed to appreciate that the 2011 profit strategy carried a risk of the unfair treatment of customers. His Principle 7 failings came from the fact that he had oversight of the Compliance Department. He did not challenge it adequately, and he failed to identify the MI as problematic.
- Breach of Principle 6, a fine of £306,700 after 30% discount for early settlement, and a prohibition on performing any significant influence function. His fine was of a level 3 seriousness.
- He was not part of the compliance framework, and failed to appreciate that he had responsibility for TCF. He did not understand that it went beyond a competitive customer proposition and he encouraged a culture in which fair treatment was put at risk in the drive for profit.
The Final Notices can be found here: Peter Halpin, Anthony Clare, Nicholas Bowyer.
The underlying details of the Swinton directors' cases are not perhaps the most inherently interesting. Nevertheless, the Notices are of some very real interest and significance:
- Readers would be well advised to study the Notices carefully to help understand the expectations of the regulators when it comes to MI.
- The Notices are highly significant as they are testament to the FCA's drive to personal accountability. Three of the then directors were fined significant sums of money and prohibited to different degrees for aspects of the business for which they were ultimately responsible. Whilst we have seen directors of companies punished before, they tend to be in respect of far smaller companies where the directors have had far more hands on involvement. This is plainly a part of the FCA's drive to greater personal accountability.
Related, and equally important, is the culture agenda. As readers will no doubt know, the FCA has been pushing this agenda hard. The comments from Tracey McDermott, director of enforcement and financial crime at the time, that accompany the Notice make it clear that culture remains firmly on the agenda. Such comments as "Those with significant influence within firms are responsible for setting the tone and the culture; they set the example that others will follow" make it clear that culture remains high on the agenda.
1 Principle 7 stated at the time "An approved person performing a significant influence function must take reasonable steps to ensure that the business of the for which he is responsible in his controlled function complies with the relevant requirements and standards of the regulatory system."
2 Principle 6 stated at the time "An approved person performing a significant influence function must exercise due skill, care and diligence in managing the business of the firm for which he is responsible in his controlled function."
Huge forex fines for 5 banks
11 November 2014:
On 11 November 2014, the FCA imposed fines totalling £1.1 billion on five banks (Citibank N.A, HSBC Bank Plc, JP Morgan Chase Bank N.A., The Royal Bank of Scotland Plc and UBS AG). Much has been written about the Final Notices, and we summarise the findings at a high level here.
The fines were the largest ever imposed by the FCA (or, before it, the FSA). In essence, the fines were for failing to control business practices in the banks' G10 spot foreign exchange trading between 1 January 2008 and 15 October 2013. By way of example, in relation to policies, it was said that these were high level and firm-wide in nature, with insufficient training and guidance on how the policies applied to the business.
As for the traders' conduct on which this was based, the FCA found that traders at different banks shared information about client activity in order to help them work out their trading strategies. One aspect of the findings was that they attempted to manipulate fix rates (the 4pm WM Reuters and the 1:15pm ECB fixes). The FCA found that traders had used online chat rooms to coordinate trading and had shared confidential information with the aim of moving the rate in a particular direction, typically by allowing one or more of the group of banks to place large trades shortly before the benchmarks were set and ensuring that no trades were made by any other bank in the group in the opposite direction. The resultant movement in the rate allowed one or more of the banks to make profits on agreements previously made with clients to execute trades on their behalf at the benchmark rate.
All 5 banks benefitted from the 30% discount for early settlement. Without this, the fines would have been some £1.6bn. In addition, there were also very significant fines imposed in the US by the Commodity Futures Trading Commission and by the Office of the Comptroller of the Currency, and disgorgement from UBS AG by FINMA.
The Final Notices can be found here:
Citibank, HSBC, JPM, RBS, UBS
It is notable that, in respect of the firm’s lack of effective controls, the FCA determined that, given there were no “detailed requirements” in the FCA Handbook for determining what “systems and controls” should have been imposed in respect of spot FX trading, it was appropriate to judge the conduct of the banks by reference to relevant "industry codes". These included the Non-Investment Products Code, the ACI Model Code (issued by the Financial Markets Association) and a statement of “good practice guidelines” in relation to forex trading issued in 2001 by the banks themselves (among others).
The fines are staggeringly large, ranging from £216m for HSBC to £233m for UBS. The fines reflect a number of different considerations eg revenue, disciplinary record etc. Plainly, they also reflect what the FCA described as the gravity of the failings. Interestingly, the penalties were increased by the FCA amongst other things to reflect what the FCA described as the failure across the industry to learn the necessary lessons about tackling the risks posed to a systemically important market, given the similar failings which arose in the context of Libor. The FCA plainly wants to hammer home an enforcement message, but there has to be a question mark over whether such huge fines are sustainable.
In that context, it is interesting to note that the FCA announced also the launch of an industry wide remediation programme to ensure that firms in future address the root causes of their failings and drive up standards.
Once again, such focus appears to be on senior management. As part of its remediation programme, the FCA said that it would require senior management at firms to take responsibility for delivering the necessary changes and to attest that this work has been completed. Attestations are a tool that is becoming increasingly popular with the FCA as a means of ensuring individual accountability, and it goes hand in hand with the new senior management regime likely to come into force relatively shortly. (For a discussion of attestations see Enforcement Watch 14 "FCA publishes further details about attestations".)
The case is also interesting because it represents the first time the FCA has pursued a settlement with a group of banks in this way. No doubt, such settlements will not in the future be the norm. However, where they do take place, there will be interesting strategic considerations about whether or not to participate. In that context, it is interesting to note that it was reported at the time that Barclays had chosen to withdraw from the negotiations at the last minute.
RBS fined for IT failings
19 November 2014:
In November 2014, the FCA and the PRA fined the Royal Bank of Scotland Plc, National Westminster Bank Plc and Ulster Bank Ltd (the "Banks") a total of £56 million for failings that led to a major disruption in its customer-facing IT systems. The Banks are part of the RBS Group.
The disruption occurred in mid-June 2012. As a result of an error in executing a software upgrade on the Banks’ IT systems, customers found that they could not access their accounts or obtain accurate balances from ATM machines, could not drawdown loans or make payments to third parties (including credit cards and mortgage providers) and that standing orders had not been paid. The error also meant that the Banks were unable to fully participate in clearing1:
Some 6.5 million customers were affected in the UK and the disruption continued for some 6 days (in the case of RBS and NatWest) and some three weeks in respect of Ulster Bank.
The investigation was carried out jointly between the PRA and FCA. The Regulators both found that the Banks had breached Principle 3 (which requires a firm to take reasonable care to organise and control its affairs responsibly and effectively with adequate management systems) by failing to put in place and maintain “adequate systems and controls to identify and manage their exposure to IT risks”. In particular it was found that the Banks’ strategy in respect of operational risk was focused solely on business continuity and should have included a much greater focus on IT Resilience (designing IT systems to withstand or minimise the risks of disruptive events).
Following the standard 30% reduction for early settlement, the FCA fined RBS £42m and the PRA fined RBS and its subsidiaries NatWest and Ulster Bank £14m.
The Final Notice can be found here.
This is the first example of a joint finding by the PRA and FCA. This approach was justified on the basis that the failings “encompassed both conduct and prudential issues and therefore had implications for the statutory objectives of both regulators”. It would appear that the FCA took the lead at least in making the relevant factual findings. If so, not least given the relative enforcement resource and experience, that is relatively unsurprising. The PRA Final Notice explicitly adopts the facts and matters set out in the FCA Final Notice and adds very little in respect of substantive findings.
Unfortunately, very little light has been shed on the question of when the PRA will consider that misconduct has sufficient prudential flavour to justify its involvement. The PRA justifies its involvement in the investigation on the grounds that the incident “could have affected the stability of the UK financial system in that it interfered with the provision of the Banks’ core banking functions and impacted third parties”. Although the explanation does not go further than that, one imagines that, in addition to the sheer scale of the customers impacted (some 10% of the UK population), the Banks’ inability to participate fully in the clearing system was a significant factor in the decision of the PRA to become involved given the fact that it is an inherently interconnected system such that failings by one bank necessarily impact the system as a whole.
The PRA element of the fine was based on the penalty regime of the FSA in force at the time. It did this "using the lens of the PRA's general objective, and (in this case) particularly the financial stability provisions in 2B(3) of FSMA". Likely penalties have always been hard to assess – the interplay of the PRA and FCA penalties are no less so.
The total fine itself is hefty, especially when one considers that some £70 million had already been paid out by the Banks to their customers as part of a redress scheme, a fact acknowledged in the Final Notice. The FCA was keen to make the point that the decision reflected its commitment that banks make the cultural shift away from business continuity (that is, recovering from disruptive events) to "resilience" (that is, ensuring that banking activities most critical to customers can withstand the effect of disruptive events like software and other IT failures).
1 Clearing is the system which manages payments between banks by way of cheque or standing order.
Fare dodging leads to prohibition
15 December 2014:
The FCA has issued a Final Notice against a former BlackRock Asset Managing Director, Jonathan Burrows, prohibiting him from performing any function in relation to any regulated activities as a result of his failure to pay his full train fares on multiple occasions.
In late 2013, Mr Burrows was stopped by ticket inspectors and was found to have failed to buy a ticket when he boarded the train at a rural station with no barriers, but "tapped out" using his Oyster travelcard. This meant that whilst Mr Burrows paid the maximum Oyster travelcard fare, this fee was roughly two thirds cheaper than the rail fare customers should have paid for this journey. When interviewed under caution, Mr Burrows admitted that he had evaded his train fare over several years and that he had done so in the knowledge that he had been breaking the law. Mr Burrows agreed to settle at an early stage of the FCA's investigation.
The FCA found that Mr Burrows "deliberately and knowingly failed to purchase a valid ticket to cover his entire journey whilst travelling on the Southeastern train service between Stonegate Railway Station, East Sussex, and Cannon Street Station, London". During this period, Mr Burrows was an approved person holding the CF30 function.
This behaviour was considered by the FCA to demonstrate that Mr Burrows lacked honesty and integrity. As a result, it found that he was not fit and proper to conduct any function in relation to a regulated activity. Whilst the FCA stated that it was not penalising Mr Burrows for failing to inform BlackRock of the circumstances surrounding this matter, it is clear from the Final Notice that his failure to do so was taken into account by the FCA when deciding what action to take against him.
The Final Notice can be found here.
This Final Notice means that approved persons can be sure that the FCA's emphasis on raising standards of personal integrity and accountability within the industry shows no sign of relenting.
In one sense, it is not that surprising that the FCA should clamp down on what was plainly dishonest behaviour1. However, what is interesting are the ways in which FCA commented about the importance in assessing fitness and propriety of conduct outside the industry. For example, Tracey McDermott, who was at the time the FCA's director of Enforcement and Financial Crime, said that "Approved persons must act with honesty and integrity at all times and, where they do not, [the FCA] will take action" [our emphasis]. Consistent with this, the Final Notice stated that "Those individuals who are approved to work within the financial services industry should conduct themselves with honesty and integrity in both their professional and personal capacities" and that as an approved person in a senior position, Mr Burrows "should have been a role model for others" and found that his conduct "fell short of the standard expected for someone in his position".
The issue is where in the FCA's mind the line should be drawn and at what types of lack of integrity or lack of honesty. Common sense must prevail. There are plainly all manner of ways in which individuals employed in the industry behave in their personal lives with what most people might consider a lack of integrity. However, that does not mean that they should not be considered fit and proper.
Related to this is the FCA's comment about Mr Burrows' failure to notify his employer of the position. Quite what an approved person should notify to his employer about outside activity and at what stage can be a very vexed question. As above, the line needs to be sensibly drawn. There are all manners of lapses in a person's private life that cannot sensibly be said to give rise to a notification obligation. It is to be hoped that that the FCA will not overreach itself.
1 There has however been commentary in the press to the effect that such conduct should not have led to a prohibition, especially where there was no evidence of misconduct in his professional capacity