Enforcement Watch Issue 8 | September 2012

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

Enforcement action has not been thin on the ground these last few months, and some very substantial fines indeed have been levied. Meanwhile, the Libor investigations rumble on, and we report on the developments there. Elsewhere, Peter Cummings described the enforcement process as an "extraordinary Orwellian process". He may not be the first to see it that way, but I would bet that he is the first to articulate it in quite that way.

As we describe in On the Horizon, clues abound about where the FSA's enforcement sights are set in the near future, and Martin Wheatley lays down a very big marker about his intentions for the FCA.

On the Horizon

Enforcement to help ensure consumers are front and centre

We have previously talked of the approach the new FCA plans to take to enforcement (see Enforcement Watch 5 "FCA’s approach to regulation points to increasing enforcement" and Enforcement Watch 7 "Specifics revealed about the future enforcement approach"). In speeches given in June and July 2012, Clive Adamson (Director of Supervision at the FSA) and Martin Wheatley (MD of the FSA, and CEO Designate of the new FCA) gave further useful indication regarding FCA goals.

  • Adamson said that the FCA will expect to foster a new culture of "professionalism" at UK firms. This relates particularly to advising clients. In short, the FCA does not want the content of advice to be driven by the need to make a sale or to make a profit. It says that advice should be based on a proper understanding of the products involved and tailored to each client's specific needs.
  • Speaking in July, Wheatley made similar comments about the need for the FCA to bring about a cultural shift whereby firms and the regulator put customers "at the heart" of what they do and consider issues from the consumer's perspective.

These high level expectations sit alongside the work the FSA has already done (for example as part of the Retail Distribution Review) in a bid to try to increase consumer confidence and understanding of the services they are receiving and the price for those services. The comments also help to contextualise the FCA's much trumpeted proactive approach. For example, Wheatley expressed a desire to have members of Enforcement involved at an early stage in Supervisory cases to ensure that appropriate action can be taken as early as possible. The backdrop to this is the oft repeated message of "credible deterrence".

What is to come in relation to LIBOR

There has been much debate in the press in recent months about powers to deal with manipulation of LIBOR, particularly criminal powers. The Wheatley Review into LIBOR published an initial Discussion Paper in August 2012 (the DP) that touches at various places on the FSA's views on the limits of available powers. To the large number of people caught up in the regulatory sweep, those aspects make interesting reading.

LIBOR submitting is not a regulated activity. The DP correctly notes that this limits the FSA's powers in relation to it. When it comes to enforcement action against individuals in relation to it, what this means is that, if the person in question happens to be an Approved Person, then action would most likely be on the basis that the individual had been "knowingly concerned" with the firm's breach of FSA Principles for Businesses. This is something that the DP describes as a "highly contingent and indirect mechanism". If the individual was not approved, then this further limits the disciplinary steps that can be taken.

As for market abuse, much manipulation or attempted manipulation will almost certainly fall outside the current regime. Readers may be interested to note however that there are currently proposals to plug this gap working their way through the European process in the shape of the European Market Abuse Regulation and of the Criminal Sanctions Directive.

As for criminal sanctions, the DP concludes that "LIBOR manipulation and attempted manipulation is unlikely to constitute a criminal offence which falls under the prosecutorial responsibility of the FSA. Even the most likely offence in FSMA, concerning misleading statements and practices established by Section 397 of FSMA [misleading statements], is unlikely to apply" (para 2.37). However, it is relevant to know that in July 2012, the SFO announced its investigation into LIBOR fixing, with the possibility that it may launch prosecutions based on fraud.

Wheatley's suggested proposals are:

  • To make LIBOR related activities into regulated activities. This would have a knock on consequence for the Approved Persons regime and would mean that those involved/responsible for submissions would need to be fit and proper to undertake that activity. One variant of this would be to keep LIBOR related activities as unregulated activities but to extend the market abuse regime to cover them.
  • To strengthen criminal sanctions. This might be brought about by an amendment to s.397 FSMA, removing the requirement that the misleading statement be made in order to induce somebody to act. As Wheatley points out, an amended s.397 would also apply to other situations and careful consideration would have to be given to the need for such a new and broad offence and to the FSA's role in policing such an offence.

The DP reflects a frustration at the FSA's limited scope for action in respect of LIBOR. It is also a call to arms in the wake of the criticisms currently being levelled in respect of LIBOR related activity. Whilst the changes to the law following the LIBOR affair will be followed with interest, what may be more interesting from an enforcement point of view will be what action will be taken as a result of the myriad of current investigations. Whilst readers will no doubt be familiar with the Barclays fine (see elsewhere in this edition "Barclays receives biggest ever fine imposed by the FSA"), they will no doubt watch with interest further news: which other firms will be punished and what the punishment will be; how many individuals will be punished, on what basis and with what outcome; which regulators will be taking the action, which public authorities and in which jurisdictions; and whether criminal sanctions will be sought.

Further UCIS enforcement all but inevitable

In the previous issue of Enforcement Watch, we commented that criticisms in relation to UCIS remained firmly on the FSA's agenda "FSA identifies its major retail risk categories". There have been two signals of intent from the FSA since then that are harbingers of UCIS enforcement action in the coming months and years.

The first is the sending by the FSA in June 2012 of over 250 supervisory letters to firms actively involved in the UCIS market. Recipients were split between (i) distributor firms and (ii) firms that establish, operate and manage UCIS. The distributor firms were required to provide information going back to 1 January 2008, whilst the other firms were required to provide information on current activities. Included within the responses are detailed attestations of compliance required from CF10s (those responsible for compliance). Information was to be provided within fairly tight timeframes.

The second is a consultation paper in August 2012 on distribution of UCIS (and also what the FSA referred to as close substitutes). The main recommendation is that the promotion of UCIS and close substitutes to retail investors in the UK be banned save in some fairly restricted circumstances. The recommendations do not extend to sales of UCIS that are on an execution-only basis.

Whilst the precise nature of the proposed reforms suggested in the consultation paper is beyond the scope of this article, it is worth reflecting on what the FSA sees as the background to the proposed changes. The background to the paper is the FSA's conclusion that the majority of retail promotions and sales of UCIS that it has reviewed fail to meet its requirements. It also says that its supervisory and enforcement findings suggest that the promotion restrictions are "widely misinterpreted, poorly understood and sometimes simply ignored". Providers have not escaped the FSA's ire, with the FSA commenting that providers have not done enough to prevent inappropriate distribution of their products. It is against this background that the FSA is proposing to ban the marketing of UCIS to ordinary retail investors.

The FSA is plainly not finished with enforcement activity on UCIS. In particular, it is not difficult to see how some of the supervisory letters could easily lead to enforcement action. Firms may for example self report problems of compliance. Or, firms may report a clean bill of health, only for that clean bill to be subsequently questioned by the FSA as has been seen in the past. Some may even run into difficult tensions between CF10s and others in the business that end up being translated into enforcement problems. Quite how the action may result is not clear. However, given the background to the matter and the steps being taken by the FSA, we believe enforcement action is all but certain to result.

Tracey McDermott becomes permanent head of enforcement

Tracey McDermott has been confirmed as permanent head of enforcement and financial crime, having been the acting head since Margaret Cole stood down last year.

Margaret Cole instigated what was widely recognised as a revolution in the FSA's approach to enforcement by aggressively pursuing both civil and criminal cases against individuals and spear-heading the move towards "credible deterrence". The FSA regards this approach as having been very successful. Moreover, the new FCA is set to continue the approach (see Enforcement Watch 5 "FCA's approach to regulation points to increasing enforcement"). Whilst McDermott's appointment is of some note, in light of the above, and the fact that McDermott has been acting head for some time now, we do not expect her permanent appointment to result in any short term change in approach to enforcement.

Wealth Managers very much on the FSA radar

In Enforcement Watch 5, we commented on likely FSA action following its review of suitability at 16 wealth manager firms and its resultant Dear CEO letter (See Enforcement Watch 5 "Dear CEO letter to wealth managers suggests action to come"). In short, the FSA had found serious failings at the 16 wealth managers it reviewed, and sent a letter to the CEOs of all firms that offered wealth management services to retail clients. Our view was that it was a racing certainty that enforcement action would follow.

On 29 August 2012, the FSA announced further developments in the area:

  • The interactions with the 16 firm sample have led to enforcement referrals, skilled person's reports (s166s) and significant remediation programmes;
  • The FSA will be considering whether it needs to take further regulatory action following interviews with key individuals from firms concerning the approach their firms have taken to remediate problems identified;
  • Most newsworthy of all, the FSA has now commenced a new phase of thematic work, looking both at client outcomes and at systems and controls. With a barely concealed threat, the FSA says "we will be acutely interested in whether firms have heeded the warnings and concerns contained within our previous communications." It says it will provide further updates on this work in 2013.

We have commented in the past on how thematic work tends to lead to enforcement action. In circumstances where the FSA has been very critical of wealth managers in the recent past, the prospects of enforcement action being taken to reinforce the FSA's message are even greater.

The FSA consults on incentives and mis-selling

The FSA has signalled a strong intent to deal with incentive schemes that increase the risk of mis-selling.

The FSA has published a consultation paper on proposed new guidance designed to reduce the risk of mis-selling caused by incentive schemes. The consultation follows on from the FSA's thematic review of 22 firms' sales practices across different sectors. That thematic review found that 20 of the 22 firms had features in their incentive schemes that increased the risk of mis-selling. Of these 20, 11 were not properly addressing the increased risk of mis-selling, and a further 5 had some shortcomings in their approach to addressing the increased risk. All 16 had since either acted to address the failings or agreed to do so. One firm had been referred to Enforcement.

The proposed guidance relates to firms' compliance with Principle 3 of the FSA's Principles for Businesses ("a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems") and with the SYSC rules. It includes examples of incentive scheme features that significantly increase the risk of mis-selling, together with examples of features that might reduce the risk of mis- selling. The proposed guidance can be found here.

This is a topic that the FSA appears very serious about dealing with. In a speech announcing the consultation, Martin Wheatley (CEO designate of the FCA) talked in stark and combative terms. He said that many, if not all, of the recent mis-selling scandals had dysfunctional incentive schemes at the root of the problem. He added "I want to draw a line in the sand here", and he described the consultation as the start of a programme to reduce the risks identified, which the FCA would take forward. He said it would involve "further supervisory work, a wide review of incentive schemes, enforcement proceedings, and a possible strengthening of [the] rules." He said that the regulator intended to change the culture of viewing consumers simply as sales targets, and added that "I am going to be personally involved in getting this right."

It appears as if Martin Wheatley is keen to make his mark as the new regulator in the new regulatory world. It is quite possible that incentive schemes will form the backdrop to, or possibly even the subject matter of, future enforcement action. In this regard, it is interesting to note that the recent Final Notice against HBOS' Peter Cummings included findings that he had allowed incentives to foster a culture that prioritised revenue over risk. See elsewhere in this edition "£500,000 fine and partial prohibition for HBOS executive".

Spotlight on the US

SEC makes its first award to a whistleblower under the Dodd-Frank Act

The U.S. Securities and Exchange Commission (SEC) announced its first award to a whistleblower under the year-old program created by the 2010 Dodd- Frank Act. According to a 21 August 2012 SEC press release, the whistleblower, who asked to remain anonymous, provided documents and information about a fraudulent scheme that enabled the SEC’s investigation to move quicker than it otherwise would have. The SEC also attributed its ability to obtain a $1m sanction to the help of the whistleblower.

For the assistance, the SEC awarded the whistleblower 30% of the amount collected by the SEC in the enforcement action, the maximum allowed under the Dodd-Frank Act. Although this award was only $50,000, the SEC noted that if and when it is able to collect more money, the whistleblower will also receive more.

Notably, the SEC also announced that it denied a claim from a second individual who sought a whistleblower award in this same matter. The SEC concluded that because the individual’s information did not lead to or significantly assist the SEC’s investigation, no award was warranted.

To read the SEC’s press release, click here.


In Enforcement Watch 6, we wrote about the creation of the whistleblower program under the Dodd-Frank Act (See Enforcement Watch 6 "Dodd-Frank Whistleblower Provision"). We highlighted the substantial number of tips the SEC had received in just the first seven weeks of the program. Now, the SEC has made its first actual award under the program, and it is significant for several reasons. Coming only a year into the life of the program, it shows the SEC has had no difficulty implementing the new procedures or exercising its new authority to reward whistleblowers. Indeed, this first award was for the maximum amount allowed by law. With its decision, the SEC appears to be signaling its encouragement to would-be whistleblowers, and has publicized that it receives approximately eight tips each day from potential whistleblowers.

New York regulator settles with record fine against British Bank

On 14 August, the ten-month-old New York Department of Financial Services (Department) settled charges of money-laundering with Britain’s Standard Chartered Bank (Standard Chartered) for a record $340m. The settlement represents the largest single fine for money laundering ever collected by a single U.S. regulator, and comes on the heels of the filing of an August 6 Complaint accusing Standard Chartered of knowingly and willfully engaging in a massive scheme to hide 60,000 transactions involving Iran and approximately $250bn in assets. Standard Chartered is the wholly-owned subsidiary of Standard Chartered plc, the London-based international banking institution with over 1,700 offices in 70 markets around the world. As of the end of March 2012, Standard Chartered’s New York branch alone held over $40bn in assets.

According to the Department’s charges, from 2001 to 2010 Standard Chartered worked with the government of Iran to hide from regulators some 60,000 transactions. The Iranian institutions involved in the scheme allegedly included the Central Bank of Iran/Markazi, Bank Saderat, and Bank Melli. The scheme was allegedly known to the bank’s most senior management, who allegedly knew the risks involved and willingly broke the law. To accomplish the improper transfers, Standard Chartered purportedly stripped origin-identifying information from wire transfers, withheld material information from state and federal regulators, and failed to maintain accurate books and records. The Department also alleged that Deloitte & Touche, LLP, the bank’s consultant, aided Standard Chartered’s scheme by omitting information from its independent report to regulators. As a result of the scheme Standard Chartered allegedly netted hundreds of millions of dollars in fees. The Department also reported that it has uncovered evidence of similar schemes by Standard Chartered to conduct business with other sanctioned countries, including Libya, Myanmar, and Sudan.

In addition to the $340m civil penalty, Standard Chartered also agreed to install a monitor who will report to the Department for at least two years, as well as to permanently install personnel in its New York branch to oversee offshore money-laundering due diligence and monitoring. Notably, the settlement came in light of the Department’s threat to revoke Standard Charter’s New York state business license within a week of the filing of the initial charges.


The Department was created in 2011 through the merging of the New York Banking Department and the New York Insurance Department. New York State Governor Andrew Cuomo proposed the legislation to create the Department with the purpose of enabling a single agency to oversee a broader array of financial institutions and services, thereby enabling the State to better maintain its oversight of the rapidly evolving financial services industry. The Department’s settlement with Standard Chartered is significant for two reasons. First, as noted above, the size of the settlement constitutes the largest single fine for money-laundering ever collected by a single U.S. regulator. Second, the settlement demonstrates that, despite being less than a year-old, the Department has both the ability and willingness to aggressively pursue alleged violators to a swift conclusion.

Public Censure for Kaupthing Singer and Friedlander
18 June 2012:

Kaupthing Singer and Friedlander Ltd (in administration) (KSFL) is the UK based subsidiary of the Icelandic banking group Kaupthing Bank Hf (KBHf). KSFL was put into administration in October 2008. The FSA has issued a public censure against KSFL for failing properly to consider whether liquidity stresses in KBHf would have had a detrimental effect on its own liquidity position.

Between September and October 2008, KSFL breached Principle 2 (due skill, care and diligence). KSFL did not give proper consideration to, nor properly monitor, a special financing arrangement it had with its parent company in Iceland, under which it could theoretically draw up to £1bn at short notice. KSFL assumed it could rely on receiving this £1bn if needed – but, crucially, KSFL did not test that assumption. By 29 September 2008, KSFL should have realised there was a risk the £1bn might not be available.

When it started to have concerns about this liquidity arrangement, KSFL also failed to discuss its concerns with the FSA in a timely manner – although KSFL did inform the FSA on 30 September 2008 that it was implementing its liquidity contingency procedures.

Whilst the FSA said that the ultimate insolvency of KSFL could not be attributed to this failure to monitor the arrangement properly and promptly, it nevertheless regarded KSFL's failings as particularly serious. This was because they occurred at a critical period for the financial markets (a time when the FSA was concerned to ensure it was fully informed about all banks' liquidity) and because KSFL held significant deposits from UK retail consumers.

The Final Notice for Kaupthing Singer and Friedlander Ltd (in administration)


It is difficult to know quite what to read into the FSA's decision. It comes some years after the event and is framed relatively narrowly. What is more, KSFL also agreed to settle this matter and we do not know what might have been the findings had the matter been contested at the RDC. Further, it is not clear quite how seriously the FSA takes the matter. It said that, were KSFL not in administration, the failures would have led it to impose a significant financial penalty, but we of course do not know what the level of such a penalty might ordinarily have been.

To compound this, various individuals have given undertakings to the FSA, but they have made no admissions and no findings of regulatory breach have been found against them.1



1 The former non-executive Chairman of KSFL (Sigurdur Einarsson), together with Hreidar Mar Sigurdsson (the former non-executive Director) and Armann Thorvaldsson (former CEO) have provided undertakings to the FSA that they will not perform any significant influence functions requiring the approval of the FSA at any UK authorised firms for a period of five years from 8 October 2008.

Barclays receives largest ever fine imposed by the FSA
27 June 2012:

The FSA has handed out a £59.5m fine to Barclays Bank Plc for misconduct relating to submissions that formed part of the benchmark LIBOR and EURIBOR interest rate setting process.

LIBOR and EURIBOR are very important benchmark reference rates. The rates are set by reference to the submissions made by selected banks to the British Bankers' Association and to the European Banking Federation. Those selected banks' submissions are based on their subjective assessment of the rates at which money may be available in the interbank market. The case against Barclays involves a number of breaches relating to this process, taking in a number of employees over a number of years. Essentially, these are:

  • Making submissions that took into account requests from traders who were looking to gain from the submissions made at a certain rate;
  • Trying to influence rate setting submissions made by banks other than Barclays;
  • Reducing its LIBOR submissions during the financial crisis as a result of senior management concerns about negative media comment;
  • Failing to have adequate systems and controls relating to the submissions until June 2010;
  • Failing in 2007 and 2008 to deal with issues when escalated to compliance.

The FSA found that Barclays had breached Principle 2 (skill, care and diligence), Principle 3 (management and control) and Principle 5 (proper standards of market conduct). Barclays settled at an early stage. As a result, the bank qualified for a 30% penalty discount. Nonetheless, the £59.5m fine is the largest ever imposed by the FSA.

The Final Notice for Barclays Bank Plc


There has been huge focus on the LIBOR affair in recent months. There have been disclosures, leaks, Treasury Select Committee coverage and press speculation to name but a few channels, quite apart from this Final Notice. Against that background, we add just a few limited comments here. On the Barclays' Final Notice itself, in relation to sanction, it is interesting to note that the FSA states that Barclays provided "extremely good co- operation", words not usually seen. It goes on to describe the type of co-operation as including providing access to evidence and facilitating voluntary witness interviews. It is not clear the extent to which such co-operation in reality impacted the level of fine.

The Barclays' fine appears to be the first of many to come. Others have been rumoured, with RBS being the most recent. It remains to be seen whether subsequent actions will attract as much attention as the Barclays action.

One aspect of future action will be how individuals will be treated. No actions against individuals have yet come out (see our discussion on this point elsewhere in this edition "What is to come in relation to LIBOR").

Another aspect to look out for in the future is the relationship between action in the UK and action abroad. In the Barclays' case, the FSA worked with the following US agencies: the Commodity Futures Trading Commission (CFTC), the Department of Justice (DOJ), the Federal Bureau of Investigation and the Securities and Exchange Commission. The CFTC also brought attempted manipulation and false reporting charges against Barclays for similar failings - which the bank similarly agreed to settle. The CFTC imposed a penalty of US$200m. Furthermore, as part of an agreement with the DOJ, Barclays admitted to its misconduct and agreed to pay a penalty of US$160m. There has recently been press speculation about the fracturing of relationships on LIBOR between the UK and the US authorities, including news that the SFO is looking at the LIBOR issue. It may be that any future actions cannot be so neatly rolled up together.

Turkish Bank (UK) Ltd fined nearly £300,000 for correspondent banking money laundering failings
26 July 2012:

The FSA has imposed a £294,000 fine on Turkish Bank (UK) Ltd (TBUK) for money laundering failings relating to its correspondent banking arrangements.

Correspondent banking involves non face to face business. Essentially, the correspondent bank (in this case, TBUK) will provide services to an overseas bank (the respondent) so that the respondent can provide its own customers with cross-border products and services, such as payment and clearing related services, which the respondent would ordinarily be unable to offer.

Between December 2007 and July 2010, TBUK acted as a correspondent bank for nine respondent banks in Turkey and six respondent banks in Northern Cyprus.

Providing correspondent banking services to banks based in non-EEA states is recognised as creating a high risk of money laundering that requires enhanced due diligence and ongoing monitoring of the relationship. During this period, Turkey and Northern Cyprus did not have anti-money laundering (AML) requirements that were equivalent to those in the UK. Nonetheless, TBUK incorrectly relied on its respondents' AML controls over their underlying customers to prevent those customers accessing the UK financial system for money laundering purposes.

The FSA found a raft of breaches of the Money Laundering Regulations 2007. These essentially flowed from the following two basic failings:

  • failing to establish and maintain appropriate and risk-sensitive policies and procedures for assessing and managing the level of money laundering risks posed by its respondents
  • failing to establish and maintain appropriate and risk-sensitive procedures for carrying out the required level of due diligence on and ongoing monitoring of its existing respondents

Whilst the failings were neither deliberate nor reckless, they were aggravated by the fact that, back in June 2007, the FSA had warned TBUK of deficiencies in its approach to correspondent banking AML controls. TBUK reached a settlement with the FSA at an early stage. Without the 30% early settlement discount, the fine would have been £420,000.

The Final Notice for Turkish Bank (UK) Ltd


There are a number of aspects of this case that are of interest.

First, whilst the FSA has previously taken enforcement action in relation to money laundering failings, this is the first FSA enforcement action against a firm for money laundering weaknesses in its correspondent banking arrangements.

Second, it is as well to appreciate the relationship of this action to the FSA's money laundering thematic review. In June 2011, the FSA published the results of its AML thematic work (see Enforcement Watch 5 "AML enforcement cases on the agenda"). One of the three main objectives of the work had been to assess whether banks had robust and proportionate systems and controls in place to detect and prevent the misuse of correspondent banking facilities.

  • The FSA visited TBUK in July 2010 as part of this thematic review. The TBUK case is one more in a long line of examples of enforcement action that come out of thematic reviews. (See also in this connection, the Coutts money laundering case that came out of the thematic review - Enforcement Watch 7 "Coutts and Habib substantial fines for anti-money laundering failings"). In our view, this trend is set to continue with the new FCA's proposed early interventionist approach.
  • Firms should consider carefully the results of the review. In relation to correspondent banking, firms are referred in particular to section 4 where the FSA's findings are set out and where it gives examples of good practice and of poor practice.

Third, there is little transparency on the level of penalty as the conduct complained of occurred prior to the introduction of the FSA's new penalty regime on 6 March 2010. See Enforcement Watch 1 "Harsher Penalty Setting Introduced". Readers should, however, note the conduct of TBUK following the breaches that was taken into account: open and co- operative; took steps to establish detailed procedures as part of an FSA remedial programme; fully accepted its failings; took disciplinary action against the senior managers responsible.

£9.5m BlackRock fine for client money breaches
11 September 2012:

The FSA has fined BlackRock Investment Management (UK) Ltd (BIM) £9,533,100 for failing to protect client money adequately. This is a result of BIM failing to put in place bank trust letters for certain money market deposits between October 2006 and March 2010.

Where a firm deposits money at a bank, it must notify the bank if the money is held on trust for its client. The firm must also arrange for formal trust letters from the bank to be put in place. The purpose of this is to ensure that, in the event of the firm's insolvency, the client money is ring-fenced from the firm's own assets.

BIM's failure to obtain trust letters occurred as a result of systems changes that followed on from the BlackRock group's prior acquisition of BIM (formerly called Merrill Lynch Investment Managers Ltd (MLIM)). The process of migrating MLIM clients' investment portfolios to BlackRock's operating system resulted in certain client money being placed on deposit with banks where trust letters were not in place. These changes rendered BIM's procedures for setting up trust letters ineffective. In addition, the departure of certain members of experienced and trained staff with institutional knowledge contributed to the firm's delay in identifying and addressing these issues. BIM was found to be in breach of:

  • Principle 3 (management and control) and Principle 10 (Clients' assets);
  • the relevant CASS rules: 7.8.1R (and its predecessor) re trust letters; 7.3.2R re organisational requirements.

On 1 April 2010, the BlackRock group self-reported to the FSA that certain trust letters had not been in place. The estimated average daily balance affected by BIM's failures was over £1.36bn.

BIM qualified for a 30% penalty discount for early settlement. Had it not been for this discount, the fine would have been £13,618,800, which equates to 1% of the estimated average amount of unprotected client money.

The Final Notice for BlackRock Investment Management (UK) Limited


Client money protection is an issue that particularly came to the fore post credit crunch, with the potential risk there was to clients' money if firms were to become insolvent. Readers are referred to Enforcement Watch 2: "The FSA gets tough on the client money rules"; Enforcement Watch 3: "Client Asset enforcement in the pipeline" and Enforcement Watch 6: "Dear CEO letters and client money breaches lead to substantial fines".

It is interesting to note how the FSA has once again set the level of penalty for client money breaches. The relevant penalty regime is the one in place for breaches prior to 6 March 2010 (see Enforcement Watch 1 "Harsher Penalty Setting Introduced"). Although not a formal tariff, there has come to be an expectation that fines will be based around 1% of the average amount of unprotected client money. This is despite the fact that BIM self-reported the issue.

Also of some note is the fact that the BIM failings came about as a result of client money issues being over-looked as part of a re-organisation. The FSA is keen to point out that this is not the first time that this has happened. Readers will take note of the fact that the Final Notice talks of the need "to send another clear message to the industry".

£500,000 fine and partial prohibition for HBOS executive
12 September 2012:

Peter Cummings was the chief executive (CF1) of HBOS' Corporate Division, one of six Divisions within the Bank that operated in a federal structure under Group-level management. From the time of his appointment in 2001, Cummings' role as chief executive included responsibility both for risk management in the Division and for sanctioning complex or high value credit transactions.

The Corporate Division's book was the most high risk part of HBOS' business and had a higher risk profile than equivalent books in other UK banks. The FSA determined that Cummings was aware (or should have been) that there were serious deficiencies in the systems and controls within the Division. Given the unusually high level of risk in the portfolio (compounded by the lending strategies pursued by Cummings), the FSA found that Cummings should have ensured that the Division had a more effective framework for monitoring and managing risk.

The FSA also determined that the aggressive lending strategy that the Division pursued under Cummings' direction (including when the risk of an economic downturn became clear and during the financial crisis itself), required a more effective framework for risk distribution and management. The situation was compounded by the aggressive growth targets for the Division Cummings adopted and by his incentive package (which included a cash incentive equivalent to 100% of his salary if targets were met).

Along with the substantial fine, Cummings was banned from holding a significant influence function in certain institutions including Banks or Building Societies. That ban was imposed on the basis of "competence and capability". The FSA did not consider that Cummings deliberately or recklessly breached FSA rules.

The Final Notice for Peter Cummings


Apart from its interest as part of the HBOS story, this Final Notice is relevant to the law concerning the liability of senior managers for failings on their watch.

In addition to complaining that he had been made a scapegoat by the FSA for the failure of HBOS (as the only individual to have had action taken against him), Cummings mounted a robust legal Defence. Three areas are worth considering:

  • Cummings argued that the FSA had to prove that he had personally been at fault, rather than simply responsible for the Division that failed. However, it is clear from Handbook guidance (DEPP, APER and the Enforcement Guide) that the FSA will be looking at an individual's "personal culpability" before taking action for a breach of the Principles and before imposing a fine under s.66 of FSMA. Accordingly, the RDC had no issue with this limb of Cummings' defence and readily agreed that he could not be vicariously liable.
  • He also argued that the FSA had to show that his conduct was unreasonable, and he described the test of reasonableness as whether his decisions were "beyond the range of plausible judgment"/irrational. Whilst the rules are clear that "personal culpability" includes consideration of whether the person's standard of conduct fell below what was reasonable in all the circumstances, the test urged by Cummings was rejected by the RDC. The RDC favoured a test that asked whether the person's conduct showed due skill, care and diligence.
  • In order to be successful, Cummings said that the FSA had to have very clear evidence to support its accusations. Whilst the RDC did not expressly contradict Cummings on this point, it was clearly not happy with his formulation. Instead, the RDC reminded itself that pursuant to s.66 FSMA it could impose a penalty where it appeared to it that there was misconduct and a penalty was appropriate. (In the event, the FSA determined that there was in fact clear and compelling evidence that Cummings' conduct was a breach of Principle 6 of the Code of Principles for Approved Persons and also that he was knowingly concerned in a breach by the Bank of Principle 3 of the FSA's Principles for Businesses.)

The RDC is not a Court of law, its decisions have no formal precedent value and its Final Notices lack the rigour of Court judgments. Nonetheless, the decision, whilst largely uncontroversial is a useful reminder of what the FSA must do to make out its case against senior managers personally.

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