Enforcement Watch Issue 9 | January 2013

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

Editor's Note

When we started this publication, I wrote that I had heard regulators talking tough over the past 20 years, but that now we were seeing them act on their rhetoric. Some two and a half years on, the new Act passed and new regulators in prospect, it just keeps coming. What with record fines, LIBOR continuing to dominate, the SFO now chipping in, and FSA speeches telling us that we are going to get more of the same, the enforcement outlook is hostile. And over in the US, readers will see that things are not much different, with the SEC alone bringing 734 actions in 2012. Whilst somewhat gloomy, I hope that readers will nevertheless find this edition of Enforcement Watch interesting and use it to help avoid the bear traps that await.

On the Horizon

Regulators' proposal to extend Statements of Principle

At present, the FSA's Statements of Principle in APER apply only to the extent that a person is performing a controlled function for which approval has been sought and granted (see APER 1.1.2G). The new Financial Services Act 2012 ("the Act") permits each of the FCA and the PRA to issue Statements of Principle that apply not only to a person's controlled function, but also to activities outside such function.

Unsurprisingly, both the FCA and the PRA intend to issue Statements of Principle that extend to any activities beyond the scope of an individual's approvals. In broad terms, the proposal is to extend them for approved persons to any function in relation to regulated activities by the firm that that person carries out, whether or not the person is in so doing carrying out a controlled function. In its consultation paper, the FSA states that this could be seen as a significant change. However, it says that it does not in reality regard it as such because it would expect individuals always to apply the same standard of behaviour in their wider roles. That may well be what the regulators assert. However, in practice, what it clearly does is to widen the range of behaviours for which approved persons may be accountable, and increases the regulators' ability to punish them. Although not quite the same, the issue has some similarities with the debate about the regulators' argued limited ability to pursue individuals in relation to LIBOR shortcomings (see Enforcement Watch 8 "What is to come in relation to LIBOR").

FSA consults on procedure for publishing information about Warning Notices

In December 2012, the FSA consulted on how various parts of the new FCA handbook would implement certain aspects of the new regime. In terms of interest for enforcement matters, we focus below on the proposed changes to the current DEPP4 manual in relation to the publication of Warning Notices.

We have previously commented on the controversial power under the new Financial Services Act 2012 ("the Act") for the FCA to publish such information about a Warning Notice as it considers appropriate. We regard this power as carrying great risks for subjects of enforcement action (see for example Enforcement Watch 6 "FSA makes its views known on early publication of Warning Notices") The power has passed into the Act, and the present consultation on the topic relates to the procedure to be followed by the FCA when exercising its new power. The key features of the proposal for exercising the new power are:

  • FCA staff will propose that details about a Warning Notice be published, but that the chairman of the RDC issuing the Warning Notice (or an alternate) will ultimately decide for the FCA whether to publish the information;
  • the RDC will settle the relevant wording of the publication;
  • the subject of the Warning Notice will usually be given 7 days to respond to the proposed publication, but may request an extension within 2 days of receipt of the proposed publication; and
  • the subject will not usually be allowed to address the RDC in person in relation to the proposed publication.

Given that the new power has been enshrined in the Act, we welcome the fact that it will be the Chairman of the RDC who decides whether information should be published and what the wording should be, rather than FSA enforcement staff. Having said that, there are aspects of the proposal that we regard as less welcome. For example, faced with what is already a draconian power, it would be fairer if subjects were permitted to address the RDC in person. (It may be, however, that respondents can effectively cater for this by the content of their previous in person representations to the RDC on whether there should be a Warning Notice in the first place.) Another potential unfairness is that the RDC may came up with an alternative formulation of proposed wording, but which the subject does not have the right to comment on.

The above relates to procedure. Separately, the FSA will publish a further consultation shortly on how the FCA proposes to use its power. It will be interesting to see whether it elects to adopt a similar test to that currently set out in the Enforcement Guide (chapter 6) in relation to publication of Decision Notices prior to any decision on appeal to the Tribunal; namely whether or not there is a compelling reason to publish.



4 Decision Procedures and Penalties Manual

The forthcoming FCA's role in tackling financial crime

One of the ways that the FSA disseminates information is by giving speeches, and publishing transcripts of those. Such was the case in a speech given by Tracey McDermott at the end of September 2012 on the role of the FSA, and subsequently the FCA, in tackling financial crime. The speech was fairly wide ranging, covering a number of historic topics. However, it also laid out rather newer topics that may be of interest to readers.

One such is a new thematic review by the FSA on trade finance. The review is looking at how banks that finance international trade control the financial crime risks in such businesses. For example, one way in which international trade can be abused is by under or over invoicing, which allows criminals to transfer value between countries. The FSA's project involves visiting a range of banks to understand their current practices, focusing in particular on risks of letters of credit and bank collections. We have seen in the past how thematic reviews often lead to enforcement action, and we shall have to see what emerges in coming months (the report is expected this summer).

For all the fanfare about the success of its credible deterrence approach, the FSA recognises that the industry is suffering a crisis of public confidence. Aside from the again threatened robust enforcement action, Tracey McDermott also talked about prevention. She highlighted two aspects. The first is a strong management commitment to better culture and better values. The second is incentive structures, on which the FSA has been consulting. This was expressed to be an area of ongoing interest to the FCA. We can expect that the FSA and the FCA will look to back up their key messages with tough action, should shortcomings be found in either of these two areas.

Some clues on future market abuse enforcement action

At the start of December, Jamie Symington (Head of Wholesale Enforcement at the FSA) gave a speech about challenging the culture of market behaviour. The speech covered a lot of different ground, looking at actions to date and the notion of credible deterrence, as well as at educational and thematic work.

For those looking to read the runes of future enforcement in the area of market abuse, a number of interesting comments were made:

  • The number of STRs (suspicious transaction reports) continues to rise. There were 364 STRs in 2009 and he considered there would be over 900 in 2012. Whilst Jamie Symington stated that the increased number of STRs does not mean that there was more market abuse, in our view, the rise in reporting is likely to lead at least to a rise in FSA enforcement;
  • The FSA considers that, with improved efficiencies, know-how and expertise, the number of "public outcomes" in the criminal and civil domains will continue to rise. In other words, they consider there will be increased successful enforcement action;
  • Whilst we all know that the level of market abuse enforcement activity has been driven up since 2008, and that it has remained at sustained levels, Jamie Symington said that it was set to remain at such levels in the future;
  • Substantial work has been done on high frequency trading, including visits to firms to test their systems and controls. This it seems has highlighted relatively poor systems and controls, and we shall have to see whether enforcement action comes out of such findings.
The FCA's proposed use of temporary product intervention rules

One of the new tools given to the FCA by the new Financial Services Act 2012 is the power to bring into force short term rules (which can last a maximum of 12 months) to quickly tackle specific sources of consumer detriment. The FCA will not have to consult before making these rules. It is therefore intended that such rules will (amongst other things) help the FCA to achieve its stated objectives of early product intervention.

The current consultation paper contains the proposed policy for the use of the temporary product intervention rules. Under the new legislative provisions, if it is to bring into force such a short term rule, the FCA must first consider that it is necessary or expedient to dispense with the requirement for consultation in order to advance the FCA's strategic objectives. The consultation makes it clear that it is not intended that these powers will be used regularly, but rather only in urgent situations. The FCA proposes that the main consideration will be whether prompt action is needed in order to reduce or prevent consumer detriment. Other proposed considerations will include the proportionality of the rules and whether they are likely to be beneficial to consumers as a whole.

There have been expressions of concern in the industry about the extent to which the new FCA will become the consumers' champion to the detriment of the industry. The new power outlined above has the scope to be used in a draconian manner. It remains to be seen both how the industry responds to this consultation and eventually how the powers will actually be used. Depending on how they are used it will be interesting to see if any aggrieved individuals or firms feel bold enough to mount a judicial review of the FCA' decision to pass such a rule.

Spotlight on the US

U.S. Authorities continue to target foreign bribery, issue guidance for compliance

On 17 December 2012, the SEC charged Allianz SE with violating the Foreign Corrupt Practices Act (“FCPA”) by making improper payments to Indonesian government officials between 2001 and 2008. According to the SEC, Allianz SE, a German based insurance and asset management company, made over $5m in profits from 295 insurance contracts obtained or retained through improper payments made by Allianz’s Indonesian subsidiary. The company has agreed to pay more than $12.3m to settle the SEC’s charges. More information can be found here.

Whilst another case also settled by a large company in the last quarter of 2012 was not against financial services companies, it is worth mentioning as it demonstrates a trend in FCPA enforcement and is the context in which to view the Allianz case. This was in relation to Tyco International Ltd. (“Tyco”) and its indirect, wholly owned subsidiary Tyco Valves & Controls Middle East Inc. (“TVC”). On 24 September, it pled guilty to a criminal charge for conspiracy to violate the FCPA in a federal court in the Eastern District of Virginia. Tyco is a Swiss-based manufacturer and seller of products related to security, fire protection and energy; TVC markets and sells valves and industrial equipment oil, gas, petrochemical, commercial construction, and other industries throughout the Middle East. Tyco agreed to pay a $13.56m to resolve charges of falsifying books and records in connection with improper payments by its subsidiaries to government officials in foreign countries. Additionally, Tyco agreed to resolve allegations by the SEC and pay approximately $13m in disgorgement and fees. TVC admitted to paying bribes to officials at Saudi Aramco, a state-owned oil and gas company in Saudi Arabia, and will pay a fine of $2.1m. Interestingly, these significant penalties came notwithstanding a timely and voluntary disclosure by Tyco and the company’s implementation of an extensive remediation program. More information can be found here.

In addition to these settlements, the DoJ and SEC jointly published a guide for companies explaining the agencies’ approach to FCPA enforcement. The comprehensive guide details the meanings of key terms in the statute, the applicability of the statute to certain situations, and the guidelines the agencies use when deciding whether to bring an action for FCPA violations. The guide is publicly available here.


These cases continue to demonstrate the seriousness with which the SEC and DoJ are taking allegations of foreign bribery. Each of the three companies is paying far more in fines than they gained in profits, suggesting that the SEC and DoJ are attempting now also to use the statute as a deterrent. Moreover, two of the companies that faced FCPA charges are foreign-based, suggesting that the SEC and DoJ are not constrained from taking action against non-U.S. companies. We expect to see the SEC and DoJ continue to actively pursue FCPA violations against companies regardless of where they are principally based.

SEC issues report on first year of whistleblower program under the Dodd-Frank Act

In November, the U.S. Securities and Exchange Commission (“SEC”) issued its first fiscal-year report on the whistle-blower program created by the 2010 Dodd-Frank Act. The report details the operations of the program and the SEC’s Office of the Whistleblower, the office in charge of administering the program. According to the report, during fiscal-year 2012, the Office of the Whistleblower returned over 3,000 phone calls to members of the public that had been made to the whistleblower hotline. During the same time period 3,001 tips were received. Of the 3,001 tips, the largest number dealt with corporate disclosures, followed by offering fraud and manipulation. The tips were received from all 50 states (California, Florida, and New York representing the three largest), as well as 49 countries (the United Kingdom, Canada, and India representing the three largest). Although only a single award has thus far been paid out, the fund from which awards are made is amply funded. The report is publicly available here.


In Enforcement Watch 6, we wrote about the creation of the whistleblower program under the Dodd-Frank Act, (Dodd-Frank Whistleblower Provision), and in Enforcement Watch 8, we discussed the first award made under the whistleblower program (SEC Makes its First Award To a Whistleblower Under the Dodd-Frank Act). The report recently published by the SEC makes clear that the "Office of the Whistleblower" is now fully operational and actively functioning. The office’s reported commitment to return all phone calls within 24 hours is impressive and combined with the statistics provided by the report, shows a serious commitment to the success of the whistleblower program. We expect to see additional awards being paid out under the program in the year to come, not only to American whistle-blowers but likely to whistle-blowers located abroad as well.

DoJ collects $9bn in settlements; SEC obtains orders totalling $3.1bn

The U.S. Department of Justice (“DoJ”) completed a banner year in terms of settlements with companies, collecting some $9 bn through 35 agreements during 2012. Two of the settlements with financial services companies were for more than one bn dollars each: HSBC Bank USA, N.A. and HSBC Holdings, at $1.9 bn for money laundering, and UBS AG, at $1.5 bn for fraud. The settlements were all in the forms of non-prosecution agreements and deferred-prosecution agreements; we addressed the SEC’s use of such agreements in Enforcement Watch 6 (SEC to step up use of Deferred Prosecution Agreements). More information is available here.

The U.S. Securities and Exchange Commission (“SEC”) also had a successful year in enforcement actions, bringing 734 actions and obtaining orders for $3.1 bn in penalties and disgorgement. Fifty-eight of the enforcement actions were for insider trading, while 29 related to the recent financial crisis. More information is available here.


The DoJ’s and SEC’s banner success is directly proportional to their use of deferred- and non-prosecution agreements. We expect the use of such cooperative agreements to continue at both agencies, even though they undoubtedly will be used in connection with large putative civil and/or criminal penalties.

Banks continue to face legal and financial repercussions from the LIBOR scandal

Banks implicated in the LIBOR rate rigging scandal continue to face legal and financial repercussions in the United States. LIBOR - or the London Interbank Offered Rate - represents the rate at which they could borrow money from other banks. The rate is computed daily and is used as the base for trillions of dollars of transactions around the world.

The LIBOR scandal broke when it came to light that banks were manipulating the LIBOR rate, enabling them to make bns of dollars in profits and to appear more credit-worthy than perhaps they actually were. Since then, two banks (Barclays PLC and UBS AG) have agreed to settle with government authorities for $450 m and $1.5 bn, respectively; Royal Bank of Scotland Group is expected to settle with government authorities within the next few weeks for at least $500 m. The UK part of the Barclays and UBS settlements are covered in some detail elsewhere in Enforcement Watch ("27 June 2012: Barclays receives largest ever fine imposed by the FSA" and this issue "19 December 2012: UBS receives largest ever FSA fine").

Notwithstanding governmental investigations, banks are also facing legal action by states, cities, public entities, and individuals in relation to LIBOR rigging. At present, there are approximately 30 lawsuits involving LIBOR manipulation being coordinated by a federal judge in New York, along with a class-action lawsuit filed in New York federal court in October. Recently, another eight lawsuits were filed in California federal court on behalf of California municipalities and public entities against twenty banks, including Bank of America, Barclays Bank PLC, Citigroup, Deutsche Bank AG, HSBC, JP Morgan Chase & Co., and UBS AG. It is expected that these lawsuits will be transferred to New York federal court for at least the pre-trial stage. More information can be found here, here and here.


The size of the LIBOR scandal may well end up being the largest financial scandal in history. More than two dozen banks are facing legal action in more than three dozen lawsuits in the United States alone. Nearly two bn dollars have already been paid to settle charges in the US - and that is only from the first two banks to settle with U.S. government authorities. What the cases go to show is that the fallout from regulatory wrongdoing is not limited to actions by the regulators. Investors can and do take cases on the back of them, and we expect the fallout from this scandal to continue vigorously throughout 2013; it would not be surprising to see the total amount of money paid out through settlements and judgments at least to double or triple what has already been paid. The scandal still has a significant way yet to run.

Bank of Scotland £4.2m fine for failing to keep accurate mortgage records
19 October 2012:

Bank of Scotland plc has been fined £4.2m for systems failures that meant it held inaccurate mortgage records for 250,000 of its customers. It settled at an early stage and therefore qualified for a 30% discount on the headline figure of £6m.

The issue was first discovered when the bank was putting in place a programme it had agreed under the terms of a Voluntary Variation of Permission (VVOP). Under the VVOP, the bank had agreed to make goodwill payments to Halifax mortgage customers in recognition that they may have received insufficiently clear information about changes to the standard variable rate of their mortgages. However, in implementing the programme, Bank of Scotland discovered that it held incorrect records on its systems for up to approximately 250,000 Halifax mortgage customers. These errors were only identified after customer complaints were made regarding the operation of the programme.

The FSA found that Bank of Scotland failed to comply 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"):

  • It relied on incorrect records held on its systems for considerable periods of time between 2004 and 2011, which resulted in Halifax mortgage customers not receiving important information about changes to the terms and conditions of their mortgages.
  • It consequently failed to implement the VVOP programme correctly. For example, the 250,000 Halifax mortgage customers were not identified as falling within the programme, and approximately 160,000 of these customers were due goodwill payments totalling approximately £162m. These payments might not have been received by them had the complaints from some of the customers not led to the identification of errors in the information held on Bank of Scotland's mortgage systems.

There was no structure in place to identify errors as they occurred and no checking procedures thereafter. The failures resulted from mortgage information being held on two separate unaligned systems and problems with two further processes where manual updates were not always carried out. However, the bank has since undertaken a detailed investigation, corrected the information on its systems and ensured no customer initially omitted from the programme has ultimately suffered any loss.

The Final Notice for Bank of Scotland plc


It is perhaps not surprising that Bank of Scotland should have received a substantial fine for such failings. However, as has so frequently occurred in recent enforcement cases, the precise way in which the fine was reached has remained slightly opaque as the real issues occurred before the FSA's new more transparent penalty regime in March 2010 (see Enforcement watch 1 "Harsher Penalty Setting Introduced") The case is interesting as a further example of the problems that can arise on integrating new businesses. In this case, the FSA has pointed out that, in a complicated organisation where several legacy systems exist, it is essential that the organisation ensures its systems are correctly synchronised. (For another example of legacy issues causing enforcement difficulties, see Enforcement Watch 8 "11 September 2012: £9.5m Black Rock fine for client money breaches")

This is the second time during the calendar year 2012 that Bank of Scotland has been found by the FSA to have failed to comply with Principle 3. In June 2012, the FSA determined that Bank of Scotland had breached Principle 3 when the bank was found to have been guilty of very serious misconduct which contributed to the circumstances that led to the UK government having to inject taxpayer funding into HBOS (see Enforcement Watch 7 "9 March 2012 FSA censures Bank of Scotland for very serious misconduct")

Tribunal rules in favour of publication of Decision Notices
19 November 2012:

In October 2010, in our view somewhat controversially, the FSA obtained the right to publish Decision Notices (see Enforcement Watch 4: "FSA presses on with enforcement sanctions changes"), and this is what it routinely does.

In the Arch Cru matter referred to elsewhere in this edition (see "Raft of serious Arch Cru notices"), the investment manager and two individuals subject to Decision Notices applied to the Upper Tribunal to prevent publication pending the hearing of the matter by the Upper Tribunal. The Upper Tribunal's detailed decision makes interesting and useful reading for practitioners.

The Upper Tribunal Decision

The case was decided by Judge Tim Herrington, who was up until recently the chair of the RDC. Those aspects particularly worthy of note are:

  • The FSA has a discretion whether to publish (see s391 of the Financial Services and Markets Act). The question as to whether the discretion has been properly exercised is not a matter that falls within the jurisdiction of the Upper Tribunal.
  • The Upper Tribunal must instead make its own decision in the context of Rule 14 of the Tribunal rules2:
    • This is subject to the overriding objective of Rule 2 that requires it to deal with cases fairly and justly. Accordingly, this was said to import the requirement that it exercises its power judicially, that is, "taking into account all relevant factors ignoring irrelevant factors and exercising the power in a manner which seeks to give effect to the overriding objective."
    • Para 3(3) of Schedule 3 to the Rules is also relevant. This relates to the power of the Upper Tribunal not to include particulars of a reference on the Register if it is satisfied that it is necessary to do so "having regard in particular to any unfairness to the Applicant."
  • The Upper Tribunal usefully ran through the relevant case law on Rule 14 and Schedule 3 Paragraph 3(3) powers.
  • It concluded that the "open justice principle"3 is to be applied when considering whether to prevent publication of Decision Notices. Therefore, in carrying out the balancing exercise relating to different factors referred to above "it starts with the scales heavily weighted in favour of publication with the burden on the Applicants to produce cogent evidence of how unfairness may arise and how they could suffer a disproportionate level of damage if publication were not prohibited."
  • In running through the relevant factors, the Upper Tribunal found that publication should not in this case be prevented.
  • Tim Herrington was also concerned to ensure that, in publishing the Decision Notices, the FSA made it clear that such decisions were provisional. He set out not only a suggested formulation, but also the prominent position it should appear in in the FSA's press release.

The case has an interesting discussion of, and ultimate rejection of, each of the factors argued by the applicants in support of their application. It demonstrates yet again the high hurdle that an applicant needs to surmount in order to prevent publication. For example, the Upper Tribunal did not accept in this case that the high level of public interest in the matter in and of itself took the matter out of the ordinary run of the mill case where publication can have a detrimental effect on reputation. Nor did it accept that because serious allegations as to integrity were made that this shifted the balance of the case. All this of course is in the context of Decision Notices, which may not even ultimately be upheld by the Upper Tribunal.

(For a discussion on a previous attempt to prevent publication, see Enforcement Watch 5 "26 August 2011: Court allows publication of Decision Notice concerning £8m market abuse fine".)



1 Since then of course (even more controversially) it was proposed that, under the new regime, Warning Notices should also be published. This proposal has also since been enacted (See below in this edition of Enforcement Watch: "FSA consults on procedure for publishing information about Warning Notices").
2 Rule 14(1) states that it "may make an Order prohibiting the disclosure or publication of… specified documents or information relating to the proceedings…"
3 This is a fluid constitutional principle in common law. It is for the Courts to determine its requirements.

UBS fined nearly £30m for Adoboli related failings
25 November 2012:

The FSA has fined UBS AG £29.7m (after applying a 30% early settlement discount) for systems and control failures that allowed one of its traders, Kweku Adoboli, to cause and disguise unauthorised trading losses totalling US$2.3bn.

Adoboli, who was a relatively junior trader, disguised the losses by making use of late bookings of real trades, booking fictitious trades to internal accounts and using fictitious deferred settlement trades. He has separately been sentenced to seven years’ imprisonment following his trial at Southwark Crown Court. In the FSA’s Final Notice relating to UBS, the firm is criticised for not focussing sufficiently on the key risks associated with unauthorised trading. Significant control breakdowns allowed Adoboli’s rogue trading to remain undetected for an extended period of time – between June and September 2011.

UBS breached both Principle 2 (due skill, care and diligence) and Principle 3 (risk management systems and controls). For example, its computerised risk management system was ineffective, and there was insufficient challenge and supervision of the front desk of its Global Synthetic Equities business based in London. UBS staff focussed on facilitation and efficiency, rather than on controlling risk. Risk was not actively discouraged. Indeed, middle office staff aspired to roles in the front office, which may have generated behaviours aligned to the front office’s interests rather than practices required to exercise effective control.

In a nutshell, UBS’s systems and controls were seriously defective. This allowed Adoboli to take vast and risky market positions that resulted in massive losses and UBS failed to manage the risks around that properly.

The Final Notice for UBS AG


Clearly, in some ways, the fact that there is fallout for UBS from the Adoboli affair is not surprising. However, there still remain certain areas of interest that are worth noting.

One such area is a particular emphasis that appears in the FSA press release. The FSA highlights the risk to market confidence caused by sudden negative announcements to the market such as the one that resulted from this case.

How the fine was arrived at is also noteworthy. The level of fine was fixed by reference to the annual revenue of the relevant trading division at the firm, Global Synthetic Equities (see in this context the relevant penalty setting regime referred to in Enforcement Watch 1 "Harsher Penalty Setting Introduced"). Having decided to fix the fine by reference to the relevant revenue, the next consideration under Step 3 of the process is the relevant percentage to apply in order to reflect the seriousness. In this case, it was bound to be one of the two most serious levels (Level 4 or Level 5). The FSA plumped for the lesser Level 4 (15%), but there is no discussion about why the FSA selected Level 4 rather than Level 5 (20%). Also of note is that, in assessing both the aggravating factors and the mitigating factors, the FSA elected not to apply any adjustment to the Level 4 figure produced. The fact that UBS promptly brought the matter to the attention of the authorities and also spent approximately £16m up to the date of the Final Notice in conducting a substantive investigation into the incident may well have weighed heavily.

One of the aggravating factors cited was the fact that UBS was earlier (in November 2009) fined £8m for systems and controls failings in its international wealth management business. This is an indication that the FSA expects lessons learned in one business area of a firm’s operation to be applied in the firm’s other business areas.

Tribunal overturns prohibition order
10 December 2012:

Christopher Ollerenshaw and Thomas Reeh are the former Chairman and CEO of Black & White Group Limited (in liquidation) respectively. The company was a relatively small one, whose main business was mortgage broking, especially in the sub-prime market.

The RDC proposed that both men receive relatively large headline fines and prohibition orders. Both referred their cases to the Upper Tribunal. The Tribunal found serious breaches of Principle 1 (integrity) and Principle 7 (SIF ensuring compliance with regulatory system). For the purposes of this publication, the facts are not particularly interesting or unusual. Whilst there is some interest in the fact that the Tribunal reduced their financial penalties, the most interesting aspect of the case for readers will no doubt be the reasons why the Tribunal did not uphold the prohibition order against Reeh (Ollerenshaw's prohibition order was upheld).

The Upper Tribunal's ruling


Ollerenshaw had built the business and was the owner of it. His salary was twice that of Reeh, and he was very much the boss of what was his business. Further, the Tribunal considered that he was out of his depth in modern financial services regulation, with FSA regulation having come late in his professional life. Whilst the Tribunal is not entirely clear on what persuaded it not to make a prohibition order against Reeh, it does say that it considered all the submissions, including those that Reeh:

  • is fundamentally honest and no danger to the markets
  • has learned from this experience
  • had never been in regulatory difficulty before this case and has been in no trouble since
  • four and a half years have gone by
  • he has built a new financial services career in Australia
  • if a prohibition order had been made, he would probably lose his job and pointless distress would be caused to his family.

Despite taking a serious view of his failings (including finding a lack of integrity), the Tribunal said it was "persuaded, just" that an Order against Reeh was not necessary. The Tribunal stated that "we do not consider that he is currently not a fit and proper person to perform regulated functions". The Tribunal no doubt was persuaded by the uncommonly long period of time that had passed since the matters in question, and Reeh's rehabilitation since that time.

As regards the rehabilitation, it is also interesting that the Tribunal did not want to impose a level of penalty which would have the effect of bringing his fresh start to an end. For a variety of reasons connected to this, it reduced his headline penalty figure (itself reduced from the RDC £170,000 figure) from £75,000 to £10,000.

Raft of serious Arch Cru notices
18 December 2012:

The FSA has published Decision Notices in respect of Arch Financial Products (AFP), its chief executive Robin Farrell and its senior partner and former compliance officer Robert Addison. The three Decision Notices are here, here and here.

AFP was investment manager of two UK authorised funds that in turn predominantly invested in 22 Guernsey cell companies of which AFP was also investment manager.

The Decision Notices have been challenged by each of the above recipients, with the cases to be determined anew by the Upper Tribunal. The Decision Notices set out the FSA's decision to date, which can be summarised on the basis of the following four aspects:

  • Conflicts of interest: the FSA says that AFP and each of the two individuals was reckless as to the risk that conflicts of interest would not be managed fairly.
  • Material non-public information: insufficient controls were put in place over such information by both the firm and Mr Addison.
  • Liquidity risks: AFP pursued an investment strategy which resulted in significant liquidity risks for the UK funds. AFP and Mr Farrell failed to ensure that the funds aimed to provide a prudent spread of risk.
  • Compliance monitoring: AFP and Mr Addison adopted an informal and ad hoc approach to compliance monitoring with insufficient recording of the monitoring that was undertaken.

There were over 6,000 investors in the UK funds. (In fact, the number of individual investors is likely to be much higher as many were nominee holders for underlying beneficial investors). At their peak in September 2008, the total sum under management was approximately £648m. The UK funds were suspended in March 2009 as a result of liquidity concerns.

AFP would have been fined £9m. However, due to its financial position, no fine was levied and AFP received instead a public censure. Mr Farrell was fined £650,000 and Mr Addison was fined £200,000. Both were prohibited from carrying out any regulated function. These decisions will be reviewed by the Upper Tribunal.

In addition, Capita Financial Managers has settled with the FSA and received a Final Notice. Capita was the Authorised Corporate Director (ACD) of the CF Arch Cru Funds. It delegated investment management of the UK funds to AFP. Whilst it delegated investment management, it remained responsible for the overall performance of the regulatory obligations in relation to the funds. The FSA found that it failed in its oversight, breaching both Principle 2 (skill, care and diligence) and Principle 3 (management and control). Its failings were neither deliberate nor reckless. Were it not for the raft of measures it took subsequently (including making the significant payments referred to below), it would have been fined a headline figure of £5.75m.

The Final Notice


Whilst the FSA stated that neither Mr Farrell nor Mr Addison acted deliberately, both were found to have been reckless. Integrity and competence failings were found. The FSA looks to have considered the cases to be at the most severe end of the spectrum that exists short of deliberate or dishonest conduct.

The cases are a reminder that FSA enforcement action is only one of a raft of potential consequences of failures:

  • As at November last year (prior to publication), it appears that: AFP was a defendant to proceedings in the Commercial Court in which transactions that are criticised in the Decision Notices formed a part; Mr Farrell was also a Defendant to those proceedings (and is accused of dishonesty in relation to one of the transactions that appears in his Decision Notice); Mr Addison was a defendant to proceedings in Guernsey arising from his directorships of the Guernsey cells.
  • Capita agreed voluntarily to contribute, without admission of liability, the sum of £32m towards a £54m payment scheme for investors in the funds.
  • Capita established a hardship fund in December 2009 for investors experiencing financial difficulty. As at 30 June 2011, payments of approximately £660,000 had been made to investors.
  • The FSA is obliging firms who advised on investments in the funds to contact their clients to ask if they want their case reviewed, in order to determine whether they were mis-sold the funds and may be eligible for redress. Investors will have the right to apply separately to the Capita payment scheme above.

The two individuals sought to argue that the FSA was time barred in imposing a penalty on them. They argued this on the basis that the Warning Notices were issued more than two years after time began to run. However, given that the two year period was extended to three years by statute before the two year period had run its course, the FSA decided that the individuals were subject to the three year period and that it was accordingly in time.

The FSA recognised that payment of the £650,000 penalty by Mr Farrell may cause him serious financial hardship or financial difficulties. However, it chose not to reduce the penalty as it would reduce its deterrent effect.

In October 2010, the FSA gained the ability to publish Decision Notices, rather than awaiting the decision of the Upper Tribunal (see Enforcement Watch 4: "FSA presses on with enforcement sanctions changes"). It is possible to make an application to the Tribunal to restrain publication pending the outcome of the Upper Tribunal proceedings, and this is what AFP and the two individuals did. They were unsuccessful in their application. The reasoning of the Upper Tribunal is interesting and is covered elsewhere in this edition (see "Tribunal rules in favour of publication of Decision Notices").

UBS receives largest ever FSA fine
19 December 2012:

UBS is now the second bank to have received an FSA fine for LIBOR and EURIBOR failings. The fine is an eye watering £160m. The headline figure is £200m, but that was reduced by a mandatory 20% due to the stage at which UBS settled.

UBS was found to have breached principle 5 (market conduct) in the period January 2005 to December 2010:

  • UBS traders routinely made requests to the internal rate submitters to adjust their submissions in order to benefit their trading positions. During the period in question, there were for example over 800 documented internal requests in respect of JPY LIBOR. The FSA said that, in view of the widespread nature of such requests, every LIBOR and EURIBOR submission in currencies and tenors in which UBS traded is at risk of having been improperly influenced;
  • Through four of its traders, UBS colluded with interdealer brokers to attempt to influence the JPY LIBOR submissions of other banks. The UBS traders were directly involved in making more than 1,000 documented requests to 11 brokers at six broker firms. In addition, through one of its traders, UBS colluded with individuals at panel banks to make submissions in relation to JPY LIBOR that benefited UBS trading positions (more than 80 documented requests, as well as making requests orally);
  • A number of managers at UBS knew about, and in some cases were actively involved in, the attempted manipulation. Improper requests directly involved 40 UBS individuals, 11 of whom were managers;
  • On a number of occasions from at least June 2008, UBS adopted LIBOR submissions directives whose primary purpose was to protect its reputation by avoiding negative media attention about its submissions and speculation about its creditworthiness.

In addition, UBS was found to have breached Principle 3 (systems and controls) in respect of different time periods in relation to LIBOR and EURIBOR, the earliest starting in January 2005:

  • No systems, controls or policies governing the procedure for making submissions;
  • It combined the role of determining submissions with proprietary trading in derivative products referenced to LIBOR and EURIBOR. This was an inherent conflict and UBS took no steps to manage it until later in 2009;
  • There were reviews in 2008 and 2009, and new procedures, but these were inadequate despite some of the changes implemented.

The Final Notice


This is the second of the fines to be announced in this area. The size of fines continues to grow. This fine eclipses the Barclays fine, which at the time was the highest ever FSA fine (see Enforcement Watch 8 "Barclays receives largest ever fine imposed by the FSA"). The FSA commented in the Final Notice that, although the misconduct was similar in nature, the UBS misconduct was considerably more serious than Barclays. It said this because it was more widespread within the firm, being exacerbated by the control failings, in particular the inherent conflict of interest in its submission function.

The public and authorities' interest continues almost unabated in relation to this issue. There is much press attention devoted to it and more disciplinary action trailed, with talk of other institutions settling. The backdrop to this is the conduct of individuals giving rise to the actions. We noted in our Barclays piece that one aspect of the affair would be how individuals had been treated; and observed that no action against individuals had yet come out. Since then, however, it has been reported that three people have been arrested in the UK in connection with the criminal probe. These were reportedly Tom Hayes (a former trader at UBS and Citigroup) and Terry Farr and Jim Gilmour of interdealer broker RP Martin.

The international co-operation between authorities is also worth mentioning. In the UBS probe, we note that the FSA thanks the CFTC, the DoJ, the FBI, FINMA and the SEC for their assistance. We also note that Tom Hayes (and Roger Darin) were both charged by the DoJ towards the end of last year. What is interesting is the press report of a supposed tussle between the SFO and the DoJ as a result of the DoJ apparently seeking the extradition of Tom Hayes. Although co-operation between regulators has increased internationally over recent years and will no doubt continue to do so, there may well be turf wars between them to come. In that context, the extradition of Hayes may well be a particularly toxic mixture, combining as it does the politically sensitive issues of UK/US extradition and of LIBOR.

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