Enforcement Watch Issue 7 | May 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

There has been no let up in enforcement since the last edition of Enforcement Watch. Indeed, such has been the proliferation of cases that we have had to choose carefully those that are likely to be of most interest to readers.

Meanwhile, there have been a number of clues in the last few months about where FSA enforcement priorities may lie in the next year. We have distilled these in our On the Horizon section, and we hope that our readers find the section valuable.

On the Horizon

Specifics revealed about the future enforcement approach

For a considerable period, the FSA has been pursuing and trumpeting its policy of credible deterrence. The new FCA is set to build on this approach (see for example Enforcement Watch 5 "FCA's approach to regulation points to increasing enforcement").

Now, in a February speech by the acting director of Enforcement, the FSA has made a number of trenchant comments about the future enforcement approach both of the FSA and the FCA. It has also mentioned cases of interest going through the system. The most interesting aspects arising are:

  • The FSA recognises that confidence in the financial services industry is at an all time low. Despite ever increasing penalties for retail failings and large sums in redress, the FSA continues to see failings which it considers indicate that the industry is not learning the lessons;
  • The investigations going through the system as at February included: market abuse and retail conduct cases; significant cross border investigations relating to alleged misconduct in relation to LIBOR; and a number of cases coming out of the thematic work into AML controls at banks;
  • We have heard previously that the FCA will intervene earlier. This may also include a willingness to take supervisory or enforcement action earlier in the cycle. Specifically singled out for mention were where the FCA might judge that a particular aspect of the firm's business model is likely in future to give rise to poor consumer outcomes: eg product selection, remuneration practices, training, recruitment;
  • There will be a lower tolerance for "firms bumping along the bottom" eg firms that only fix things when the FCA tells them to. Early intervention may well include restricting firms' businesses in part or in whole;
  • The FSA (and no doubt also the FCA) will expect to see people speaking up more than they do. They warn that people must not put their relationships with colleagues, employers, sources of income etc above their obligations as approved persons. If they do, action will be taken.
Getting tough on unfair contract terms?

The Unfair Terms in Consumer Contracts Regulations 1999 apply to standard form contracts between firms and consumers. The Regulations allow the FSA to take action to have unfair contracts terms struck out. This can plainly have very far reaching consequences.

At the end of January, the FSA published Guidance Notes, identifying five examples of terms it commonly finds to be unfair or unclear and giving the following reasoning:

  1. Terms allowing a firm to unilaterally vary the contract. These are the most common example of an unfair term that the FSA encounters. Such terms are less likely to be unfair if the consumer is given reasonable notice and a right to terminate the contract without cost, or a valid reason for the variation is specified in the contract (for example a change in the law, interest rates or overheads).
  2. Terms giving a firm the freedom to terminate a contract. The effect on the consumer of termination will be a major factor in the FSA's determination of the fairness of such a clause. For example, the FSA will consider the cost to the consumer of putting a new contract in place. However, terms that allow a firm to terminate in specified serious circumstances, and which allow the consumer a chance to remedy the situation, are more likely to be fair.
  3. Terms giving a firm excessive discretion to exercise a contractual power. The FSA recognises that, in response to unforeseen circumstances, a firm may have to exercise such powers. However, such powers should not be abused and the firm's discretion to vary should be clearly defined in the contract.
  4. Terms giving a firm the right to transfer its obligations under the contract. These are likely to be unfair if the consumer is less well served or protected by the new provider.
  5. Terms that are not in plain and intelligible language. An example is the use of terms such as "consequential loss" without explanation.

In a speech on 21 March, the FSA warned that it expected to see improvements in contract terms to ensure consumers received a fair deal. It stated that now there could be no more excuses that firms misunderstood how the Regulations worked. If there were not improvements, the FSA warned that it was prepared to obtain injunctions to prevent firms from relying on unfair terms.

It is possible of course that the FSA's stance could lead to enforcement action. Equally concerning for firms is the impact it could have on liability to clients. For example, "consequential loss" provisions (referred to at 5 above) are frequently important in investment disputes. If the term was struck down, for example because it had not been properly explained, that could have a significant impact on firms' liabilities in investment disputes.

In the context of the Regulations, readers may be interested in the High Court case in May, in which a consumer defeated a summary judgment claim by Spreadex Ltd. In that case, the Court set out why it said that the term on which Spreadex sought to rely was unfair under the Regulations. Firms would do well to heed the terms of the judgment.

FSA identifies its major retail risk categories

The FSA's Retail Conduct Risk Outlook ("RCRO") is an annual publication of the FSA's analysis of the major risks facing retail consumers of financial products and services in the UK. It plays a key role in defining the work that the FSA (and its successors) will undertake in the next 12 to 18 months.

The FSA warns of risks to consumers arising from the current troubled environment. It has identified its15 highest priority risk conduct categories. Those that may be of particular interest are:

  1. Aligning business models to the fair treatment of consumers. In light of economic conditions, firms are changing aspects of their business models in order to survive. In doing so, the FSA is concerned that consumers may suffer. Examples include the use of aggressive sales techniques to meet more ambitious targets and an increase in the attempts to cross-sell potentially unsuitable products.
  2. Complexity in retail investment products and services. The FSA anticipates an increase in the complexity of products being sold to consumers to counter the combination of prevailing low interest yields and market instability. Examples are the sale of Structured Products and Traded Life Policy Investments.
    • In relation to TLPIs, the FSA has announced (p69) that in 2012, as part of a review of the rules relating to Unregulated Collective Investment Schemes, it intends to consult on a ban of all marketing of TLPIs to retail investors.
    • UCIS criticisms remain firmly on the agenda. The FSA raised concerns about the mis-selling of UCIS in its 2011 RCRO. In particular, the FSA was concerned that intermediaries had failed to understand the restrictions on the marketing of UCIS or how the products actually worked. These concerns remain, despite the FSA flagging that it has taken some enforcement action in the interim. (Enforcement action on UCIS continues to be taken and the FSA has indicated that it will consult on proposals to ensure that they cannot be marketed to retail investors in the UK except in rare circumstances "UCIS clampdown continues with big fine for small firm")
  3. Firms' response to regulatory or legislative change. The FSA has concerns that firms are not properly engaged with major regulatory reform on the horizon. This includes changes following the Retail Distribution Review and new Banking Conduct Regime.
  4. Inadequate Complaints Handling. In April 2010, the FSA published a major review of complaints handling practices by the major banks operating in the UK. Whilst the FSA has seen some improvement, in general, standards remain poor. The FSA will continue to monitor and engage with the banks to seek improvement. In relation to other firms, the FSA expects to see senior management instilling the appropriate culture in all staff to ensure that complaints are dealt with properly and fairly.
  5. Centralised Investment Propositions. The FSA is concerned that firms offering Centralised Investment Propositions (CIPs) may not be taking adequate steps to ensure their suitability for the client. On 4 April 2012, the FSA published a Guidance Consultation which included discussion of CIPs. This publication is explored elsewhere in this issue (On the Horizon "Inability to demonstrate suitability in 75% of CIP files reviewed".)
  6. Investment Risk Profiling. The FSA has concerns that consumers are seeking the incompatible goals of low risk and high return and that firms may be incentivised to mis-sell products where the consumer does not fully understand the nature and extent of the risk.
  7. Projections. Indicative projections are a key point of sale disclosure. In 2012, the FSA will monitor firms' compliance with the rules on projections, and take action where necessary to ensure that consumers are not being give unrealistic expectations about what returns to expect.
  8. Systems and Controls weaknesses in networks. The FSA will continue its supervisory activity in relation to networks to ensure that there are proper monitoring procedures and resources given to oversight of appointed representatives.

The RCRO is essentially the FSA's view of where the potential dangers lie in the next 12-18 months. Firms need to assess whether they have taken sufficient action to meet the challenges highlighted by the RCRO. They can expect the FSA to conduct their resources (and their firepower) in those areas. No doubt, enforcement action will follow from at least some of the 15 areas. The FSA warns that "it is clear that the financial services industry…[has] a lot of work to do."

FSA sets out enforcement priorities

The FSA has published what is likely to be its last ever Business Plan before new regulators come into force next year.

The 2012/2013 Business Plan published in March this year includes details of enforcement priorities for the 12 months from 1 April 2012. Whilst it comes as no surprise that credible deterrence remains firmly on the agenda, readers may be interested in the following details underpinning that agenda.

  • Enforcement's budget is increased by almost £5m to just under £73m;
  • As part of its market confidence objective:
    • the FSA will concentrate its surveillance and enforcement resources on market abuse, insider dealing and wholesale misconduct within the UK markets;
    • As we have previously commented, the FSA believes that actions against individuals are more likely to lead to behavioural changes and to increased standards. Targeting individuals appears to be a key strategy for the year ahead;
    • We have frequently commented in this publication on how thematic work leads to enforcement action. As far as market integrity is concerned, the FSA's continued programme of thematic work is focussed on suspicious transaction reporting and pre-soundings;
    • The FSA does not believe that proper lessons have been learnt on transaction reporting and is making this one of its focusses.
  • As part of its consumer protection objective:
    • We have seen increasing focus by the FSA on the fitness and propriety of those taking up controlled functions. We regard this as a form of quasi enforcement, and we note that the FSA plans to continue its approach;
    • Credible deterrence will include the FSA focussing on fair treatment of customers, insurance fraud, mortgage fraud and the mis-selling of complicated products such as unregulated collective investment schemes, see On the Horizon "FSA identifies its major retail risk categories".
    • No doubt with an eye to the troubles caused by recent collapses, the FSA also intends to focus on bringing actions in respect of client money breaches.
Inability to demonstrate suitability in 75% of CIP files reviewed

The FSA has carried out a thematic review into centralised investment propositions (CIPs). A CIP is a standardised approach to giving investment advice. For example, portfolios with a pre-determined asset allocation may be offered to customers with differing risk profiles. Whilst consumers may benefit from CIPs (for example investments that are recommended are more likely to have been properly researched), the FSA has concerns that:

  • firms may recommend unsuitable products/investments;
  • firms may engage in "churning" by switching existing clients to CIP's without considering the customers' interests; and
  • CIP may result in higher charges.

Some firms offering CIPs divide up their client base into segments (e.g. clients with a small asset base or clients with more investment experience) and provide CIP products or discretionary fund management accordingly. The FSA has identified this approach as good practice.

However, the FSA emphasises that CIPs will not be suitable for all clients. As part of its thematic review, the FSA reviewed 181 investment files from 17 firms which recommended a CIP. Alarmingly, the FSA found the advice unsuitable in 33 cases and "unclear" in 103 cases. That is, in 75% of cases, suitability could not be demonstrated. The FSA wants the needs of the client to be the critical determining factor for firms recommending CIPs.

Accordingly, before making a recommendation to enter a CIP or to switch into one, firms must take reasonable steps to ensure that the CIP is suitable for each individual client. They must also ensure that the client understands the risks associated with all of the investments contained within the CIP. The FSA will expect firms recommending CIPs to maintain robust systems and controls to manage the risk of unsuitable advice being given. Given the results of the thematic review, we expect to see FSA enforcement action in relation to CIPs.

Interest rate derivatives on the agenda

For some period, we have seen disputes involving the sale of interest rate swaps bundled up with bank loans. From time to time, there have also been details publicly emerging about the issue. Now, the topic has become more centre stage as the Treasury Select Committee has published its correspondence with the FSA and the FOS on the matter, and made its feelings known. The following points are worthy of note.

The Committee wrote to the FSA and the FOS in March of this year, expressing its concern about reports from a number of small businesses over the way they have been sold complex interest rate derivative products by the major banks.

The FOS believed the complaints to it were modest. However, it was at pains to point out that, in practice, the remit of the FOS seldom covered the larger business loans that it believed were at the heart of the reported concerns.

The FSA first undertook some work on the issue in 2010 and 2011, and did not at the time see any widespread underlying problem. However, it is now doing more work to understand in more detail the types of products that have been sold. It believes that there are some complex products in the market, including for example structured collars, which may introduce a degree of interest rate speculation that are less likely to meet customers' needs than the simple fixed rate loans. The FSA is working to assess the scale and severity of any potential issues. The areas it is looking at include product design, sales processes and practices, and incentives.

The FSA stated that if it found widespread evidence of breaches of its rules or mis-selling, it would take action. We shall have to see what it uncovers. The political push from the Committee however is obvious - the Chairman has said that the alleged mis-selling had been of concern to the Committee for some time, and he declared himself "pleased the FSA is now investigating it".

Spotlight on the US

SEC Enhances Cooperation With Foreign Counterparts

On March 23, the U.S. Securities and Exchange Commission (“SEC”) announced the establishment of two new comprehensive agreements with the Cayman Islands Monetary Authority (“CIMA”) and the European Securities and Markets Authority (“ESMA”). These two agreements follow a similar agreement reached in 2010 with the Ontario Securities Commission and Quebec Autorité, and subsequently expanded to also include the British Columbia Securities Commission. In total, the SEC now has partnerships with approximately 80 separate jurisdictions that enable the SEC and its counterparts to collect and share information.

The agreements between the SEC, CIMA, and ESMA are memorialized as memorandums of understanding (“MOUs”). The MOUs do “not create any legally binding obligations, confer any rights, or supersede any domestic laws,” and do not alter any other bilateral or multilateral agreements concerning cooperation in cross-border securities matters to which the agencies may be a party (see SEC-ESMA MOU at p.2). Rather, the MOUs state that the agencies will cooperate with each other to the fullest extent allowed by the respective laws governing them (see p1). Cooperation may be denied when it would require one of the agencies to violate a law or regulation, when the request for cooperation is not made in accordance with the terms of the MOU, or on grounds of public interest (see p3).


The MOUs are noteworthy as the latest move by the SEC to enable it to target cross-border businesses and individuals. The Cayman Islands, for instance, is a well-known off-shore financial center that is home to financial funds, advisors, and managers that regularly access the U.S. market. To the extent the MOU's make it easier to obtain information on such entities and individuals, the SEC believes it will be better positioned to investigate conduct taking place outside of the United States.

Additional information on the SEC’s new agreements, including links to the agreements, can be found here.

U.S. Authorities Continue To Target Individuals Involved In Foreign Corruption

The U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) continue to target individuals both inside and outside of the United States who engage in improper conduct abroad in violation of the U.S. Foreign Corrupt Practices Act (“FCPA”).

The DOJ has recently brought an action against Garth Peterson, an American citizen living in Singapore and a former managing director for Morgan Stanley’s real estate business in China. According to the criminal Information filed by the DOJ, Peterson had a personal friendship with a local Chinese-government official who introduced him to various real estate development opportunities in Shanghai. Peterson allegedly conspired with this official to evade Morgan Stanley’s internal controls and transfer a multi-million dollar ownership interest in a Shanghai building to himself and the official. On April 25, 2012, Peterson pled guilty to one count of conspiracy to circumvent internal controls. At his sentencing scheduled to take place in July 2012, Peterson faces a maximum penalty of five years in prison and a $250,000 fine. Separately, the SEC charged Peterson with violations of the FCPA and aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act of 1940. Peterson agreed to a court order requiring him to disgorge $254,589 and relinquish the interest he secretly acquired from Morgan Stanley’s fund in the Jin Lin Tiandi Serviced Apartments.


In addition to providing another example of the DOJ and SEC pursuing fraudulent conduct abroad and against individuals, the Peterson case is also significant because of what the DOJ and SEC chose not to do: namely, bring charges against Morgan Stanley. Rather, both the DOJ and SEC noted in press releases that Morgan Stanley maintained internal controls (in fact, the DOJ noted, between 2002 and 2008 the company trained Peterson on the FCPA seven times and provided at least 35 reminders to comply with the statute), fully cooperated with the government investigations, and conducted thorough internal investigations itself.

SEC v. Citigroup Global Markets Inc.: Part II

As reported in the sixth edition of Enforcement Watch "US District Court rejects SEC/Citigroup Settlement Agreement", on 28 November 2011, Judge Jed Rakoff of the United States District Court for the Southern District of New York (“District Court”) rejected a proposed settlement agreement between the U.S. Securities and Exchange Commission (“SEC”) and Citigroup Global Markets Inc. The SEC had charged that Citigroup created a $1 billion fund with negatively projected assets that it misrepresented as an attractive investment while at the same time taking a short position in the same assets. The proposed settlement would have required Citigroup to pay a $285 million in disgorged profits, interest, and civil penalties, but would not have required Citigroup to admit or deny liability. Judge Rakoff rejected the proposed settlement, finding it was not in the public interest.

On 15 March, the United States Court of Appeals for the Second Circuit (“Second Circuit”) stayed the proceedings before the District Court pending a resolution of the parties’ appeals seeking to set aside Judge Rakoff’s decision. In granting the stay, the Second Circuit preliminarily examined the decision in an effort to establish the likelihood of success of the appeal. In doing so, the Second Circuit identified several legal problems with the District Court's conclusion that an agreement in which a defendant neither admits nor denies liability is not in the public interest. Additionally, the Second Circuit noted that Judge Rakoff failed to give the proper amount of deference to the SEC on discretionary matters of policy. The Second Circuit also rejected Judge Rakoff’s finding that the proposed settlement was unfair to Citigroup. Finally, the Second Circuit expressed doubt as to whether the absence of facts established by an admission of liability could justify the rejection of the proposed settlement. In sum, the Second Circuit concluded that the SEC and Citigroup had established a likelihood of success on the merits of their appeal seeking to reverse Judge Rakoff’s decision. See S.E.C. v. Citigroup Global Markets Inc., 673 F.3d 158(2d Cir. 2012).


Although not a final decision on the merits, the Second Circuit’s decision is significant because it appears to reject many of the headline conclusions reached by the District Court. Indeed, Judge Rakoff’s decision was already having an impact on SEC policy. In January 2012, the SEC announced that it would no longer allow defendants to “neither admit nor deny liability” in settlement agreements also involving deferred- or non-prosecution agreements. Notwithstanding the SEC’s apparent change in policy, the Second Circuit’s analysis with respect to judicial deference to the SEC on discretionary matters of policy is likely to quell any future judicial pushback on SEC settlement proposals. The next decision by the Second Circuit will be a decision on the merits of Judge Rakoff’s decision. Whether the Second Circuit decides to affirm or reverse Judge Rakoff’s decision, the Court’s opinion is certain to have an impact nationwide.

UCIS clampdown continues with big fine for small firm
13 February 2012:

The FSA has handed out a £97,600 fine to Topps Rogers Financial Management in relation to Unregulated Collective Investment Scheme (UCIS) related recommendations. The FSA has also cancelled the firm's Part IV permission.

Topps Rogers was a small independent advisory firm. It failed to promote UCIS business in compliance with the s.238 restriction and exemptions, to take adequate steps to ensure suitability of its recommendations and put in place adequate commission arrangements across its business. Nonetheless, the firm advised 94 customers to invest over £12m in UCIS.

The Final Notice for Topps Rogers Financial Management

Also, by way of a Decision Notice, the FSA decided to fine and make a Prohibition Order in respect of the only adviser and partner performing significant influence functions at the firm, Martin Edward Rigney. Mr Rigney has since referred the Decision Notice to the Tribunal.


A clampdown on the sale of UCIS has long been high up on the FSA's agenda. See for example Enforcement Watch 4: "Thematic UCIS visit leads to enforcement action" and Enforcement Watch 5: "Raft of UCIS cases".

Through the above cases, the FSA has clearly been trying to send a message. It seems that it believes its message is not getting through. Since Topps Rogers, the FSA has announced that its current restrictions "clearly … aren't going far enough". It has also announced that proposals in its forthcoming consultation paper will look to ensure that UCIS should not be marketed to retail investors in the UK except in rare circumstances. We should expect a zero tolerance approach by the FSA in future.

Improper disclosure of information in three major cases
February/March 2012:

The FSA has recently imposed large fines on three senior individuals for improper disclosures of information.

Nicholas Kyprios: Mr Kyprios was Head of European Credit Sales at Credit Suisse in London. He engaged in improper market conduct by disclosing client confidential information ahead of a significant bond issue in November 2009. So that he could market the bond to clients, on 9 November, Mr Kyprios was wall-crossed regarding the takeover and proposed bond issue. He was provided with confidential information concerning the bond issue, told that it was inside information and given written instructions not to disclose it to third parties.

On 11 November, Mr Kyprios called a fund manager to invite him to a road show for the bond issue. The fund manager told Mr Kyprios that he did not want to be wall crossed but he asked Mr Kyprios about the bond issue and, in response (in breach of Principle 2 - skill care and diligence and Principle 3 - market conduct), Mr Kyprios engaged in a guessing game, including advising when the fund manager was “getting warmer” in guessing the confidential information. Mr Kyprios was an active participant in the guessing game and could have extracted himself from it, but he did not do so. Further, he was in a senior position and sat with his team on an open plan trading floor, such that a number of people might have heard the confidential information; and his conduct may have set a bad example for his subordinates. He was fined £210,000 (reduced from £300,000 for early settlement).

Andrew Osborne: Mr Osborne was a Managing Director in Corporate Broking at Merrill Lynch International (now Bank of America Merrill Lynch), which was the long-term broker to Punch Taverns Plc. Mr Osborne led this broking account. He was responsible for wallcrossing certain shareholders based in the US in relation to a proposed transaction to issue new equity.

Mr Osborne approached Greenlight Capital Inc, a major Punch shareholder at the time. Greenlight refused to be wallcrossed. Mr Osborne arranged a conference call between Punch management and Greenlight on a non-wallcrossed basis. During the call, the FSA found that Mr Osborne improperly disclosed inside information about the fundraising.

Shortly after the call, Mr Osborne was aware that Greenlight was selling Punch shares but he failed to raise any concerns with senior management, legal or compliance personnel. On 15 June 2009, Punch announced an equity fundraising of £375m and the price of its shares fell. The FSA accepted that Mr Osborne’s actions were inadvertent, but nevertheless fined him £350,000.

Ian Hannam: The FSA has published a Decision Notice indicating that it has decided to impose a £450,000 fine on Mr Hannam, the former Chairman of Capital Markets at JP Morgan Cazenove. The Decision Notice represents the findings of the FSA’s Regulatory Decisions Committee. Mr Hannam has referred the matter to the Upper Tribunal. This is an independent body which will hear the case afresh, and will reach its own conclusion which it will substitute for the Decision Notice. We shall have to see what conclusion the Upper Tribunal reaches, but in the interim, we describe the FSA’s Decision Notice below.

Mr Hannam was a key adviser to Heritage Oil Plc. He sent two separate emails to a prospective client related to Heritage, one in September 2008 and one in October 2008. In the first, the FSA said that the email indicated that Heritage’s corporate advisers were in discussion with a potential acquirer, and that the CEO had decided to engage in those in nine days time. In the second, the PS to the email ("Tony has just found out and it is looking good") indicated that drilling tests at a specific well were positive.

The Final Notice for Nicholas Kyprios

The Final Notice for Andrew Osborne

The Decision Notice for Ian Hannam


There are a whole variety of areas of interest arising from these three cases. Perhaps the most significant for Enforcement Watch are the following.

First, the FSA has for a considerable period been concerned about market cleanliness, and what its published statistics seem to show. Unlike other cases, the above cases all involve investment banks, all involve those at a senior level, and all impose significant fines. It is the clearest indication yet of how seriously the FSA is taking the issue.

Second, two of the cases are market abuse cases1. Market abuse was a new "civil offence" introduced for the first time in 2001. It is known as a "no fault" offence. However, most cases do involve deliberate action. The Osborne and Hannam cases are notable for not doing so. In both cases, the FSA explicitly recognised that there was no deliberate action, yet still came down hard on the conduct complained of.

Third, market abuse cases can involve very fine judgements about the propriety of disclosing certain information. The fine judgements are seen in both Osborne and Hannam. In Osborne, the FSA says that he disclosed three pieces of information, yet accepts that none of them in the context of the 45 minute call that took place would in isolation amount to inside information. However, taken together and in context, it says that they did so. Similarly, with Hannam, there was plainly argument in front of the RDC about whether the PS was sufficiently precise or price sensitive to constitute inside information. After the event, lawyers and regulators can have the luxury of arguing such fine points over a considerable period. Market participants do not. (Indeed, Mr Hannam’s evidence at the time of the second email was that it had been sent at a time of extreme pressure – he had been in meetings almost continuously on the day the email was sent).

Finally, these cases give rise to a need for a reassessment of procedures and processes, and how they are monitored in corporate broking. They are acknowledged to have sent ripples through the industry.



1 The Kyprios case was not a market abuse case as the investments were not “qualifying investments”

Santander fined £1.5m for FSCS customer communication failures
16 February 2012:

The FSA has fined Santander UK PLC1 £1.5m for breaching Principle 2 (skill, care and diligence in business) and Principle 7 (communication with clients) by failing to make clear the circumstances in which certain structured products would be covered by the Financial Services Compensation Scheme (FSCS).

Customers invested in the Santander structured products were covered by a guarantee of one of the Santander subsidiaries. Towards the end of 2008, customers increasingly began to query the extent of FSCS cover in place in relation to the structured products.

Whilst Santander identified concerns about the extent of FSCS coverage in October 2008, it took: (i) 8 months until it properly reached conclusions on the limits of coverage, (ii) a further 6 months before it trained its sales advisers on them, and (iii) a further one month before it updated its product literature and contacted customers who had previously bought the products to notify them of its revised opinion. Between October 2008 and when it updated its literature, Santander sold approximately £2.7bn of the structured products. The FSA has not made any findings that the products were sold to customers for whom they were not suitable.

A copy of the Final Notice is available here.


Santander took the relatively unusual position for such an institution of challenging the FSA at a hearing in front of the Regulatory Decisions Committee. Amongst other things, it argued that its materials were entirely accurate and, what is more, that its conduct in relation to FSCS disclosure at the time was in step with prevailing industry standards of the time. The FSA was unpersuaded.

Clearly, the FSA is particularly keen to ensure in the current climate that it protects consumers. One aspect the FSA was keen to point out was that, considering the sales of its products took place during a time of financial uncertainty, Santander should have moved more quickly to confirm in which circumstances FSCS cover would be available. In circumstances where many parties (including the FSA) have been criticised in relation to the financial crisis, the FSA is coming down hard on failings in this period.



1 Known as Abbey National plc at the time

FSA censures Bank of Scotland for very serious misconduct
9 March 2012:

The FSA has set out its detailed findings in respect of failings by the Corporate Banking Division of Bank of Scotland plc in relation to the failure of HBOS during the wider financial crisis. The FSA has judged that, during the period January 2006 to December 2008, Bank of Scotland was guilty of very serious misconduct which contributed to the circumstances that led to the UK government having to inject taxpayer funding into HBOS.

Bank of Scotland failed to comply with Principle 3 (management and control). Its Corporate Banking Division pursued an aggressive growth strategy that focused on high-risk sub-investment grade lending. It did so despite known weaknesses in the control framework, which meant that it failed to provide robust oversight and challenge to the business. Its internal culture was focused on revenue rather than assessing the level of risk in transactions. It did not take reasonable steps to assess, manage or mitigate the risks involved in the growth strategy.

This strategy was highly vulnerable to a downturn in the economic cycle, yet Bank of Scotland continued with the strategy even as markets began to worsen in 2007. Rather than re-evaluating its business as conditions worsened, the Corporate Banking Division set out to increase its market share as other lenders started to pull out of the market. It failed to adequately and prudently manage high value transactions which showed signs of stress.

As it became apparent that high value transactions were demonstrating signs of stress, it should have been evident to Bank of Scotland that a more prudent approach was needed to mitigate risk. However, the bank did not have systems and controls that were appropriate to the high level of risk that its Corporate Banking Division was taking on. There were serious deficiencies in both its framework for managing credit risk across the portfolio and its processes for identifying and managing transactions that showed signs of stress.

The FSA found that, in ordinary circumstances, the misconduct would have justified a very substantial financial penalty. However, given that significant taxpayer money had already been spent by the Government to acquire shares in the bank, it made little sense to penalise the taxpayer again by a financial penalty. In those exceptional circumstances, a public censure was the most effective sanction.

The Final Notice for Bank of Scotland plc


It is perhaps no great surprise that the FSA has reached serious conclusions against Bank of Scotland. Whilst a public censure takes us so far, what the public clamour will be for however is more accountability. This accountability could have two separate aspects.

First, readers will recall the clamour for a public report following the failure of RBS. As a result of this, the FSA finally agreed to produce a public report on the reasons for RBS's failure (see Enforcement Watch 6: "FSA report on RBS failure opens up enforcement debate"). Perhaps to head off any criticism of it for not producing a report, in the case of HBOS, the FSA has publicly committed to producing a public interest report into the causes of its failure. However, it will not do so until following the conclusion of other enforcement proceedings in order not to prejudice them.

Second, and related, readers will also recall the debate following RBS on the extent to which individuals at RBS could or should be held liable in respect of the failures, and the attendant discussions about possible law change. (see also Enforcement Watch 6: "FSA report on RBS failure opens up enforcement debate"). However, unlike with RBS (and with the fudged exception of Johnny Cameron (see Enforcement Watch 1 "The FSA do a deal with Johnny Cameron"), it appears that other enforcement proceedings in connection with the failure of HBOS are going through the system. We assume that these relate to HBOS individuals. The FSA will no doubt be keen to flex its muscles for a whole variety of reasons, but we shall have to see what comes out in future. One interesting aspect will be the extent to which the FSA believes it can hold individuals to account for certain managerial failings.

In the meantime, details of the Final Notice make very interesting reading.

Coutts and Habib substantial fines for anti-money laundering failings
March/May 2012:

Coutts: The FSA has fined Coutts £8.75m for failing to take reasonable care to establish and maintain effective anti-money laundering systems and controls in relation to customers who posed a higher than normal money laundering risk. Disregarding the 30% discount for early settlement, the fine would have been £12.5m.

In deciding to impose this very large fine, the FSA took account of the fact that Coutts has a leading position in the private banking market and is a gateway to the UK financial system for high net worth international customers. The FSA took the view that it was therefore particularly important that Coutts had robust systems and controls in place to prevent and detect money laundering.

The Principle 3 (management and control) and SYSC failings at Coutts were not identified by the firm itself. The FSA’s investigation identified that Coutts did not apply robust controls when starting relationships with high risk customers, and that it failed consistently to apply appropriate monitoring of those high risk relationships.

The FSA found deficiencies in nearly three-quarters of the high risk customer files it reviewed. The failings were serious, systemic and were allowed to persist for almost three years. They resulted in an unacceptable risk of Coutts handling the proceeds of crime.

The Final Notice for Coutts

Habib Bank AG Zurich: Habib Bank AG Zurich (Habib) has been fined £525,000 together with its former Money Laundering Reporting Officer, Syed Itrat Hussain (who has been fined £17,500), for failure to take reasonable care to establish and maintain adequate anti-money laundering systems and controls. The fines were reduced by 30% for early settlement.

Approximately 45% of Habib's customers were based outside the UK. About half of its deposits came from jurisdictions which seemingly had less stringent anti-money laundering requirements than the UK or were perceived to have higher levels of corruption. Habib nonetheless maintained a high risk country list that excluded certain high risk countries simply on the misconceived basis that the bank happened to have an office in those excluded countries. Further, amongst other failings, Habib failed to conduct adequate enhanced due diligence in relation to higher risk customers.

The Principle 3 and SYSC failings at Habib continued for almost three years and exposed the bank to an unacceptable risk of handling the proceeds of crime.

The Final Notice for Habib Bank AG Zurich

The Final Notice for Syed Itrat Hussain


The Coutts case is yet another matter in which a step up in thematic work has led to enforcement activity. The FSA visited Coutts during October 2010 as part of its thematic review into banks' management of high money laundering risk situations. The Coutts case is likely to have been one of the enforcement cases alluded to by the FSA in 2011 (see Enforcement Watch 5: "AML Enforcement Cases on the Agenda"). With earlier intervention and thematic work a key part of the new regulatory landscape, other cases will follow from thematic reviews.

The size of the fines, in particular the Coutts' fine, highlights just how seriously the FSA views money laundering failures. In both cases, given that most of the misconduct occurred before the introduction of its new penalty regime, the FSA applied the penalty regime that was in place before that date (see Enforcement Watch 1: "Harsher Penalty Setting Introduced"). There is accordingly little transparency on precisely how the £8.75m and £525,000 figures were arrived at.

There appear to be other money laundering cases going through the system and we will no doubt learn of them in due course. Firms should also ensure they are familiar with the FSA's relatively new guide to preventing financial crime introduced in 2011, which includes guidance on dealings with high risk and PEP customers.

FSA imposes largest ever fine in a client conflict of interest case
2 May 2012:

Martin Currie Investment Management Limited and Martin Currie Inc (together Martin Currie) have been fined £3.5m (reduced from £5m for settling early) for failing, amongst other things, to manage a conflict of interest between two of its clients. The FSA describes this as the largest fine ever imposed by the FSA in a conflict of interest case.

In essence, the conflict of interest issue arose as follows. Martin Currie caused one of its clients (Fund B) to enter into an ill-advised investment which rescued another one of its clients (Fund A) from serious liquidity concerns. Both funds were managed by the same fund managers in Martin Currie's Shanghai office.

In April 2009, Martin Currie caused Fund B to invest around £15m in an unlisted bond issued by an offshore Chinese firm. Martin Currie failed to ensure that the bond’s valuation or the rationale behind the investment were properly scrutinised at the time of the transaction. The investment proved to be a poor one for Fund B, halving in value over the next two years.

However, whilst the investment was detrimental to Fund B, it had significant advantages for Fund A. In 2009, Fund A was facing serious liquidity concerns due in part to its exposure to illiquid investments in an offshore Chinese entity. Fund A’s liquidity problems were solved by Fund B’s investment because nearly half of the proceeds of the bond issue were passed up to the issuer's parent, in whom Fund A had invested, and were used to repay Fund A. This in turn helped Martin Currie to avoid any reputational damage which may have arisen if Fund A’s liquidity problems had continued and Fund A had been unable to meet pending redemptions by investors.

In sum, Fund B's investment gave rise to a clear conflict of interest between Fund A and Fund B. Martin Currie should have identified the conflict much earlier and ensured Fund B's Board understood that the transaction proceeds would be used to repay an investment made by one of Martin Currie’s other clients. However, the conflict of interest was not disclosed to Fund B’s Board; and Martin Currie did not obtain the Board’s informed consent to continue with the investment in the bond.

The Final Notice for Martin Currie Investment Management Ltd and Martin Currie Inc


The FSA found a variety of failings by Martin Currie, which included systems and controls failings related to conflicts of interest. It is the conflict of interest failings that the FSA has been particularly concerned to send a message about. It is the focus of its press release. It is also a real feature of the Final Notice where, in terms of sanction, the FSA emphasises the deterrence it is seeking to achieve: "…the FSA considers there to be a need to send a strong message to the industry that investment management firms must put in place effective controls and supervision over their fund managers, and ensure that any conflicts of interest are managed fairly and, where appropriate, are properly disclosed to clients."

The fine is significant. As in so many current cases, the failings are pre 6 March 2010 and so the new penalty regime is not applicable (see Enforcement Watch 1: "Harsher Penalty Setting Introduced"). Accordingly, there is little transparency on how the penalty was set. It is noteworthy that Martin Currie suffered significant other costs, including indemnifying Fund B, investigating the issues and reviewing other unlisted investments, and in suffering an SEC fine of just over $8m.

Finally, as can be seen from the above, this is yet another example of cross border co-operation between regulators. The FSA is keen to send this as a message, pointing out the co-operation it received in the matter from the SEC. Increasing numbers of investigations involve cross border co-operation between regulators, many of which in our experience are transatlantic. (On the topic of cross border assistance, see also Enforcement Watch 1 "A boost in assisting overseas regulators" and current Enforcement Watch edition, Spotlight on the US ""). The Decision Notice for Anthony Verrier

Well known Court case leads to FSA prohibition decision
March 2012:

The FSA has published a Decision Notice based on strongly worded findings in the well-known Court case involving BGC and Tullett Prebon.

At the High Court trial, Mr Justice Jack found that Mr Verrier had participated in an unlawful means conspiracy, including the inducement of brokers to breach their contracts of employment with Mr Verrier's former employer by them leaving early without lawful justification. Moreover, amongst other strongly worded findings, the High Court judgment states, that during his evidence given at court, "Mr Verrier stuck to the truth where he was able to, but departed from it with equanimity and adroitness where the truth was inconvenient". The appeal against the High Court's findings was dismissed by the Court of Appeal.

Based on the Court's findings, the Decision Notice indicates that the FSA has decided to prohibit Anthony Verrier (a senior BGC employee) from performing any function in relation to any regulated activity in the financial services industry. Mr Verrier has referred the matter to the Upper Tribunal, which will reach its own conclusion that it will substitute for the Decision Notice. It remains to be seen what the Upper Tribunal decides.



The FSA's decision arises from its finding that Mr Verrier is not a fit a proper person because he does not satisfy the "honesty, integrity and reputation" test. It appears from the Decision Notice that Mr Verrier raised a variety of arguments in front of the FSA's Regulatory Decisions Committee for why it should not prohibit him.

Included amongst his arguments was that, by relying on the High Court proceedings without conducting its own investigation, the FSA had not considered the findings in context or heard Mr Verrier's explanation for the matters. Given that Mr Verrier had himself given evidence in Court over a period of 5 days, this argument got fairly short shrift from the FSA. Equally, the FSA dismissed his argument that it was over-reaching itself by relying on conduct in relation to matters that were not themselves regulated activities.

It is perhaps not surprising that the FSA chose to rely on trenchant findings in High Court proceedings in reaching a decision to prohibit. What is perhaps more interesting about the case is that it chose to do so at all. Mr Verrier was in an overseas role and did not require approval. Certainly, if that was the position at the outset, one option for the FSA would have been for it to do nothing, wait to see whether he applied for registration in the future and then seek to block that registration on the very same basis as above. The fact it did not do so may say something about the regulator it wants to be.

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