22 February 2016
In a Final Notice dated 22 February, the FCA fined WH Ireland £1.2 million and imposed a restriction pursuant to s.206A FSMA.
The FCA found that, in breach of Principle 3, WHI had insufficient systems and controls to protect against the risk of market abuse. The systems and controls failings followed a familiar pattern, involving a combination of such matters as a failure to minimise the risk of information leak between departments, personal account dealing control failures, lack of compliance oversight, insufficiently clear reporting and accountability lines and lack of sufficient records of training received.
The FCA further found breaches of SYSC rules in the FCA Handbook relating to the management of conflicts. Specifically, the FCA found that the firm had failed to maintain a proper record of activity in which a conflict may arise. It also found that it had failed to maintain a written conflicts policy which was appropriate to the size and nature of the firm and which specifically identified the activities carried out by the firm which gave rise to conflicts and the procedures to be followed in respect of such conflicts.
In addition to a fine of £1.2m, pursuant to section 206A of FSMA, the FCA further imposed a restriction for a period of 72 days on the firm’s Corporate Broking Division from taking on new clients. Both the fine and the restriction had been reduced by 20% on the basis of WHI settling at stage 2.
A copy of the Final Notice can be seen here.
Use of restriction
This is only the third time since the provision was introduced in August 2010 that the FCA has used its power under s.206A to impose a restriction on a firm’s permission to carry out a regulated activity. It is sometimes somewhat difficult to predict whether the FCA will impose a restriction in addition to a financial penalty and, if so, what its nature and length may be. In discussing the restriction, the FCA highlighted two failures in particular that:
- the misconduct was widespread, suggesting a poor compliance culture.
- despite WHI agreeing to implement within 3 to 12 months all of the recommendations of a Skilled Person's Report it had commissioned, a further implementation report by the Skilled Person a year later found that a number of recommendations had not been implemented.
The failing for lack of proper and timely implementation is indicative of quite how closely the FCA expects firms to follow its recommended remedial actions. In effect, if the firm fails to take the chance to put things right, or even fails to do so within prescribed deadlines, it is exposed to the risk of the FCA by way of restriction simply not allowing the firm to carry on that part of its business.
The sense in this case was that the reason for the restriction was related to a large extent to the fact that these were market abuse risks. Further, that the range of work undertaken by WHI made it particularly vulnerable to the risk of market abuse. Specifically, WHI had a “private side” to its business – which included corporate broking and acting as a nominated Advisor (NOMAD) to companies seeking listing on AIM – and also a “public side” – which included private client stockbroking and investment research. One aspect that the FCA found was that the firm did not have sufficient systems and controls to prevent the bleeding of information from the private side into the public side. Firms with a similar structure would be well advised to ensure its systems and controls adequately address this possibility.
The case is a good example of the five-step process for calculating financial penalty being ill-suited to cases in which there is no disgorgement and no easily discernible financial benefit.
At Step 1 (disgorgement), the FCA found that WHI had not received any financial benefit directly from the breach. At Step 2 (seriousness), the FCA based its figure on the amount of revenue generated by WHI’s Private Wealth Management and Corporate Broking Divisions as being “indicative of the harm or potential harm caused by its breach”. Having done so, it then determined the seriousness to be at level 4, producing a figure of £1.25 million. This was then uplifted by 20% at Step 3 (mitigating/aggravating features) on grounds of failure to follow the earlier Skilled Person report and FCA communications and was unchanged at Step 4 (deterrence). It was then reduced by 20% at Step 5 (settlement).
It is clear that the basic penalty was effectively set at Step 2, yet it is difficult to see how the FCA determined that this was a case in which the revenue generated by certain divisions of the firm was “indicative of the harm or potential harm caused”.
Focus on the Notice in Market Watch
In its April 2016 edition of Market Watch, the FCA devoted a section to key messages from the WH Ireland Final Notice. Key messages included warning that firms that undertake a broad range of business need to be "particularly vigilant" to the risks of market abuse. It added that risks are created by having access to inside information through relationships with issuer clients, internal research analysts, or large client orders, or by being wall crossed by external advisers.
The publication warned that the weaknesses identified in the Final Notice "should act as a catalyst for firms to consider whether their own controls are fit for purpose, as well as offering examples that regulated firms can use to assess their own systems and controls." Also relevantly for enforcement watchers, it went on to talk about its increased focus on the issue, concluding by stating "We place as strong an emphasis on identifying weaknesses in regulated firms' controls as we do in pursuing market abuse." We shall have to see whether these types of come out of enforcement in the future.