Enforcement activity shows no sign of abating.
As readers of Enforcement Watch will know, last year was a record year for FSA fines. 2011 has started in similar vein. Moreover, as suggested in On the Horizon below, there is unlikely to be a great slowdown of enforcement activity. For example, the indications are that the FSA is increasingly taking joined up action with regulators both at home and abroad. Further, the FSA is highlighting some of the areas where it expects to be taking enforcement action in the future.
2011 is not shaping up to be a quiet year for enforcement activity. However, for firms that heed well the FSA's messages, it might well be.
On the Horizon
Increasing assistance of overseas regulators
In Enforcement Watch Issue 1, we reported on the judicial review proceedings brought by Amro and Creon of the FSA's decision to assist the SEC in obtaining a wide range of documents in support of an SEC action against others. We commented that the case gave the SEC the green light to co-operate with foreign regulators based on relatively low levels of engagement.
In September 2010, the FSA further boosted its cross jurisdictional co-operation by signing an MoU with the US Financial Industry Regulatory Authority (FINRA) . The signing of the MoU provides a formal basis for co-operation between the FSA and FINRA. The MoU sets out a framework for information sharing between them and has a particular focus on enforcement matters. It also envisages the establishment of joint investigations between the regulators in certain circumstances.
For a whole variety of reasons, we believe that cross jurisdictional co-operation between regulators is set to increase, especially between the UK and the US. We have recently seen how the FSA has co-operated with the SEC for example in the Blue Index related case. The signing of the MoU with FINRA is but one further example of this trend.
Looming changes in enforcement sanctions
In October 2010, the FSA published Consultation Paper 10/23 to seek views on changes to the Decision Procedures Manual (DEPP) and to the Enforcement Guide (EG). The consultation period closed on 14 December 2010.
Many aspects on which the FSA consulted are fairly small matters of detail. However, two issues stand out as potentially having significant consequences for those facing disciplinary action.
First, there has long been an issue about certain third parties meeting fines. Currently for example, the FSA prohibits firms from carrying insurance to meet the FSA fines of any person. It now proposes to introduce a rule that prohibits firms (save for sole traders) from paying a financial penalty imposed on a present or former employee, partner or director of the firm or an affiliated company. The FSA says that this is all part of its policy of credible deterrence. This is no doubt intended to signal to individuals their real accountability for their actions. It will be interesting to see what support this proposal gets from the industry.
Second, as matters stand, the FSA operates a discount scheme involving financial penalties. Discounts of up to 30% of a financial penalty are available depending on the time at which a person settles. Under the Financial Services Act 2010, the FSA was given a new power, permitting it to impose suspensions (up to 12 months on a firm, and up to two years on an approved person). The FSA is now proposing to apply a similar discount scheme to the length of suspension periods.
If the proposal goes through, it will be interesting to see how widely it is taken up in practice. It is not difficult to see why financial penalty cases are settled – a potentially lengthy and costly battle is avoided and there is certainty about the outcome, at a lower level than the FSA proposes. However, the same considerations may not always apply to suspension cases. For example, if a person is taken out of the market for a period by a suspension, it may matter little to him whether the suspension period is 7 months or 10 months as the mere fact of suspension may in practice be the end of his career. In those circumstances, there may be little to be gained from settling early.
The FSA continues to pursue criminal proceedings
The FSA has continued to pursue potential criminal action in a public way during this period.
In November 2010, the FSA executed search warrants as part of an FSA investigation concerning insider dealing. This is a further example of cross border assistance between authorities; as well as executing two of the warrants in London, it executed one in Germany with the assistance of the police and prosecution authority in Hessen.
Also in November, 5 individuals were charged with insider dealing contrary to s.52 of the Criminal Justices Act 1993. Those charged included James Sanders co-owner and director of Blue Index Limited and his wife Miranda Sanders. The five were originally charged on 27 May 2009. The offences were alleged to have taken place between October 2006 and February 2008. All five were granted bail.
Directly related to the Blue Index announcement, a former Deloitte tax partner and his wife were charged by the SEC with insider trading in December 2010. Whilst not an FSA prosecution, the FSA was involved in a parallel investigation with the SEC. This provides a further example of the increasing co-operation between the FSA and foreign regulators referred to elsewhere in this edition of Enforcement Watch, an activity we had previously suggested was likely to increase.
In January 2011, a senior investment banker (Christian Littlewood) and his wife pleaded guilty to insider dealing, as a result of which they were alleged to have made £590,000 profit. The offences related to shares in a number of LSE and AIM listed shares between 2000 and 2008. The full sentencing hearing is due to take place later.
As at 10 January 2011, the FSA had prosecutions of 12 individuals pending for insider dealing.
Taping of Mobile Phones is to be introduced
In Enforcement Watch Issue 1, we reported on the FSA consultation on taping mobile phones. The proposal was to extend taping rules so:
- firms record and keep copies of all relevant conversations made on mobile phones provided to individuals by firms; and
- also to introduce a new rule that requires firms to take reasonable steps to ensure conversations that involve taking client orders or dealing in financial instruments do not take place on private phones.
The consultation period has closed and the FSA has published its Policy Statement, indicating that it will extend the rules as proposed. The new rules will apply as from 14 November 2011.
In its Policy Statement, the FSA set out a summary of the main points emerging from the 15 responses that it had received. Much was not particularly interesting for our purposes. One point that is however worth mentioning was that much of the industry feedback centred on what the FSA expected in terms of firms taking "reasonable steps" to prevent relevant conversations from taking place on private lines. The FSA largely refused to provide this, although it did indicate certain matters that might in principle comply and which firms might find it useful to look at eg policies and procedures to prohibit the use of mobiles provided by the firm to make/receive relevant conversations.
As we previously set out, the use of mobile phones in and around firms has long been a taboo subject. It is not uncommon for regulators to look at mobile call patterns to try to draw inferences in enforcement cases. As from November 2011, there may well be more certainty as, assuming firms and those within them are complying, recordings of the calls should be able to be recovered.
Is there RBS enforcement fallout to come?
In early December 2010, the FSA announced that it had closed its supervisory investigation of RBS. It determined that the bad decisions made by RBS, most significantly the decision to acquire ABN AMRO and the decision to expand aggressively its investment banking business, were not the result of any individual's fraud or lack of integrity or honesty, nor were they the result of a corporate governance failure at board level. The FSA concluded that no enforcement action would be taken against either the firm or any individual.
This provoked an outcry on two fronts. First, there was a complaint that the FSA was not publishing its report. The FSA of course is not legally able to do so without various consents. The FSA publicly stressed that they were unhappy with the position. Indeed, they suggested legislative changes to enable the new PRA to publish a full analysis of the causes of any bank failure or rescue.
Second, and more relevantly for the purposes of this publication, there was criticism that no charges would be brought. On this score, the FSA stuck to its guns, saying that an enforcement case needed to rest on whether any rules had been broken, not a popular desire to find someone to blame. Whilst it seems fairly clear then that there will be no enforcement action, the FSA can of course flex its muscles in other related ways. The FSA makes specific mention of this in connection with the RBS matter, pointing out that the competence of individuals at RBS can and will be taken into account in any application by individuals to work at FSA regulated firms. Whilst details may not be made public, we suspect that this may not be the end of the matter for those concerned.
Client Asset enforcement action in the pipeline
In a speech in the first week of December 2010, the FSA set out details of its activities in relation to client money and assets compliance.
It said that firms should think carefully about their CASS (client asset sourcebook) compliance in the following four areas:
- low levels of awareness and knowledge about CASS;
- insufficient resources and management oversight through, for example, management information reports;
- inadequate trust documentation; and
- incomplete records, accounts and reconciliations (for example a lack of documented due diligence before placing client assets with third parties).
Somewhat ominously, it was said by the FSA that they were generally finding compliance with CASS fell short of their expectations.
This theme was echoed in the figures given by the Head of Prudential Banking, Investment Business Policy and the Client Asset Unit on the same day. He explained that in 2010, the Unit had taken the following enforcement steps in relation to CASS:
- enforcement action against 11 firms and eight individuals, and imposed over £34m in fines;
- referral of five firms to Enforcement for investigation;
- active consideration in progress of further referrals;
- issued two private warnings to firms; and
- required 28 firms to commission s166 Skilled Person Reports.
The FSA sends a tough message on Suitability
In January 2011, the FSA reported on its findings in relation to unsuitable investment selections. It stated that the high number of unsuitable investment selections in the pensions and investment markets was still a significant concern.
The report considered how firms assessed and continued to check the risk appetite of retail customers. The context for this is a Firm's obligations under COBS 9.2.1R to take reasonable steps to ensure that a personal recommendation or decision to trade is suitable for its customer. The context is also its obligation under COBS 9.2.2R to take account of customers' preferences regarding risk taking, their risk profile and to ensure that they are financially able to bear any related investment risk. Of the investment files reviewed and considered unsuitable by the FSA between March 2008 and September 2010, over half were unsuitable on the basis of risk.
The FSA stated that the level of failure was unacceptable. It expected all types of firms to consider whether they needed to improve the way they assessed and checked the risk a customer was willing and able to take, and so ensure they made suitable investment selections. It warned that it would continue to take tough action to address failings within individual firms.
Whilst in some senses the report makes grim reading and contains threats of future action, the report is helpful in providing a reasonable amount of detail of what the FSA's expectations in this area are. Firms in this area would be well advised to heed carefully what the FSA spells out in the report. In that respect, readers will be interested in the fine levied on Barclays Bank in January 2011 for failings relating to unsuitable advice covered elsewhere in this publication.
Broker banned and fined for payment of cash kickbacks
27 september 2010:
The FSA banned Fabio Massimo De Biase from working in the financial services industry and fined him £252,239 due to a lack of integrity. In essence, he had agreed enhanced commission rates with a hedge fund trader, which he then secretly split with the trader.
Details of the case
Fabio Massimo de Biase was employed as a cash equities broker (CF30) with TFS Derivatives Limited ("TFS") until May 2010. Anjam Ahmad was a hedge fund trader at AKO Capital, a client of TFS.
The ordinary rate of commission that AKO paid to TFS was 0.05%. On 20 occasions in 2008 and 2009, De Biase massively inflated the commission payable by AKO, hid the fact that he had done so and split it with Ahmad in proportions agreed between them. In this way: AKO unknowingly paid additional commissions of $739,000; De Biase personally retained the sum of £198,000; he also paid the sum of £131,000 to Ahmad, directly linked to the commissions.
The FSA noted that De Biase had breached Principle 1 of the Statements of Principle for approved persons (an approved person must act with integrity in carrying out his controlled function). The FSA said his misconduct was particularly serious as "he was an approved person carrying out a controlled function, and an experienced broker who disadvantaged his clients by his actions".
The FSA prohibited him from working in the financial services industry. It also fined him £252,239, representing a disgorgement of £198,000 and an additional penalty element of £54,239.
Close Investments Limited manages a number of unregulated collective investment schemes. From January 2008, a new process was put in place for the payment of distributions to investors. A number of Distribution Accounts were set up. 21 of these should have been set up as client accounts, but were not. CIL failed to identify the error until January 2010, when one of the Distribution Accounts was overdrawn.
As a result of CIL’s failure, 2384 investors had been exposed to risk. The largest amount at risk at any one point was £2.2m. Between January 2008 and 2010, the aggregate amount at risk was £8.2m. The FSA recognised that CIL had reported the issue to the FSA, that it had reviewed and revised its client money procedures and that it was co-operative with the FSA throughout.
The FSA found CIL to be in breach of Principles 10 (firms must arrange adequate protection for client's assets) and 3 (adequate risk management systems), and of the CASS rules. It imposed a financial penalty of £98,000 (including a 30% stage 1 discount).
In some senses, the case is not particularly noteworthy. For example, it is hardly surprising that the FSA would come down hard on deliberately dishonest conduct.
What is, however, worthy of note is the fact that the FSA continues to press in appropriate cases for both a prohibition order and a severe penalty. What is also interesting is the FSA's statement that, had it not been for De Biase's financial hardship (and his agreement to settle early), the additional penalty element would have been £500,000. In other words, in appropriate cases, the FSA will not press to cause the individual serious financial hardship. In this case, the FSA was at pains to point out that there was "verified evidence of financial hardship." (This can be interestingly contrasted with NAQUI below).
Punishment for stockbroker in FEI share ramping
6 december 2010:
Graham Betton, a stockbroker with over 30 years experience in the financial services industry, was banned from working in the industry for his role in the FEI share ramping scheme. The Tribunal is considering the appropriate level of penalty, which will be announced at a future date.
Details of the case
Simon Eagle and Graham Betton were the only two directors of stockbroking firm SP Bell. Eagle, together with Betton, executed a fraudulent plan that drove up the price of shares in an AIM listed company Fundamental-E Investments plc ("FEI"). Punishments have previously been meted out to others by the FSA for their roles in the FEI share ramping scheme. This wider context was described in Enforcement Watch Issue 1.
Betton had over thirty years experience as a stockbroker and, unlike Eagle, was authorised to execute the trades. Betton admitted that he did execute some of the "rollover trades" (the effect of which was to give the market the impression that there was a constant demand for FEI shares). However, he argued that there was no evidence to suggest that he was aware that there was a share ramping scheme in operation or that Eagle was using the market in an improper way. Betton also contended that a prohibition order was a disproportionate punishment given that other SP Bell brokers escaped sanction and Winterfloods employees only received financial penalties.
Betton's case went to the Tribunal. The Tribunal concluded as follows. Betton must have known that Eagle was seeking to increase the price in FEI shares through a share ramping scheme. Whilst Betton was not a "co-conspirator" with Eagle, he was closely involved in the implementation of the scheme. Betton was the managing director of SP Bell and therefore had a position of special responsibility. Yet he was actively involved in the scheme and encouraged other brokers to carry out the distorting trades. Betton ignored all the warning signs that his thirty years of experience should have given him that a share ramping scheme was being deployed by Eagle. In summary, it would be unthinkable if Betton were to continue to be allowed to operate in the financial sector and a prohibition order was therefore appropriate. The Tribunal delayed consideration of its financial penalty to a later stage, pending Betton's submission of material regarding his financial position.
The events complained of go back to 2003 and 2004. Apart from ruling on the appropriate level of penalty, this ruling marks the end of the FSA's long running saga in relation to the FEI share ramping scheme, a fact noteworthy of itself.
The legal analysis of the case is not particularly worthy of note. It is fairly standard market abuse fare. What is perhaps more worth noting is that, recognising that he was not the architect of the scheme, and in face of his denials, the Tribunal was perfectly prepared to conclude that he knew about the share ramping scheme and that he should be punished accordingly. It will be interesting to see what figure it puts on the penalty.
Mismarking leads to prohibition order and £750,000 fine
13 December 2010:
The former head of the Credit Products Group at Toronto Dominion was prohibited and fined £750,000 for deliberate and sustained mismarking of his book.
Details of the Case
Between July 2006 and June 2008 Nabeel Naqui was head of the Credit Products Group at Toronto Dominion Bank. Whilst Naqui was the head of the desk, he was also involved in trading credit default index and tranche products ("the Products"). All the trades in the Products which were subject to investigation by the FSA were proprietary trades. At every month end, Toronto Dominion ran an Independent Price Verification process which involved re-valuing its positions. This was to ensure that no pricing errors had been made. On 23 June 2008, Naqui was made redundant and in the process of handing his book over to another trader, pricing issues were uncovered. As a result of these issues, Toronto Dominion revalued its book downwards by CAD $96m.
An investigation revealed that Naqui had been extensively mis-marking his positions at prices which did not reflect the market price for those positions. In order to conduct its Independent Price Verification, Toronto Dominion had been asking Naqui to source the data from independent dealers. Naqui had been altering this data before forwarding it on to the relevant person in the bank who would be conducting the Independent Price Verification. As a result, his mis-marking had not been detected.
When interviewed by the FSA Naqui denied mis-marking and said that his actions were transparent. He never accepted that he had acted improperly. Naqui claimed he altered the figures he supplied for the Independent Price Verification in order to re-calibrate some systemic pricing issues within the bank. He justified the difference between the value of his book and the proper market value by reference to these same system issues and said that he had complained internally about these issues. He further argued that the FSA had failed to find any motive to explain why he might want to mis-mark.
The FSA found that by amending the data to be used by the bank in its Independent Valuation Process, Naqui was knowingly concerned in the bank's breach of Principle 2 of the FSA's Principles for Businesses (A firm must conduct its business with due skill, care and diligence). The FSA rejected that it was obliged to show motive in order to make out its case against Naqui, although it did in fact find motive in this case. The FSA rejected Naqui's excuse that systems explained the apparent mis-marking and his amendment of the data used to conduct the Independent Price Valuation. Naqui only amended some of the data he supplied and the issues he identified would not explain away all of the mis-marking. The FSA said that the penalty was justified by, amongst other factors, the seriousness of the mismarking (CAD$96m), the period of time over which it occurred and Naqui's seniority at the bank. Finally, the FSA rejected Naqui's statement of means and therefore did not believe his claim that he would suffer severe financial hardship as a result of the penalty.
Naqui was prohibited and fined £750,000.
This is not the first mismarking case the FSA has taken and will not be the last it (or its successor) takes. Nonetheless, there are a number of matters worthy of comment in this case.
First, the FSA publicly sanctioned one of Naqui's erstwhile colleagues for mismarking at the very time that Naqui was mismarking. The FSA took this into account in assessing the punishment to be handed out to Naqui.
Second, Naqui argued amongst other things that others who had not been investigated may also be culpable of misconduct. The FSA found that this had no bearing on whether Naqui had engaged in misconduct and what the sanction should be.
Third, Naqui asked the FSA to reduce the financial penalty to take account of his financial circumstances. Unlike in the De Biase case, the FSA did not reduce the financial penalty. This is because, unlike in that case, it did not accept Naqui's statement of his means. Whilst details of what he put to them are not published, the case at least shows that the FSA will not necessarily accept details of means at face value.
Scottish Equitable significant fine and consumer redress programme
15 December 2010:
Scottish Equitable was fined £2.8m (discounted from £4m) and agreed to a consumer redress programme estimated to cost £60m. The enforcement action is a result of poor administrative procedures over many years. Scottish Equitable was found to be in breach of Principle 3.
Details of the case
In 2009, Scottish Equitable ("SE") informed the FSA that it had identified around 300 issues relating to problems in administering its policies. A number of these problems had been identified some years previously, although not diligently acted on. They affected many thousands of policies and of customers, leading to customer detriment. Of the 300 issues, SE identified 35 as high priority. The FSA investigated 5 issues most representative of the problems within the firm and which had resulted in consumer detriment. In essence, it found the following:
- A lack of proper organisation and administrative procedures resulted in 238,000 policyholder documents not being issued. It was not clear to the FSA whether any customer detriment had resulted.
- SE failed to trace in excess of 200,000 policyholders who had "gone away". It was not clear to the FSA whether any customer detriment had resulted.
- SE failed to calculate Guaranteed Minimum Pension payments correctly. The consumer detriment was calculated at between £6-7m involving 774 customers.
- SE failed to identify systemic errors in the calculation of Fund Charge Rebates and Fund Value Rebates (these are "bonuses" applied to a variety of SE products) in respect of 25,000 policies. This resulted in consumer detriment of £5.7m and £2.8m respectively.
- SE failed to match Department of Work and Pension contributions to personal pensions for around 2,500 customers resulting in a detriment of £6.7m
SE estimated that the consumer detriment arising out of the above 5 issues is approximately £22m. The cumulative consumer detriment from all 300 issues identified is estimated to be in the region of £60m.
Although SE had not previously been effective in its dealing with the issues it had identified, when the FSA required it to shorten its timetable, it was very responsive. Specifically, it increased the resourcing of the project from August 2009 when it had 60 staff involved with a budget of £9.5m, to June 2010 when it employed 300 full time members of staff, with a budget of £22m for 2010.
SE was found to be in breach of Principle 3 (a firm must take care to organise and conduct its affairs responsibly and effectively, with adequate risk management systems):
- it failed adequately to identify and resolve the 300 issues it ultimately identified. The firm did not act responsibly by allowing the situation to develop over 12 years;
- it failed to have an adequate and effective corporate structure in place resulting in inadequate risk management systems and an inability to identify, resolve and monitor risks as they arose;
- it failed to have sufficiently robust governance arrangements and a clear enough organisational structure in place resulting in confusion and a lack of clarity regarding accountability. This directly contributed to many of the issues;
- it failed to identify or manage or report risks and had inadequate administrative procedures and safeguard arrangements in place, meaning that issues went undetected for a long time.
SE committed to a customer redress programme estimated by it to cost £60m. In addition, the FSA fined SE £2.8m for the above failings (discounted from £4m for early settlement), considering its actions to be serious, although not deliberate or reckless.
Clearly, the FSA takes such failings very seriously. In some respects, the £2.8m is a fairly modest fine. The FSA says it gave SE credit for referring the matter to the FSA, for identifying and resolving the historical issues, and for co-operating by initiating the legacy management programme and for agreeing to a substantial customer redress programme. What we will never know is what would have been the level of fine if one or more of the above factors had not been present.
Very little detail is given in the final notice on the failures of corporate structure and governance arrangements. What might have been useful to firms in considering the implications of the final notice was quite how that structure and those arrangements had failed so that they could see what lessons could be learned.
RBS and NatWest fined £2.8m for poor complaints handling
11 January 2011:
The FSA fined RBS and NatWest £2.8m for multiple failings in the way they handled customers' complaints, responding inadequately to more than half the complaints reviewed by the FSA.
Details of the case
RBS and NatWest are both part of the RBS Group and their UK retail bank branch networks operate under the umbrella of RBS UK Retail. In the last quarter of 2009, the FSA reviewed complaints at RBS UK Retail as part of its wider review of complaint handling in major banks.
Of the complaint files reviewed by the FSA, 53% showed deficient complaint handling; 62% showed a failure to comply with FSA requirements on timeliness and disclosure of Ombudsman referral rights; and 31% failed to demonstrate fair outcomes for consumers.
The FSA investigation concluded that in relation to its routine and non complex complaints in the period December 2008 to March 2010, there was an unacceptably high risk that customers may not have been treated fairly due to a number of failings within the banks' approach to routine complaint handling. It identified the following failings:
- the monitoring at branch level and the resulting management information was ineffective in assessing whether customers were being treated fairly. It focused on whether complaint handlers adhered to process; it did not assess the quality of customer outcomes.
- a failure to ensure that complaint handlers properly reviewed complaints taking account of all relevant factors:
- complaint handlers failed to obtain all relevant and reasonably available information;
- guidance on complaint handling provided was limited. It focussed on timeframes rather than for example providing detailed guidance on how to approach an investigation and gather information properly;
- there was no formal requirement to consider and feed back the results from FOS decisions to complaint handlers;
- the complaint handling process applied led to delays in sending out responses to customers, multiple attempts to resolve the complaints with customers and led to delays in customers receiving details of their FOS referral rights.
- a failure to ensure that correspondence sent to complainants addressed fully all concerns raised by the customer and set out the outcome of the investigation in a way that was fair, clear and not misleading.
This led to a finding that RBS and NatWest were in breach of:
- Principle 3 ("a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems");
- Principle 6 ("a firm must pay due regard to the interests of customers and treat them fairly");
- DISP 1.4.1R (Complaints resolution rules).
RBS UK Retail agreed to make significant changes to its complaints handling arrangements, including working with a skilled person to undertake an extensive review of all parts of its complaint handling arrangements. RBS and NatWest were fined £2.8m, having qualified for a 30% reduction in penalty.
The FSA regards a firm's complaints handling as a key indicator of how it treats its customers. In this case, it found that RBS UK Retail posed a high risk to the FSA's statutory objectives in terms of complaints handling, and the fine it imposed was a significant fine. Interestingly, despite the failure of organisation, the FSA did not in this case impose any punishment on any individual concerned for failing to put in place the proper systems.
Former Analyst fined £50,000 for disclosing misleading information
12 January 2011:
A former senior equity research analyst was fined £50,000 for sending a careless message to a number of recipients that contained misleading and inaccurate information. The message gave the false impression that it contained inside information.
Details of the case
Gower was at the relevant time a research analyst at MF Global. In May 2008, he attended a meeting with the CEO of Punch Taverns. In the course of that meeting, they discussed an application by ETI to HMRC for approval to convert to REIT status (ie a Real Estate Investment Trust). The discussion concerned solely information which was in the public domain.
Following the meeting, Gower sent the following Bloomberg message to 14 clients, a Bloomberg reporter and an MF Global equity salesmen:
Just had meeting with CEO of PUNCH TAVERNS. They have heard from HM Revenue & Customs that it is highly likely Enterprise Inns has been granted REIT status and ETI are due to announce this on 13th May at interims. Expect ETI to bounce (was up 10% on previous HMRC news) BUT then fall back as mkt realises it will take time to implement.... MORE on my meeting to follow.... Chris
Following Gower's Bloomberg, this information was circulated widely in the market. At 16:04 ETI announced that it had received confirmation from HMRC that it was eligible to convert to REIT status subject to certain conditions. Between Mr Gower's disclosures at 13:57 and ETI's announcement at 16:04, ETI's share price rose by 4.45% with approximately 6.4 million shares traded. This compared with a price rise between the opening of the market that day and 13:57 of 4.66% with approximately 1.5 million shares traded.
The FSA did not allege that Gower's Bloomberg message contained any inside information. However, it considered that the Bloomberg gave the impression that it contained inside information (although it accepted that Gower did not intend to give that impression). Further, the FSA alleged that the message was misleading as it did not accurately reflect the discussion earlier that day.
The case was contested by Gower who argued amongst other things that: his conduct fell outside his controlled function; the chat system employed meant that the recipients would understand that this was simply broker banter; that it was in context a substantially accurate dissemination; there was no evidence that it had any material impact on the market.
The FSA accepted that Gower was not lacking in integrity or acting recklessly. However, it did regard him as careless. It concluded that he was in breach of Principle 3 of the Statements of Principle for Approved Persons ("An approved person must observe proper standards of market conduct in carrying out his controlled function".) This was because he disclosed misleading and inaccurate information to clients, a Bloomberg reporter and an MF Global salesmen which he ought to have known conveyed the impression of being inside information and therefore was highly likely to have a significant impact on ETI's share price. It also considered that his actions had a substantial impact on the market.
In terms of punishment, the FSA imposed a fine of £50,000. In doing so, it took into consideration that he had at the time been employed as a senior equity research analyst at a firm of notable size with a large number of clients. The FSA observed that he was in a privileged position in that he could affect or influence the market and therefore it was critical that he ensure that any information he disseminated was accurate and not misleading. This, it said, was particularly true in this case as ETI was, at the time, a FTSE 100 stock. It said that Gower ought to have known that his disclosures gave the impression of containing inside information and were inaccurate.
In some ways, the Gower case is an interesting one. It is a case that is out of the ordinary as far as FSA enforcement activity is concerned (although somewhat reminiscent of the Pignatelli case back in 2006).
The case will no doubt have partly turned on a factual argument in front of the RDC about what was said by Punch to Gower and also a debate about what the actual impact was of the information disseminated. More generally though, one aspect of the case worth noting is that it demonstrates the care with which information must be disseminated, regardless of the medium by which the information is communicated or the format within which it is communicated. In some ways, it is a useful companion piece to the FSA's review in 2008 of rumours and the care that needs to be taken as to how they are circulated.
Barclays Bank fined £7.7m for investment advice failings
14 January 2011:
Barclays Bank plc was fined £7.7 m in respect of its sales between July 2006 and November 2008 of two funds (the Global Balanced Income Fund and the Global Cautious Income Fund). They were sold to over 12,000 customers in amounts totalling a little over £690 million.
Details of the Case
Principle 9 of the FSA's Principles states that "A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment."
The FSA found that Barclays Bank breached Principle 9 in that it failed to take reasonable care to ensure the suitability of its advice in relation to the funds, and that it also breached the specific rules on suitability. It imposed a penalty of £7.7 million, having applied a discount of 30% for early settlement.
The FSA found that Barclays' failings included the following:
- the training material given to Barclays staff was inadequate. Notably, rather than highlight the risks, the training material gave advisers a misleading impression of the risks involved.
- similarly, the sales briefs and product updates Barclays sent to its advisers increased the risk of the Funds being mis-sold because they referred only to the potential benefits of investing in the Funds.
- product brochures and other documentation given to customers contained inadequate information and statements which could have misled customers about the nature and levels of risk involved.
- Barclays failed to put in place adequate procedures for monitoring of sales of the Funds and this resulted in a failure to promptly identify and investigate potentially unsuitable sales.
As a consequence, the FSA concluded that customers were exposed to an unacceptable risk of unsuitable sales and a number of unsuitable sales were made. By 7 December 2010, 1676 customers had complained about their investment in the Funds and compensation of approximately £17 million had been paid.
The FSA considered that the breaches were particularly serious because:
- Barclays identified at an early stage concerns with the Funds but did not take adequate steps to mitigate those concerns.
- a large number of investors were placed at risk and the potential impact was significant.
- the mis-conduct spanned more than 2 years.
In deciding the level of penalty, the FSA also took into account that Barclays is undertaking a comprehensive past business review to ensure that customers do not lose out as a result of the failings identified. It is expected that this will result in between £20 million and £42 million further compensation being paid.
In addition to the redress being paid, this is clearly a significant fine. It represents the highest fine imposed by the FSA for retail failings. It reflects the FSA's determination to ensure that it acts within its statutory objectives, two of which are maintaining market confidence and securing the appropriate degree of protection for consumers. In that respect, it should be noted that 80% of customers were between the ages of 60 and 90.
The case forms something of a companion piece to the FSA's January 2011 paper on suitability covered later in this publication, and the indications of future action set out there.
Finally, there has been some interesting debate press arising out of this fine, most notably around the extent that consumers may be given a false impression of the riskiness of a product by dint of its name alone.
City Index fined £490,000 for transaction reporting failures
20 January 2011:
The FSA has fined yet another firm for failures related to transaction reporting. This time, the FSA has fined City Index. It has imposed a fine of £490,000, down from £700,000 after taking into account a 30% discount for early settlement.
Details of the Case
City Index is a broker that enters into spread bets, contracts for differences and other transactions with its clients, most of whom are retail clients. These transactions are required to be reported to the FSA in accordance with SUP 17. SUP 17 requires transaction reports containing mandatory details to be submitted to the FSA by the end of the next business day following the day on which the firm entered into the transaction.
The following SUP 17 failings were identified (predominantly by City Index at the instigation of the FSA):
- a failure to report 55,589 spread betting transactions in five weeks in May and June 2008;
- a failure to re-submit to the FSA's Approved Reporting Mechanism (ARM) transactions that had been rejected by the system as a result of ISIN numbers being input incorrectly or similar data entry errors. The issue affected approximately 10 transactions per working day during the period from 5 November 2007 to 1 August 2008;
- fundamental errors in the set-up of the process for the new G2 trading platform that City Index had introduced in March 2008. These errors affected all transaction reporting on the G2 platform:
- in all transactions reported on the G2 trading platform, the buy/sell indicator was input from the client's perspective rather than the firm's perspective. This reporting error related to 1.85 million transactions;
- approximately 10% of these transaction reports were also rendered non-compliant with SUP 17 by City Index's population of one or more other fields (derivative type, instrument type, market venue, price multiplier, quantity and unit price).
- as regards transaction reporting by the other City Index trading platforms, 122,380 transaction reports had included incorrect codes for derivative type and/or price and/or strike price fields eg they stated that the price had been expressed in pounds, when in fact it had been expressed in pence, thereby reporting erroneous prices.
In addition to breaching SUP 17, City Index breached the FSA's Principles for Businesses as follows:
In breach of Principle 2, it failed to conduct its business with due skill, care and diligence. Specifically, on implementation of the G2 trading platform, it failed to identify fundamental errors in the set-up of the G2 process relating to transaction reporting; and
In breach of Principle 3, City Index failed to take reasonable care to organise and control its affairs responsibly and effectively in relation to transaction reporting. The FSA found that it was in breach in that, at the implementation of MiFID and throughout the period of November 2007 – September 2009, it failed to have in place, adequate transaction reporting processes and procedures to ensure that it was fully compliant with MiFID requirements. Specifically, it failed to make arrangements to ensure adequate internal governance of its transaction reporting processes and procedures and failed to put in place an internal mechanism for ensuring the accuracy and validation of its transaction reports.
The FSA regarded the failings as serious. This was not least because of the high proportion of transactions affected and the sustained period over which it took place. In mitigation, the FSA took into account the external formal review City Index commissioned of its transaction reporting processes and controls, its internal review as regards the accuracy and completeness of historic reporting and its implementation of a comprehensive mediation review. Nevertheless, its conduct still justified a fine of £700,000, discounted down to £490,000 for early settlement.
This is one of a series of fines by the FSA for failures in relation to transaction reporting. It is the seventh such fine levied by the FSA since August 2009 (see Enforcement Watch issue 1 and issue 2). One reason why the FSA takes the issue so seriously is because transaction reporting is primarily used by the FSA to detect and investigate market abuse. Market abuse remains high on the FSA's list of priorities, especially in view of its statutory objectives of maintaining market confidence and reducing financial crime.
One point for firms particularly to note is that one reason that the FSA treated the failure as so serious is because of the heightened awareness there was of the matter at the time as a result of the implementation of MiFID and public statements by the FSA. Firms would do well to heed the details of what the FSA puts out to the market, not least by way of its enforcement cases.
Barclays Capital Securities fined £1.13m for client asset breaches
24 January 2011:
Barclays Capital Securities was fined £1.13m (after taking account of a 30% discount for early settlement) for failures in relation to segregating client money over an extended period. The penalty imposed (exclusive of the discount) is based on 1% of the average daily amount of unsegregated client money held by Barclays in the relevant client money market account in the 8 year period.
Details of the Case
Barclays failed to segregate client money maturing from its sterling money market deposits on an intra-day basis. These client monies were segregated overnight, but matured into a proprietary bank account and were mixed on a daily basis with Barclays' own funds, typically for between five and seven hours every day. This occurred over a period of 8 years (between 1 December 2001 and 29 December 2009).
The FSA considered this to be in breach both of Principle 10 of the FSA’s Principles for Businesses (“a firm must arrange adequate protection for clients’ assets when it is responsible for them”) and the Client Asset Rules (CASS and their predecessor pre MiFID rules).
The FSA considered the breach to be particularly serious, amongst other things, because of the failure of Barclays to detect the issue for eight years and because of the sums involved. The average daily amount not segregated rose from £6m in 2002 to £387m in 2009. The highest amount held in the account and at risk at any one time, if Barclays had become insolvent, was £752m.
The FSA did not consider that Barclays had acted deliberately or negligently and Barclays co-operated fully with the FSA, instigating a review of its compliance with the CASS rules and correcting the defect quickly. The FSA imposed a penalty of £1.13m (after taking account of a 30% discount for early settlement).
This case should be read alongside those covered in issue 2 of Enforcement Watch (see under 25 May, 4 June 2010: The FSA gets tough on the client money rules). The fine imposed on Barclays is far less than the record breaking fine imposed on JP Morgan. However, the basis for calculation is exactly the same as for both JP Morgan and Rowan Dartington (also in Issue 2), namely 1% of the average daily amount of unsegregated client money held. As we said in Issue 2, it looks as if the basis of calculation may come to have some form of persuasive precedent value
The FSA has recently taken a number of steps to raise awareness of client asset issues. Especially in light of the details set out elsewhere in this Issue (see under “Client Asset enforcement action in the pipeline”), this case looks like it is a taste of things to come.
JJB Sports fined for failure to disclose
25 January 2011:
JJB Sports plc has been fined £455,000 (after taking account of a 30% discount). The fine is for being in breach of disclosure rules for failing to disclose the true costs of two acquisitions to the market.
Details of the Case
JJB acquired both the retail chain Original Shoe Company (“OSC”) and the retail chain Qubefootwear (“Qube”). In relation to both acquisitions, the FSA determined that JJB had failed to disclose to the market inside information regarding the total consideration for the acquisitions. The FSA determined that this gave the market a false and misleading impression regarding the consideration for OSC and Qube.
In relation to the purchase of OSC, JJB disclosed to the market that the consideration was £5m. However, it failed to disclose that it also had to purchase the in-store stock from the vendor for just over £10m.
In relation to the acquisition of Qube, JJB disclosed to the market that the consideration was £1, but failed to disclose that it had agreed to settle Qube's overdraft a day prior to completion. The cost of settling the overdraft was £6.47m, although the potential liability JJB had agreed to was unlimited.
In both cases, the FSA determined that the information JJB withheld from the market was inside information and that the failure to disclose that information to the market as soon as possible constituted a breach of the disclosure rules (DTR 2.2.1). Furthermore, that failure gave the market a false impression of the cost of OSC and Qube and the impact of those acquisitions on the true nature and costs of JJB’s strategy for 2008 which led to the creation of a false market, until the true consideration was disclosed to the market (contrary to Listing Principle 4). In the case of OSC, the delay was 9 months and 4 days; in relation to Qube, it was 4 months and 4 days. The continuing failure to disclose the true cost of OSC and Qube to the market was treated as a continuing breach of the disclosure rules by the FSA.
JJB’s failure was brought to its attention by its auditors on 22 September 2008. Full details of the acquisition costs were disclosed to the market through JJB’s 2008 interim results, which were published on 26 September 2008. The interim results included other negative news about JJB, including concerns about its ability to trade as a going concern. On the day that the interim results were released, JJB’s share price fell by 49.5%.
The FSA imposed a penalty of £455,000 (after taking into account a 30% discount for early settlement).
The JJB fine is the second largest fine imposed by the FSA on a company for breach of the Disclosure & Transparency and Listing Rules. (Readers might also want to refer to Issue 2 of Enforcement Watch concerning the penalty imposed on Photo-Me.
In some ways, however, the fine might be thought to be somewhat on the low side given the FSA’s tougher stance in recent times. Reasons might be found in the mitigating factors that included amongst other things:
- JJB’s co-operation with the investigation;
- the fact that the entire executive board and almost all of the non-executive directors had changed since the events in question;
- the fact that JJB has since substantially improved its systems and controls for the approval of regulatory announcements and DTR compliance.
It may also be that JJB's financial position played a part. In that context, it is noteworthy that the fine was agreed to be paid in six separate monthly instalments.