Regulatory Enforcement Trends 2015

Transcription

1 February 2015 Regulatory Enforcement Trends 2015 This is the fourth edition of our annual note in which we explore the areas we consider likely to generate enforcement activity by both the FCA and PRA in the coming year saw a number of developments which set the direction of travel for the FCA s enforcement team. It proved to be yet another record year in terms of FCA fines. It also saw the imposition of the FCA s highest fine to date, 233m, on a major investment bank as part of the conclusion of its investigation into suspected misconduct on the FX markets. We also witnessed a number of firsts, with the FCA making the first use of its suspension power, issuing its first warning notice statements, making the first use of its product intervention powers and embarking on its first joint enforcement action with the PRA should bring the FCA greater investigative resource, as its investigations into misconduct on both the LIBOR and FX markets have now largely concluded. This may enable its wholesale enforcement team to tackle a wider variety of cases in 2015 than we have seen in recent years. The impact of former FCA Director of Enforcement Tracey McDermott s move to the Director of Supervision role, which was announced towards the end of 2014, will also be interesting to observe. Set out below are our predictions in terms of the likely focus and direction of regulatory enforcement work in the coming year. A copy of the 2014 Enforcement trends note can be found here, for those wishing to check on the FCA s progress. 1 Policy Contents 1 Policy Culture Early intervention Decision-making and penalties Firms Consumer outcomes Retail Wholesale Financial crime Individuals Market abuse and insider dealing Market abuse Insider dealing Upper Tribunal and Court of Appeal Culture Although much was said by the FCA during 2014 of the importance of establishing the right culture within firms, organisations have to date (perhaps deliberately) been given very little concrete information about what good culture looks like. Enforcement final notices have highlighted examples of bad culture, but it has very much been left to regulated firms to determine what good looks like in their individual organisations. Although the regulator accepts that it cannot enforce culture, it is clear that the regulators consider that culture can, and has been, the cause of many regulatory breaches. Regulatory Enforcement Trends

2 Examples of positive cultural outcomes in both FCA communications and final notices during 2015 would be welcome. The FCA s focus on firms controls in this context and on areas that might be driving a negative culture, such as remuneration, incentives and career progression, is unlikely to reduce in It is clear that ensuring good culture is not seen as the responsibility of compliance departments it is down to boards and senior management to set the tone from the top, a point that will be reinforced by the PRA s prescribed responsibilities in relation to culture, which will have to be allocated to senior managers under the new Senior Managers Regime. In terms of interface with customers, however, it is vital that the appropriate culture is embedded on the front line if an improved business culture is to have any real impact in practice. Recent decisions concerning breaches which led to poor consumer outcomes suggest that this is still a live issue for firms. Questions also remain about how culture is evidenced and the strength of risk governance within organisations. These remain fertile areas for enforcement investigations and boards should continue to engage actively with these issues as 2015 progresses. The assessment and measurement of culture will feature prominently in the conduct risk framework programmes being established by many authorised firms. 1.2 Early intervention One of the most significant trends in terms of enforcement during 2014 was the move towards early intervention. The FCA s supervisory team intervened early in 31 cases last year, compared with just 14 in It also made its first use of new early intervention powers, banning the sale of contingent convertible capital products to retail consumers for 12 months. The FCA s supervision team seem likely to become more confident about intervening early on matters, in conjunction with their enforcement colleagues, as the year progresses. 1.3 Decision-making and penalties The FCA published its recommendations following its review of enforcement decision-making at both the FCA and PRA in late 2014 (the Review ). Our note on the conclusions of the Review can be found here. Whilst heavily dependent on the FCA and PRA for their implementation, the government s recommendations include calls for greater transparency around early intervention, the decision to refer firms or individuals to enforcement and around precisely how cooperation between the two regulators will work in joint investigations. Greater and more open communication between the regulator and subject during the initial scoping meeting and as an investigation progresses is also encouraged. The PRA has been charged with establishing its own independent decision-making body equivalent to the FCA s Regulatory Decisions Committee will see both regulators publish proposals for the implementation of these Regulatory Enforcement Trends

3 recommendations. The Review also makes reference on a number of occasions to the FCA s own review of its current penalty policy (introduced in 2010), which is due to take place this year. It suggests that the FCA consider introducing incentives to admit breaches during the initial scoping meeting and that it look at removing discounts for early settlement beyond the 30% currently offered to those who come to an agreement with the FCA during Stage One settlement negotiations. 2 Firms 2.1 Consumer outcomes 2.2 Retail As a conduct regulator, the impact of financial services practices on consumers will always be a high concern for the FCA in both the retail and wholesale sectors. Since its inception it has repeatedly challenged firms to move beyond the application of rules to considering the likely outcomes of their decisions, in all areas of their business saw further fines imposed on retail banks and building societies for giving unsuitable advice and the treatment of customers in mortgage arrears. Penalties were also levied for unfair sales of investment products to unsophisticated investors. It is clear that the FCA expects firms to consider the impact of both their products and business decisions on clients and is prepared to issue heavy fines where firms fail to do so. The FCA s focus on conduct and consumer outcomes has resulted in a fresh examination of the links between wholesale and retail markets and the prospect that misconduct in the former may result in losses in the latter. Fines last year levied against firms engaged in wholesale market activities included allegations of breaches of Principle 6, particularly where the portfolios affected attracted or impacted retail investors. Any misconduct affecting consumers also brings with it the likelihood of past business reviews and costly redress schemes, in addition to fines. Given its consumer focus, we are likely to see an increasing willingness on the part of the FCA to track though breaches in the wholesale sector to assess their impact (or the risk of them impacting) on retail consumers. The FCA has indicated that it has continued concerns around financial promotions, particularly in the consumer credit sector but also those involving products offered by wealth management firms. The risk that investors may not getting a good deal in respect of their pensions and other investments has also been highlighted. The fine referenced above concerning the poor treatment of customers in mortgage arrears is a stark reminder of the change in mindset for which the regulator will now be looking. The FCA continues to devote significant resources to the retail sector, with mis-selling and systems and controls failings in all areas Regulatory Enforcement Trends

4 continuing to attract attention also saw a number of decisions concerning poor, or unsuitable, investment advice. Redress schemes and past business reviews remain likely to follow any fine where large numbers of customers have been affected by a breach. Scrutiny of sales practices in the retail sector look likely to continue, with the FCA concerned with whether practices generated a risk of consumer detriment, rather than any actual detriment itself Consumer credit The FCA s first months as regulator for consumer credit firms were marked by the announcement of an immediate thematic review into the arrears management practices of, and treatment of borrowers in difficulty by, payday lenders. This resulted in the imposition of a number of high-profile voluntary redress schemes where firms systems fell short of the FCA s expectations. Price caps were also introduced at the beginning of this year in the high-cost, short-term credit market, following a lengthy consultation during the course of These are intended to ensure that borrowers never have to repay more than double the amount they originally borrowed. The FCA has indicated that it remains concerned about risks in the high-cost, short-term credit market, issues with credit cards and overdrafts (to be addressed largely by way of a market study announced last year) and with improving financial promotions and debt management. It has demonstrated that it is unafraid of pursuing swift and costly enforcement action in this area, a trend which looks set to continue during Cyber resilience The record retail fine levied by the FCA upon RBS in December 2012 relating to certain IT failures which took place in June 2012 demonstrates the FCA s continued focus on ensuring that regulated firms organise their affairs in such a way as to minimise the impact of disruptive events upon consumers. The IT failures also resulted in enforcement action and a fine being imposed by the PRA, on the basis that the incident had the potential to affect the stability of the UK financial system. Add to this the increasing use of cyber attacks as a tool for damaging institutions and the existence of hackers looking to steal clients data, money or assets, and the importance to firms of ensuring that their IT systems are fully protected becomes clear. Given the FCA s desire for firms to demonstrate strong compliance cultures and a robust approach to conduct risk, firms should consider testing of their IT systems resilience and reporting regularly on this and other related risks to management as part of its governance and risk management framework. The FCA, PRA and government have conducted Regulatory Enforcement Trends

5 2.3 Wholesale a number of tests on firms ability to withstand cyber attacks. A failure to take on board the lessons of such exercises and the RBS decision could result in costly enforcement action. A significant proportion of the FCA s wholesale enforcement activities in recent years have been focused on the long-running LIBOR and FX investigations. Many of the more traditional areas of concern for the FCA in respect of the wholesale markets are likely to feature in further enforcement action in Last year saw a number of significant fines for client money breaches, including the highest fine imposed by the regulator to date in this area and the first example of a penalty for misconduct relating to safe custody assets. Transaction reporting also remains high on the agenda Asset managers The FCA has recently voiced concern about consumer outcomes in this sector, particularly where retail clients may become involved. Questions have also been raised about the transparency of charging structures. Building on previous action involving asset managers for client money failings, 2014 saw the first enforcement action in this sector for the breach of certain COLL rules. Action based upon investment limit breaches has not previously been taken by the FCA. As such, this decision may mark the beginning of increased focus by the regulator on technical compliance within the asset management industry has already seem the FCA announce its intention to undertake a market study into competition in the asset management sector and publish the conclusions of its thematic review of asset management firms and the risk of market abuse. This follows earlier thematic reviews of conflicts of interest and best execution/the use of dealing commissions, both of which concluded in the second half of The coming year is, therefore, likely to involve further scrutiny of asset managers business models and practices, with the FCA using enforcement action to highlight conduct it dislikes to the wider market Transition management The FCA imposed a 22.9m fine on a global financial services firm last January for failings in its transitions management business, having concluded that the firm charged mark-ups on certain transitions in addition to the agreed management fee or commission. The FCA also published the results of its thematic review of the transition management sector. This found that, although firms broadly met with its requirements, deficiencies existed in terms of the controls, marketing materials, governance and transparency Regulatory Enforcement Trends

6 within certain firms. Consequently, organisations offering these services will need to consider carefully whether their operations are compliant in light of the review s findings and recommendations. This is an area the FCA looks certain to keep under review Benchmarks 2.4 Financial crime 2014 saw the conclusion of the bulk of the FCA s investigation into misconduct on the FX markets, together with a few further decisions against firms involved in LIBOR misconduct whose actions were not concluded in Some activity in relation to both the LIBOR and FX investigations looks likely to continue, in particular, actions against individuals (once related criminal proceedings have concluded). The regulator has also considered practices in the commodities markets, fining a bank and former trader in May in relation to misconduct concerning the gold price fix. Although (like the currency markets) historically unregulated, commodities markets should expect increased regulatory scrutiny going forward, particularly as HM Treasury s Fair and Effective Markets Review has proposed bringing the commodities and currency markets fully within the FCA s regulatory sphere Financial crime remains a perennial concern for the FCA. Last year saw the regulator conclude two thematic reviews in this area. It was also the most frequent target of its nascent early intervention programme, with a number of firms prevented from taking on new business until they resolved issues concerning their AML systems and treatments of PEPs. The publication of restrictive measures against Russia in the wake of its annexation of the Crimea served to further highlight the obligations on firms to prevent terrorists from accessing their systems and products. Linked closely to this is the continued global focus on AML controls and measures to counter bribery and corruptions, exemplified in Europe by the expected adoption later this year of the Fourth Money Laundering Directive FCA Head of Investigations, Jamie Symington, indicated in a recent speech that the FCA has clear plans to target financial crime, including bribery and sanctions risks, focusing on systems and controls and working with the SFO where matters have a potential criminal element. Recent years have seen a trend towards de-risking, where major banks pull out of areas that they perceive to be too much of a threat from an financial crime perspective. This practice is frowned upon by the FCA, which has indicated that it will publish a paper in the Regulatory Enforcement Trends

7 first quarter of 2015 signalling its position on this practice. It has also called upon US regulators to do the same, recognising that de-risking can be prompted by concerns about global regulators, particularly those in the US The increase in global co-operation between regulators (a record 1014 requests for assistance were made to the FCA during 2014) is also likely to have an impact in this area. The FCA is now reportedly working with both the SFO and US DoJ on a number of financial crime investigations, a move of considerable significance given the often global nature of financial crime operations. Ensuring that systems and controls intended to guard against firms involvement in financial crime are fit for purpose and suited to the individual business should remain a top priority for firms in Individuals Despite repeatedly declaring its intention to hold senior management to account for failings within their organisations, 2014 actually saw a decrease in the number of individuals fined by the FCA. Thirteen individuals were fined a total of 2.9m. These figures arguably belie the true level of activity in this area. On the supervisory side, requests for senior managers to attest that their businesses have complied with a particular regulatory requirement have risen significantly. Turning to enforcement, the fine of three former executives of the insurance firm Swinton regarding their roles in its mis-selling of insurance add-ons (Swinton was fined 7.4m in 2013 for adopting an aggressive sales strategy that resulted in mis-sales of monthly addon insurance policies between 2010 and 2012) served as a reminder of the FCA s increased focus on the culture within firms and the role that senior executives play in fostering this. This has since been followed by fines against two former senior executives of Martin Brokers UK Ltd for failings which were said to have contributed to a culture at the firm which facilitated LIBOR misconduct. In terms of Approved Persons, last year saw the FCA reinforce the expansive nature of the fit and proper test, not only considering an individual's conduct whilst acting as an Approved Person, but also examining their behaviour outside of work. This resulted in bans for individuals based on their conduct in separate civil proceedings, during an FCA investigation and following the revelation of train fare evasion extending over a number of years. The coming year will see the publication of final rules for the new Senior Managers and Certification Regime by both the FCA and PRA, both for UK banks and PRA regulated investment firms and branches of equivalent non-uk firms. The new regime will come into force in March Whilst consultations as to the exact detail of the new schemes are ongoing, these have been designed to require Regulatory Enforcement Trends

8 firms to articulate more clearly which individuals have regulatory responsibility for each part of its business. This, combined with the presumption of responsibility will make it easier for regulators to attribute failings within a particular business area to one or more specific senior managers, something which the FCA has traditionally struggled to do in relation to failings within large/complex firms. As such, in future it will become increasingly important that senior managers can provide clear, contemporaneous evidence demonstrating how they have discharged their obligations. As mentioned above, it is possible that action brought against individuals involved in misconduct on the LIBOR (and possibly FX) markets may conclude during 2015 (subject to any related criminal proceedings). We may even see the first enforcement action against an individual based upon an inappropriate or unreasonably given attestation. Given the likely increase in resource within the FCA s wholesale enforcement team (following the conclusion of the majority of the LIBOR and FX investigations) and the added impetus of the introduction of the new Senior Managers Regime, this is an area we expect to attract greater attention as the year progresses. Further information about the new Senior Managers and Certification Regime can be found in our client note here (September 2014) and here (January 2015). 4 Market abuse and insider dealing 4.1 Market abuse The Upper Tribunal s decision against Ian Hannam for improper disclosure of inside information was probably the most significant development in this area last year. Actions were also brought in 2014 in both the equities and commodities markets and the FCA continues to have a steady pipeline of criminal as well as civil cases. Tackling market abuse remains a stated priority for the regulator. From a policy point of view, the main developments in this area expected during 2015 is the continuing preparation, at a European level, for the implementation of the new Market Abuse Regulation ( MAR ). This came into force on 2 July 2014, although it will not become law in member states until 3 July As an EU Regulation, MAR will have direct effect in all EU Member States and will replace the market abuse civil regime currently in s.118 FSMA, as well as the FCA s Code of Market Conduct will see the delivery by ESMA to the Commission of its final technical advice on reporting procedures and, subsequently, final draft regulatory, technical advice and implementing technical standards. These are expected to be adopted into implementing legislation by 2 December 2015 and published in the Official Journal in June Listed companies and market participants in particular will shortly need to begin considering Regulatory Enforcement Trends

9 the procedures and processes they will need to amend in preparation for the regulation taking effect in July Insider dealing Whilst still a key concern, 2014 was a relatively quiet year for the regulator in terms of insider dealing convictions. The FCA s largest insider dealing investigation to date, Operation Tabernula, had its trial date pushed further back into The investigation did, however, yield two guilty pleas. Graham Shelley and Julian Rifat both pleaded guilty to insider dealing for their role in the alleged trading during the course of Already this year the FCA has secured guilty pleas in two additional investigations into insider dealing, bringing the total number of individuals convicted by the FCA to 27, with seven others now awaiting trial. It is possible that these investigations have been yet another victim of the FCA s constrained resources in recent years, resulting in only the most significant cases being pursued. The FCA has stressed on a number of occasions, however, the complexity of insider dealing investigations, which means that it has found it difficult to conclude its enquiries swiftly. As such we may see an increase in arrests and charges as 2015 progresses. 5 Upper Tribunal and Court of Appeal In addition to the Ian Hannam decision referred to above, last year the Upper Tribunal also issued an interesting decision considering the circumstances in which a third party can argue that he is identified in an FCA decision or final notice which does not specifically name him. The Upper Tribunal upheld a claim by Achilles Macris, former Chief Investment Officers at JP Morgan and Approved Person claim that he had been singled out for criticism in the FCA s final notice against JP Morgan, in which it fined the bank m for systems and controls failings relating to what have become known as the London Whale trades. This was despite the fact that Mr Macris was not mentioned by name in the final notice. Consequently, it agreed that he should have been afforded the right to comment on the draft notice in accordance with s.393 FSMA. The FCA s appeal against this decision was heard in December 2014, with judgment being reserved. If unsuccessful, it faces the prospect of further proceedings to determine whether its criticisms of Mr Macris were justified. The outcome of the appeal will be particularly interesting given the public and political disquiet at the continued delay in the publication of the PRA and FCA s report into financial difficulties at HBOS in Whilst this report is not subject to the same statutory process as applies to disciplinary notices, the delay has been largely attributed to the need to allow individuals criticised in the report the right to comment prior to publication on the basis of equivalent principles of administrative law. Regulatory Enforcement Trends

10 Further information about these and all ongoing developments concerning contentious regulatory work can be found in our Regulatory Investigations Update. Contacts For further information please contact: Martyn Hopper Partner (+44) Patrick Robinson Partner (+44) Nikunj Kiri Partner (+44) Author: Sara Cody This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2015 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ or on and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. One Silk Street London EC2Y 8HQ Telephone Facsimile Linklaters.com Regulatory Enforcement Trends / /