Mishcon Document

September 2012
Enforcement Watch
Issue 8
EDITOR’S NOTE
Enforcement action has not been thin on the ground these last few months,
and some very substantial fines indeed have been levied. Meanwhile, the
Libor investigations rumble on, and we report on the developments there.
Elsewhere, Peter Cummings described the enforcement process as an
"extraordinary Orwellian process". He may not be the first to see it that
way, but I would bet that he is the first to articulate it in quite that way.
As we describe in On the Horizon, clues abound about where the FSA's
enforcement sights are set in the near future, and Martin Wheatley lays
down a very big marker about his intentions for the FCA.
Adam Epstein
Partner
[email protected]
+44 20 7440 7102
Enforcement Case Highlights
18 June 2012: Public Censure for Kaupthing Singer and Friedlander
27 June 2012: Barclays receives largest ever fine imposed by the FSA
26 July 2012: Turkish Bank (UK) Ltd fined nearly £300,000 for
correspondent banking money laundering failings
11 September 2012: £9.5m BlackRock fine for client money breaches
12 September 2012: £500,000 fine and partial prohibition for HBOS
executive
On the Horizon
Enforcement to help ensure consumers are front and centre
What is to come in relation to LIBOR
Further UCIS enforcement all but inevitable
Tracey McDermott becomes permanent head of enforcement
Wealth Managers very much on the FSA radar
The FSA consults on incentives and mis-selling
Spotlight on the US
SEC Makes Its First Award To A Whistleblower Under The Dodd-Frank Act
New York Regulator Settles With Record Fine Against British Bank
ENFORCEMENT CASE HIGHLIGHTS
18 June 2012: Public Censure for Kaupthing Singer and Friedlander
Kaupthing Singer and Friedlander Ltd (in administration) (KSFL) is the UK
based subsidiary of the Icelandic banking group Kaupthing Bank Hf (KBHf).
KSFL was put into administration in October 2008. The FSA has issued a
public censure against KSFL for failing properly to consider whether liquidity
stresses in KBHf would have had a detrimental effect on its own liquidity
position.
Between September and October 2008, KSFL breached Principle 2 (due
skill, care and diligence). KSFL did not give proper consideration to, nor
properly monitor, a special financing arrangement it had with its parent
company in Iceland, under which it could theoretically draw up to £1bn at
short notice. KSFL assumed it could rely on receiving this £1bn if needed –
but, crucially, KSFL did not test that assumption. By 29 September 2008,
KSFL should have realised there was a risk the £1bn might not be available.
When it started to have concerns about this liquidity arrangement, KSFL
also failed to discuss its concerns with the FSA in a timely manner –
although KSFL did inform the FSA on 30 September 2008 that it was
implementing its liquidity contingency procedures.
Whilst the FSA said that the ultimate insolvency of KSFL could not be
attributed to this failure to monitor the arrangement properly and promptly,
it nevertheless regarded KSFL's failings as particularly serious. This was
because they occurred at a critical period for the financial markets (a time
when the FSA was concerned to ensure it was fully informed about all
banks' liquidity) and because KSFL held significant deposits from UK retail
consumers.
The Final Notice for Kaupthing Singer and Friedlander Ltd (in
administration)
Comment
It is difficult to know quite what to read into the FSA's decision. It comes
some years after the event and is framed relatively narrowly. What is more,
KSFL also agreed to settle this matter and we do not know what might have
been the findings had the matter been contested at the RDC. Further, it is
not clear quite how seriously the FSA takes the matter. It said that, were
KSFL not in administration, the failures would have led it to impose a
significant financial penalty, but we of course do not know what the level of
such a penalty might ordinarily have been.
To compound this, various individuals have given undertakings to the FSA,
but they have made no admissions and no findings of regulatory breach
1
have been found against them.
1
The former non-executive Chairman of KSFL (Sigurdur Einarsson), together with Hreidar
Mar Sigurdsson (the former non-executive Director) and Armann Thorvaldsson (former
CEO) have provided undertakings to the FSA that they will not perform any significant
influence functions requiring the approval of the FSA at any UK authorised firms for a period
of five years from 8 October 2008.
ENFORCEMENT CASE HIGHLIGHTS
27 June 2012: Barclays receives largest ever fine imposed by the FSA
The FSA has handed out a £59.5m fine to Barclays Bank Plc for misconduct
relating to submissions that formed part of the benchmark LIBOR and
EURIBOR interest rate setting process.
LIBOR and EURIBOR are very important benchmark reference rates. The
rates are set by reference to the submissions made by selected banks to the
British Bankers' Association and to the European Banking Federation. Those
selected banks' submissions are based on their subjective assessment of the
rates at which money may be available in the interbank market. The case
against Barclays involves a number of breaches relating to this process,
taking in a number of employees over a number of years. Essentially, these
are:
-
Making submissions that took into account requests from traders
who were looking to gain from the submissions made at a certain
rate;
Trying to influence rate setting submissions made by banks other
than Barclays;
Reducing its LIBOR submissions during the financial crisis as a result
of senior management concerns about negative media comment;
Failing to have adequate systems and controls relating to the
submissions until June 2010;
Failing in 2007 and 2008 to deal with issues when escalated to
compliance.
The FSA found that Barclays had breached Principle 2 (skill, care and
diligence), Principle 3 (management and control) and Principle 5 (proper
standards of market conduct). Barclays settled at an early stage. As a result,
the bank qualified for a 30% penalty discount. Nonetheless, the £59.5m fine
is the largest ever imposed by the FSA.
The Final Notice for Barclays Bank Plc
Comment
There has been huge focus on the LIBOR affair in recent months. There
have been disclosures, leaks, Treasury Select Committee coverage and press
speculation to name but a few channels, quite apart from this Final Notice.
Against that background, we add just a few limited comments here.
On the Barclays' Final Notice itself, in relation to sanction, it is interesting to
note that the FSA states that Barclays provided "extremely good cooperation", words not usually seen. It goes on to describe the type of cooperation as including providing access to evidence and facilitating voluntary
witness interviews. It is not clear the extent to which such co-operation in
reality impacted the level of fine.
The Barclays' fine appears to be the first of many to come. Others have
been rumoured, with RBS being the most recent. It remains to be seen
whether subsequent actions will attract as much attention as the Barclays
action.
One aspect of future action will be how individuals will be treated. No
actions against individuals have yet come out (see our discussion on this
point elsewhere in this edition "What is to come in relation to Libor").
Another aspect to look out for in the future is the relationship between
action in the UK and action abroad. In the Barclays' case, the FSA worked
with the following US agencies: the Commodity Futures Trading
Commission (CFTC), the Department of Justice (DOJ), the Federal Bureau
of Investigation and the Securities and Exchange Commission. The CFTC
also brought attempted manipulation and false reporting charges against
Barclays for similar failings - which the bank similarly agreed to settle. The
CFTC imposed a penalty of US$200m. Furthermore, as part of an
agreement with the DOJ, Barclays admitted to its misconduct and agreed to
pay a penalty of US$160m. There has recently been press speculation about
the fracturing of relationships on LIBOR between the UK and the US
authorities, including news that the SFO is looking at the LIBOR issue. It may
be that any future actions cannot be so neatly rolled up together.
ENFORCEMENT CASE HIGHLIGHTS
26 July 2012: Turkish Bank (UK) Ltd fined nearly £300,000 for
correspondent banking money laundering failings
The FSA has imposed a £294,000 fine on Turkish Bank (UK) Ltd (TBUK) for
money laundering failings relating to its correspondent banking
arrangements.
Correspondent banking involves non face to face business. Essentially, the
correspondent bank (in this case, TBUK) will provide services to an overseas
bank (the respondent) so that the respondent can provide its own
customers with cross-border products and services, such as payment and
clearing related services, which the respondent would ordinarily be unable
to offer.
Between December 2007 and July 2010, TBUK acted as a correspondent
bank for nine respondent banks in Turkey and six respondent banks in
Northern Cyprus.
Providing correspondent banking services to banks based in non-EEA states
is recognised as creating a high risk of money laundering that requires
enhanced due diligence and ongoing monitoring of the relationship. During
this period, Turkey and Northern Cyprus did not have anti-money
laundering (AML) requirements that were equivalent to those in the UK.
Nonetheless, TBUK incorrectly relied on its respondents' AML controls over
their underlying customers to prevent those customers accessing the UK
financial system for money laundering purposes.
The FSA found a raft of breaches of the Money Laundering Regulations
2007. These essentially flowed from the following two basic failings:
-
failing to establish and maintain appropriate and risk-sensitive
policies and procedures for assessing and managing the level of
money laundering risks posed by its respondents
failing to establish and maintain appropriate and risk-sensitive
procedures for carrying out the required level of due diligence on
and ongoing monitoring of its existing respondents
Whilst the failings were neither deliberate nor reckless, they were
aggravated by the fact that, back in June 2007, the FSA had warned TBUK of
deficiencies in its approach to correspondent banking AML controls.
TBUK reached a settlement with the FSA at an early stage. Without the
30% early settlement discount, the fine would have been £420,000.
The Final Notice for Turkish Bank (UK) Ltd
Comment
There are a number of aspects of this case that are of interest.
First, whilst the FSA has previously taken enforcement action in relation to
money laundering failings, this is the first FSA enforcement action against a
firm for money laundering weaknesses in its correspondent banking
arrangements.
Second, it is as well to appreciate the relationship of this action to the FSA's
money laundering thematic review. In June 2011, the FSA published the
results of its AML thematic work (see Enforcement Watch 5 "AML
enforcement cases on the agenda"). One of the three main objectives of the
work had been to assess whether banks had robust and proportionate
systems and controls in place to detect and prevent the misuse of
correspondent banking facilities.
-
-
The FSA visited TBUK in July 2010 as part of this thematic review.
The TBUK case is one more in a long line of examples of
enforcement action that come out of thematic reviews. (See also in
this connection, the Coutts money laundering case that came out of
the thematic review - Enforcement Watch 7 "Coutts and Habib
substantial fines for anti-money laundering failings"). In our view, this
trend is set to continue with the new FCA's proposed early
interventionist approach.
Firms should consider carefully the results of the review. In relation
to correspondent banking, firms are referred in particular to section
4 where the FSA's findings are set out and where it gives examples
of good practice and of poor practice.
Third, there is little transparency on the level of penalty as the conduct
complained of occurred prior to the introduction of the FSA's new penalty
regime on 6 March 2010. See Enforcement Watch 1 "Harsher Penalty
Setting Introduced". Readers should, however, note the conduct of TBUK
following the breaches that was taken into account: open and co-operative;
took steps to establish detailed procedures as part of an FSA remedial
programme; fully accepted its failings; took disciplinary action against the
senior managers responsible.
ENFORCEMENT CASE HIGHLIGHTS
11 September 2012: £9.5m BlackRock fine for client money breaches
The FSA has fined BlackRock Investment Management (UK) Ltd (BIM)
£9,533,100 for failing to protect client money adequately. This is a result of
BIM failing to put in place bank trust letters for certain money market
deposits between October 2006 and March 2010.
Where a firm deposits money at a bank, it must notify the bank if the
money is held on trust for its client. The firm must also arrange for formal
trust letters from the bank to be put in place. The purpose of this is to
ensure that, in the event of the firm's insolvency, the client money is ringfenced from the firm's own assets.
BIM's failure to obtain trust letters occurred as a result of systems changes
that followed on from the BlackRock group's prior acquisition of BIM
(formerly called Merrill Lynch Investment Managers Ltd (MLIM)). The
process of migrating MLIM clients' investment portfolios to BlackRock's
operating system resulted in certain client money being placed on deposit
with banks where trust letters were not in place. These changes rendered
BIM's procedures for setting up trust letters ineffective. In addition, the
departure of certain members of experienced and trained staff with
institutional knowledge contributed to the firm's delay in identifying and
addressing these issues. BIM was found to be in breach of:
-
Principle 3 (management and control) and Principle 10 (Clients'
assets);
the relevant CASS rules: 7.8.1R (and its predecessor) re trust
letters; 7.3.2R re organisational requirements.
On 1 April 2010, the BlackRock group self-reported to the FSA that certain
trust letters had not been in place. The estimated average daily balance
affected by BIM's failures was over £1.36bn.
BIM qualified for a 30% penalty discount for early settlement. Had it not
been for this discount, the fine would have been £13,618,800, which
equates to 1% of the estimated average amount of unprotected client
money.
The Final Notice for BlackRock Investment Management (UK) Limited
Comment
Client money protection is an issue that particularly came to the fore post
credit crunch, with the potential risk there was to clients' money if firms
were to become insolvent. Readers are referred to Enforcement Watch 2:
"The FSA gets tough on the client money rules"; Enforcement Watch 3:
"Client Asset enforcement in the pipeline" and Enforcement Watch 6: "Dear
CEO letters and client money breaches lead to substantial fines".
It is interesting to note how the FSA has once again set the level of penalty
for client money breaches. The relevant penalty regime is the one in place
for breaches prior to 6 March 2010 (see Enforcement Watch 1 "Harsher
Penalty Setting Introduced"). Although not a formal tariff, there has
come to be an expectation that fines will be based around 1% of the
average amount of unprotected client money. This is despite the fact that
BIM self-reported the issue.
Also of some note is the fact that the BIM failings came about as a result of
client money issues being over-looked as part of a re-organisation. The FSA
is keen to point out that this is not the first time that this has happened.
Readers will take note of the fact that the Final Notice talks of the need "to
send another clear message to the industry".
ENFORCEMENT CASE HIGHLIGHTS
12 September 2012: £500,000 fine and partial prohibition for HBOS
executive
Peter Cummings was the chief executive (CF1) of HBOS' Corporate
Division, one of six Divisions within the Bank that operated in a federal
structure under Group-level management. From the time of his
appointment in 2001, Cummings' role as chief executive included
responsibility both for risk management in the Division and for sanctioning
complex or high value credit transactions.
The Corporate Division's book was the most high risk part of HBOS'
business and had a higher risk profile than equivalent books in other UK
banks. The FSA determined that Cummings was aware (or should have
been) that there were serious deficiencies in the systems and controls
within the Division. Given the unusually high level of risk in the portfolio
(compounded by the lending strategies pursued by Cummings), the FSA
found that Cummings should have ensured that the Division had a more
effective framework for monitoring and managing risk.
The FSA also determined that the aggressive lending strategy that the
Division pursued under Cummings' direction (including when the risk of an
economic downturn became clear and during the financial crisis itself),
required a more effective framework for risk distribution and management.
The situation was compounded by the aggressive growth targets for the
Division Cummings adopted and by his incentive package (which included a
cash incentive equivalent to 100% of his salary if targets were met).
Along with the substantial fine, Cummings was banned from holding a
significant influence function in certain institutions including Banks or Building
Societies. That ban was imposed on the basis of "competence and
capability". The FSA did not consider that Cummings deliberately or
recklessly breached FSA rules.
The Final Notice for Peter Cummings
Comment
Apart from its interest as part of the HBOS story, this Final Notice is
relevant to the law concerning the liability of senior managers for failings on
their watch.
In addition to complaining that he had been made a scapegoat by the FSA
for the failure of HBOS (as the only individual to have had action taken
against him), Cummings mounted a robust legal Defence. Three areas are
worth considering:
-
Cummings argued that the FSA had to prove that he had personally
been at fault, rather than simply responsible for the Division that
failed. However, it is clear from Handbook guidance (DEPP, APER
and the Enforcement Guide) that the FSA will be looking at an
individual's "personal culpability" before taking action for a breach of
the Principles and before imposing a fine under s.66 of FSMA.
Accordingly, the RDC had no issue with this limb of Cummings'
defence and readily agreed that he could not be vicariously liable.
-
He also argued that the FSA had to show that his conduct was
unreasonable, and he described the test of reasonableness as
whether his decisions were "beyond the range of plausible
judgment"/irrational. Whilst the rules are clear that "personal
culpability" includes consideration of whether the person's standard
of conduct fell below what was reasonable in all the circumstances,
the test urged by Cummings was rejected by the RDC. The RDC
favoured a test that asked whether the person's conduct showed
due skill, care and diligence.
-
In order to be successful, Cummings said that the FSA had to have
very clear evidence to support its accusations. Whilst the RDC did
not expressly contradict Cummings on this point, it was clearly not
happy with his formulation. Instead, the RDC reminded itself that
pursuant to s.66 FSMA it could impose a penalty where it appeared
to it that there was misconduct and a penalty was appropriate. (In
the event, the FSA determined that there was in fact clear and
compelling evidence that Cummings' conduct was a breach of
Principle 6 of the Code of Principles for Approved Persons and also
that he was knowingly concerned in a breach by the Bank of
Principle 3 of the FSA's Principles for Businesses.)
The RDC is not a Court of law, its decisions have no formal precedent
value and its Final Notices lack the rigour of Court judgments. Nonetheless,
the decision, whilst largely uncontroversial is a useful reminder of what the
FSA must do to make out its case against senior managers personally.
ON THE HORIZON
Enforcement to help ensure consumers are front and centre
We have previously talked of the approach the new FCA plans to take to
enforcement (see Enforcement Watch 5 "FCA’s approach to regulation
points to increasing enforcement" and Enforcement Watch 7 "Specifics
revealed about the future enforcement approach"). In speeches given in
June and July 2012, Clive Adamson (Director of Supervision at the FSA) and
Martin Wheatley (MD of the FSA, and CEO Designate of the new FCA)
gave further useful indication regarding FCA goals.
-
Adamson said that the FCA will expect to foster a new culture of
"professionalism" at UK firms. This relates particularly to advising
clients. In short, the FCA does not want the content of advice to
be driven by the need to make a sale or to make a profit. It says
that advice should be based on a proper understanding of the
products involved and tailored to each client's specific needs.
-
Speaking in July, Wheatley made similar comments about the need
for the FCA to bring about a cultural shift whereby firms and the
regulator put customers "at the heart" of what they do and consider
issues from the consumer's perspective.
These high level expectations sit alongside the work the FSA has already
done (for example as part of the Retail Distribution Review) in a bid to try
to increase consumer confidence and understanding of the services they are
receiving and the price for those services. The comments also help to
contextualise the FCA's much trumpeted proactive approach. For example,
Wheatley expressed a desire to have members of Enforcement involved at
an early stage in Supervisory cases to ensure that appropriate action can be
taken as early as possible. The backdrop to this is the oft repeated message
of "credible deterrence".
ON THE HORIZON
What is to come in relation to LIBOR
There has been much debate in the press in recent months about powers
to deal with manipulation of LIBOR, particularly criminal powers. The
Wheatley Review into LIBOR published an initial Discussion Paper in August
2012 (the DP) that touches at various places on the FSA's views on the
limits of available powers. To the large number of people caught up in the
regulatory sweep, those aspects make interesting reading.
LIBOR submitting is not a regulated activity. The DP correctly notes that
this limits the FSA's powers in relation to it. When it comes to enforcement
action against individuals in relation to it, what this means is that, if the
person in question happens to be an Approved Person, then action would
most likely be on the basis that the individual had been "knowingly
concerned" with the firm's breach of FSA Principles for Businesses. This is
something that the DP describes as a "highly contingent and indirect
mechanism". If the individual was not approved, then this further limits the
disciplinary steps that can be taken.
As for market abuse, much manipulation or attempted manipulation will
almost certainly fall outside the current regime. Readers may be interested
to note however that there are currently proposals to plug this gap working
their way through the European process in the shape of the European
Market Abuse Regulation and of the Criminal Sanctions Directive.
As for criminal sanctions, the DP concludes that "LIBOR manipulation and
attempted manipulation is unlikely to constitute a criminal offence which falls
under the prosecutorial responsibility of the FSA. Even the most likely
offence in FSMA, concerning misleading statements and practices established
by Section 397 of FSMA [misleading statements], is unlikely to apply" (para
2.37). However, it is relevant to know that in July 2012, the SFO
announced its investigation into LIBOR fixing, with the possibility that it may
launch prosecutions based on fraud.
Wheatley's suggested proposals are:
-
-
To make LIBOR related activities into regulated activities. This
would have a knock on consequence for the Approved Persons
regime and would mean that those involved/responsible for
submissions would need to be fit and proper to undertake that
activity. One variant of this would be to keep LIBOR related
activities as unregulated activities but to extend the market abuse
regime to cover them.
To strengthen criminal sanctions. This might be brought about by
an amendment to s.397 FSMA, removing the requirement that the
misleading statement be made in order to induce somebody to act.
As Wheatley points out, an amended s.397 would also apply to
other situations and careful consideration would have to be given to
the need for such a new and broad offence and to the FSA's role in
policing such an offence.
The DP reflects a frustration at the FSA's limited scope for action in respect
of LIBOR. It is also a call to arms in the wake of the criticisms currently
being levelled in respect of LIBOR related activity. Whilst the changes to the
law following the LIBOR affair will be followed with interest, what may be
more interesting from an enforcement point of view will be what action will
be taken as a result of the myriad of current investigations. Whilst readers
will no doubt be familiar with the Barclays fine (see elsewhere in this edition
"Barclays receives biggest ever fine imposed by the FSA"), they will no doubt
watch with interest further news: which other firms will be punished and
what the punishment will be; how many individuals will be punished, on
what basis and with what outcome; which regulators will be taking the
action, which public authorities and in which jurisdictions; and whether
criminal sanctions will be sought.
ON THE HORIZON
Further UCIS enforcement all but inevitable
In the previous issue of Enforcement Watch, we commented that criticisms
in relation to UCIS remained firmly on the FSA's agenda "FSA identifies its
major retail risk categories". There have been two signals of intent from the
FSA since then that are harbingers of UCIS enforcement action in the
coming months and years.
The first is the sending by the FSA in June 2012 of over 250 supervisory
letters to firms actively involved in the UCIS market. Recipients were split
between (i) distributor firms and (ii) firms that establish, operate and
manage UCIS. The distributor firms were required to provide information
going back to 1 January 2008, whilst the other firms were required to
provide information on current activities. Included within the responses are
detailed attestations of compliance required from CF10s (those responsible
for compliance). Information was to be provided within fairly tight
timeframes.
The second is a consultation paper in August 2012 on distribution of UCIS
(and also what the FSA referred to as close substitutes). The main
recommendation is that the promotion of UCIS and close substitutes to
retail investors in the UK be banned save in some fairly restricted
circumstances. The recommendations do not extend to sales of UCIS that
are on an execution-only basis.
Whilst the precise nature of the proposed reforms suggested in the
consultation paper is beyond the scope of this article, it is worth reflecting
on what the FSA sees as the background to the proposed changes. The
background to the paper is the FSA's conclusion that the majority of retail
promotions and sales of UCIS that it has reviewed fail to meet its
requirements. It also says that its supervisory and enforcement findings
suggest that the promotion restrictions are "widely misinterpreted, poorly
understood and sometimes simply ignored". Providers have not escaped the
FSA's ire, with the FSA commenting that providers have not done enough
to prevent inappropriate distribution of their products. It is against this
background that the FSA is proposing to ban the marketing of UCIS to
ordinary retail investors.
The FSA is plainly not finished with enforcement activity on UCIS. In
particular, it is not difficult to see how some of the supervisory letters could
easily lead to enforcement action. Firms may for example self report
problems of compliance. Or, firms may report a clean bill of health, only for
that clean bill to be subsequently questioned by the FSA as has been seen in
the past. Some may even run into difficult tensions between CF10s and
others in the business that end up being translated into enforcement
problems. Quite how the action may result is not clear. However, given the
background to the matter and the steps being taken by the FSA, we believe
enforcement action is all but certain to result.
ON THE HORIZON
Tracey McDermott becomes permanent head of enforcement
Tracey McDermott has been confirmed as permanent head of enforcement
and financial crime, having been the acting head since Margaret Cole stood
down last year.
Margaret Cole instigated what was widely recognised as a revolution in the
FSA's approach to enforcement by aggressively pursuing both civil and
criminal cases against individuals and spear-heading the move towards
"credible deterrence". The FSA regards this approach as having been very
successful. Moreover, the new FCA is set to continue the approach (see
Enforcement Watch 5 "FCA's approach to regulation points to increasing
enforcement"). Whilst McDermott's appointment is of some note, in light
of the above, and the fact that McDermott has been acting head for some
time now, we do not expect her permanent appointment to result in any
short term change in approach to enforcement.
ON THE HORIZON
Wealth Managers very much on the FSA radar
In Enforcement Watch 5, we commented on likely FSA action following its
review of suitability at 16 wealth manager firms and its resultant Dear CEO
letter (See Enforcement Watch 5 "Dear CEO letter to wealth managers
suggests action to come"). In short, the FSA had found serious failings at the
16 wealth managers it reviewed, and sent a letter to the CEOs of all firms
that offered wealth management services to retail clients. Our view was that
it was a racing certainty that enforcement action would follow.
On 29 August 2012, the FSA announced further developments in the area:
-
-
The interactions with the 16 firm sample have led to enforcement
referrals, skilled person's reports (s166s) and significant remediation
programmes;
The FSA will be considering whether it needs to take further
regulatory action following interviews with key individuals from firms
concerning the approach their firms have taken to remediate
problems identified;
Most newsworthy of all, the FSA has now commenced a new phase
of thematic work, looking both at client outcomes and at systems
and controls. With a barely concealed threat, the FSA says "we will
be acutely interested in whether firms have heeded the warnings
and concerns contained within our previous communications." It
says it will provide further updates on this work in 2013.
We have commented in the past on how thematic work tends to lead to
enforcement action. In circumstances where the FSA has been very critical
of wealth managers in the recent past, the prospects of enforcement action
being taken to reinforce the FSA's message are even greater.
ON THE HORIZON
The FSA consults on incentives and mis-selling
The FSA has signalled a strong intent to deal with incentive schemes that
increase the risk of mis-selling.
The FSA has published a consultation paper on proposed new guidance
designed to reduce the risk of mis-selling caused by incentive schemes. The
consultation follows on from the FSA's thematic review of 22 firms' sales
practices across different sectors. That thematic review found that 20 of the
22 firms had features in their incentive schemes that increased the risk of
mis-selling. Of these 20, 11 were not properly addressing the increased risk
of mis-selling, and a further 5 had some shortcomings in their approach to
addressing the increased risk. All 16 had since either acted to address the
failings or agreed to do so. One firm had been referred to Enforcement.
The proposed guidance relates to firms' compliance with Principle 3 of the
FSA's Principles for Businesses ("a firm must take reasonable care to
organise and control its affairs responsibly and effectively, with adequate risk
management systems") and with the SYSC rules. It includes examples of
incentive scheme features that significantly increase the risk of mis-selling,
together with examples of features that might reduce the risk of mis-selling.
The proposed guidance can be found here.
This is a topic that the FSA appears very serious about dealing with. In a
speech announcing the consultation, Martin Wheatley (CEO designate of
the FCA) talked in stark and combative terms. He said that many, if not all,
of the recent mis-selling scandals had dysfunctional incentive schemes at the
root of the problem. He added "I want to draw a line in the sand here",
and he described the consultation as the start of a programme to reduce
the risks identified, which the FCA would take forward. He said it would
involve "further supervisory work, a wide review of incentive schemes,
enforcement proceedings, and a possible strengthening of [the] rules." He
said that the regulator intended to change the culture of viewing consumers
simply as sales targets, and added that "I am going to be personally involved
in getting this right."
It appears as if Martin Wheatley is keen to make his mark as the new
regulator in the new regulatory world. It is quite possible that incentive
schemes will form the backdrop to, or possibly even the subject matter of,
future enforcement action. In this regard, it is interesting to note that the
recent Final Notice against HBOS' Peter Cummings included findings that he
had allowed incentives to foster a culture that prioritised revenue over risk.
See elsewhere in this edition "£500,000 fine and partial prohibition for
HBOS executive".
SPOTLIGHT ON THE US
SEC makes its first award to a whistleblower under the Dodd-Frank Act
The U.S. Securities and Exchange Commission (SEC) announced its first
award to a whistleblower under the year-old program created by the 2010
Dodd-Frank Act. According to a 21 August 2012 SEC press release, the
whistleblower, who asked to remain anonymous, provided documents and
information about a fraudulent scheme that enabled the SEC’s investigation
to move quicker than it otherwise would have. The SEC also attributed its
ability to obtain a $1m sanction to the help of the whistleblower.
For the assistance, the SEC awarded the whistleblower 30% of the amount
collected by the SEC in the enforcement action, the maximum allowed
under the Dodd-Frank Act. Although this award was only $50,000, the SEC
noted that if and when it is able to collect more money, the whistleblower
will also receive more.
Notably, the SEC also announced that it denied a claim from a second
individual who sought a whistleblower award in this same matter. The SEC
concluded that because the individual’s information did not lead to or
significantly assist the SEC’s investigation, no award was warranted.
To read the SEC’s press release, click here.
Comment
In Enforcement Watch 6, we wrote about the creation of the whistleblower
program under the Dodd-Frank Act (See Enforcement Watch 6 "DoddFrank Whistleblower Provision"). We highlighted the substantial number of
tips the SEC had received in just the first seven weeks of the program.
Now, the SEC has made its first actual award under the program, and it is
significant for several reasons. Coming only a year into the life of the
program, it shows the SEC has had no difficulty implementing the new
procedures or exercising its new authority to reward whistleblowers.
Indeed, this first award was for the maximum amount allowed by law. With
its decision, the SEC appears to be signaling its encouragement to would-be
whistleblowers, and has publicized that it receives approximately eight tips
each day from potential whistleblowers.
SPOTLIGHT ON THE US
New York regulator settles with record fine against British Bank
On 14 August the ten-month-old New York Department of Financial
Services (Department) settled charges of money-laundering with Britain’s
Standard Chartered Bank (Standard Chartered) for a record $340m. The
settlement represents the largest single fine for money laundering ever
collected by a single U.S. regulator, and comes on the heels of the filing of a
6 August Complaint accusing Standard Chartered of knowingly and willfully
engaging in a massive scheme to hide 60,000 transactions involving Iran and
approximately $250bn in assets. Standard Chartered is the wholly-owned
subsidiary of Standard Chartered plc, the London-based international
banking institution with over 1,700 offices in 70 markets around the world.
As of the end of March 2012, Standard Chartered’s New York branch alone
held over $40bn in assets.
According to the Department’s charges, from 2001 to 2010 Standard
Chartered worked with the government of Iran to hide from regulators
some 60,000 transactions. The Iranian institutions involved in the scheme
allegedly included the Central Bank of Iran/Markazi, Bank Saderat, and Bank
Melli. The scheme was allegedly known to the bank’s most senior
management, who allegedly knew the risks involved and willingly broke the
law. To accomplish the improper transfers, Standard Chartered purportedly
stripped origin-identifying information from wire transfers, withheld material
information from state and federal regulators, and failed to maintain
accurate books and records. The Department also alleged that Deloitte &
Touche, LLP, the bank’s consultant, aided Standard Chartered’s scheme by
omitting information from its independent report to regulators. As a result
of the scheme Standard Chartered allegedly netted hundreds of millions of
dollars in fees. The Department also reported that it has uncovered
evidence of similar schemes by Standard Chartered to conduct business
with other sanctioned countries, including Libya, Myanmar, and Sudan.
In addition to the $340m civil penalty, Standard Chartered also agreed to
install a monitor who will report to the Department for at least two years,
as well as to permanently install personnel in its New York branch to
oversee offshore money-laundering due diligence and monitoring. Notably,
the settlement came in light of the Department’s threat to revoke Standard
Charter’s New York state business license within a week of the filing of the
initial charges.
Click for more information on the New York Department of Financial
Services’ charges against Standard Chartered and the settlement.
Comment
The Department was created in 2011 through the merging of the New
York Banking Department and the New York Insurance Department. New
York State Governor Andrew Cuomo proposed the legislation to create
the Department with the purpose of enabling a single agency to oversee a
broader array of financial institutions and services, thereby enabling the State
to better maintain its oversight of the rapidly evolving financial services
industry. The Department’s settlement with Standard Chartered is significant
for two reasons. First, as noted above, the size of the settlement constitutes
the largest single fine for money-laundering ever collected by a single U.S.
regulator. Second, the settlement demonstrates that, despite being less than
a year-old, the Department has both the ability and willingness to
aggressively pursue alleged violators to a swift conclusion.