When the UK Financial Services Authority became the Financial Conduct Authority (“FCA”) in April 2013, we were told that this would herald a tougher and more intrusive style of regulation. The FCA’s enforcement record in the last two years bears this out, with fines hitting record levels.
Total fines for 2013 were £474 million, jumping to £1,471 million in 2014 and £905 million in 2015. A large part of the 2014 figure comprised the £1,114 million of fines paid by five major banks for failures in the G10 spot foreign exchange market. Take these out of the equation and you have fines for 2014 of £357 million, down around 25%, but more than doubling in 2015.
In short, 2015 was a bumper year for fines, with the trend set to continue.
Market dealing cases
Market misconduct features prominently in the FCA’s caseload. The rules on market abuse and insider dealing are highly technical, but it is notable that the FCA’s approach in this area owes as much to general principles of negligence and recklessness as the technical minutiae of the Financial Services and Markets Act or European-level legislation. The spot FX prosecutions of 2014 did not even come within the scope of the Market Abuse Directive – instead the FCA held the banks liable under principle 3 (failing to take reasonable care to organise and control their affairs properly and effectively).
For asset managers and others less concerned with the sell side of the market, enforcement actions related largely to failures in internal processes and dealings with the regulator, as distinct from traditional suitability and misselling issues. Many of these actions were based on concerns over the effectiveness of the firm’s own internal procedures, particularly where problems had continued over a long period and not been rectified. In some (but by no means all) cases a specific client-related problem had resulted from those concerns.
The FCA published 40 decision notices in 2015 covering a wide range of individuals and firms and including major institutions such as Aviva, Bank of New York Mellon, Merrill Lynch, Lloyds Bank, Barclays and Threadneedle. The largest individual fine was £284 million and the FCA’s findings covered issues such as:
cherry picking in trading allocations;
custody reconciliations and transaction reporting;
handling of customer complaints;
procedures for dealing with high risk clients; and
controls over the initiation, booking and execution of trading decisions.
2015 also saw increased focus by regulators on financial crime. According to Ernst & Young, the amount of prison time being served for financial misconduct has increased by 124% since 2013, with the average prison sentence for financial crime now standing at 52 months, three times longer than the average criminal sentence in the UK. 58% of SFO investigations resulted in prison sentences and 36% of FCA investigations against individuals resulted in prison sentences.
2015 saw a relatively limited number of FCA cases against individuals. Just over half of the 40 fines reported in 2015 related to individual breaches of the approved persons code. However, the senior managers regime (SMR), due to come into effect for PRA-regulated firms in 2016 and for asset managers and others in 2018, is likely to give rise to a new focus on individual responsibility. Unlike the approved persons regime, it focuses regulatory approval specifically on the senior managers responsible for the overall running of the regulated business, with dealer and customer functions subject to a new negative approval regime and all members of staff subject to an enforceable code of conduct. While 2018 may seem a long way off at the moment, its potential impact should not be underestimated.
Predictions for 2016
Relatively low emphasis on technical breaches, particularly in relation to voluminous and complicated EU legislation.
Particular emphasis on:
prosecution of market abuse and financial crime;
willingness to take on major institutions;
failure to take remedial action in relation to problems with compliance and business structure, particularly where concerns have previously been raised by the FCA;
international and cross-border structures that give rise to special business risks;
for asset managers, whatever findings come out of the FCA’s forthcoming asset management market study (the terms of reference for which were published last month); and
in extreme cases the taking of criminal proceedings.