On 5 July 2017, the Financial Conduct Authority (“FCA”) published its Enforcement Annual Performance Account (the “Account”) for the 2016/2017 year as part of its Annual Report and Accounts.1
The Account is the FCA’s assessment as to whether it is operating fairly and effectively in investigating suspected misconduct and in bringing criminal, civil and administrative proceedings in appropriate cases. In this article, we look at some of the highlights arising from the Account.
The Account reveals that the FCA is running a record number of investigations. The number of open investigations has increased dramatically with 414 still open as of April 2017, as compared to 237 open at the same time in 2016. The increase in investigations may be explained by the FCA’s new strategy of opening more investigations in light of the HBOS Report released in 2015 which criticised the FCA for being too cautious in it approach to commencing investigations.
However, while more investigations are being opened, a higher percentage of investigations are being concluded with no action being taken. In 2016/2017, 62% of cases were closed with no further action being taken, whereas in 2015/2016 only 24% of cases resulted in the FCA not taking any further action (in 2014/2015, the figure was 33%, so still significantly lower).
There has been a sharp fall in both the number and quantum of financial penalties imposed by the FCA for 2016/2017 (although the number of criminal convictions remained steady). In the 2016/2017 financial year, the FCA applied 15 financial penalties, totalling GBP 181 million. This represents a significant reduction compared to 2015/2016 where 34 fines equating to GBP 884.6 million were ordered (the figures for 2014/15 were 43 fines totalling nearly GBP 1.41 billion).
The majority of the GBP 181 million total fine sum imposed for 2016/2017 is comprised of the GBP 163 million fine imposed on Deutsche Bank for failing to maintain an adequate antimoney laundering control framework in relation to Russian ‘mirror trades’. This is the biggest fine the FCA has levied in relation to money-laundering to date. 6 of the 15 fines were imposed on firms and the remaining 9 on individuals.
The FCA has also, for the first time, used its powers under section 384 of the Financial Services and Markets Act 2000 to require a listed company to pay compensation to those who have suffered loss as a result of market abuse. These powers have been used in relation to Tesco Plc following action taken by the SFO and FCA for market abuse. It is estimated that the amount that may need to be paid to the retail and institutional investors affected will be approximately GBP 85 million excluding interest.2
The most commonly investigated topics during 2016/2017 (with reference to cases opened during the year and remaining open) are insider dealing, unauthorised business, retail conduct and financial crime. Notably, the FCA’s Annual Report and Accounts for 2016/17 disclosed that, during the year, the FCA had opened its first competition enforcement case.
As mentioned earlier, there were 9 fines levied on individuals during 2016/17, but these were relatively small, with a cumulative value of GBP 0.9million. The number of prohibition orders applied to individuals has remained fairly steady over the past three years (2016/17: 23; 2015/16: 24; 2014/15: 26).
The dramatic decline in penalties may indicate that the FCA is adopting a softer approach. However, the FCA states that they “remain committed to investigating and holding firms and individuals accountable for misconduct and to ensure wrongdoers pay for the costs of remediation”. They maintain that there has been no change in the approach to misconduct or financial penalties as taken in previous years. The FCA has explained the fall in financial penalties with reference to the aftermath of the Libor and forex rigging scandals. The FCA says that the “exceptional” punishments handed out in respect of these scandals had the effect of skewing the results of previous years.
In order to manage the increased number of investigations, the FCA has implemented a number of process changes in an effort to make investigations sharper and more efficient. It is said that feedback from those who have been investigated is encouraged and welcomed by the FCA. While the average cost (to the FCA) of an enforcement case has reduced from GBP 565,800 in 2015/16 to GBP 240,900, the Account reveals that enforcement investigations remain lengthy. The average case length for regulatory and civil cases is 17.6 months.
The FCA is continuing to build and strengthen its relationships with its international partners both in the Unites States and in Europe. The FCA is an active participant in the International Organisation of Securities Commission which has recently launched an Enhanced Multilateral Memorandum of Understanding (“EMMoU”). The EMMoU contains new enforcement co-operation powers and is said to represent a “significant milestone” for cross border co-operation. In 2015/17 the FCA received 998 requests for assistance from regulatory and law enforcement agencies across 59 different countries. It remains to be seen what impact Brexit and the trigger of Article 50 will have on the scope and scale of the FCA’s international relations. However, the FCA has called for their European counterparts to continue cooperation with the UK after it leaves the European Union.
It must not be forgotten that the Prudential Regulatory Authority (“PRA”) also undertakes investigations and enforcement action, albeit focused on issues concerning a firm’s safety and soundness as opposed to conduct issues. During 2016/17, the PRA took enforcement action against three firms. These included:
• A UK-incorporated subsidiary bank of an overseas bank (QIB (UK) plc) which was fined GBP 1.38 million for failing to recognise that it had to comply with regulatory requirements relating to the assessment and maintenance of financial resources and capital;
• A London branch of an international bank (MUFG Securities EMEA plc) which was fined USD 8.925 million for failing to be open and co-operative with the PRA in relation to an enforcement action by US regulators against Bank of Tokyo-Mitsubishi UFJ Limited (“BTMU”). BTMU itself was also fined GBP 17.85 million
This represents a drop in the number and size of fines from the year prior, when the PRA imposed three fines of firms totalling GBP 125.87 million and also three fines on individuals, totalling nearly GBP 300,000.