While in-house counsel and compliance professionals monitoring activities in the United Kingdom are awaiting action on a number of matters, including those related to bribery and related misconduct, other regulatory actions have hinted at new vigilance by UK regulators, particularly the United Kingdom’s Financial Conduct Authority (“FCA”).
On January 22, 2015, the FCA levied substantial fines on senior officers of a London-based interdealer broker relating to the firm’s involvement in the wrongful manipulation of LIBOR. It is the first time that LIBOR-related fines have been levied against individuals,1 and the action yields several lessons for managers in the financial services sector who face the risk of employee misconduct.
The former CEO of Martin Brokers (UK) Ltd, David Caplin, and the firm’s former compliance officer, Jeremy Kraft, were fined £210,000 and £105,000, respectively, with a 30% discount applying in each case for early settlement.2 Both have been prohibited from performing any “significant influence function” in the regulated sector, effectively barring them from any future senior management roles in the U.K. financial services industry.
In May 2014, the FCA had fined the broking firm £630,000 for its role in the manipulation of LIBOR.3 Among other things, the firm was found to have minimal compliance policies and procedures in place to regulate the activities of its brokers, as well as unclear reporting lines.
The FCA’s actions serve to show that individuals found to be responsible for systemic compliance failings will face sanctions in order to illustrate that relevant officers and employees, as well as their employer, will be punished. It also signals a “broken windows” enforcement ethos whereby all breaches are pursued, even those by smaller industry participants.
This message was echoed in the FCA’s recent announcement that non-executive directors who discharge high-level functions such as Chairman or Chair of various key committees within deposit-takers and dual regulated investment firms will be subject to the new Senior Managers Regime, which aims to increase individual accountability.4
The FCA’s Findings
The FCA’s Final Notice identifies Caplin, the chief executive during the relevant time period, as having assumed responsibility for ensuring the firm implemented adequate compliance systems and controls. The FCA also took Caplin’s direct contact with the firm’s brokers to amount to the assumption of de facto responsibility for monitoring their conduct.5
In summary, the FCA found that Caplin had:
- Presided over a firm with an “extremely weak” compliance culture;
- Failed to implement compliance advice received from a third party consultancy which highlighted shortcomings and provided recommendations;
- Inadequately supervised the firm’s compliance function;
- Not effectively monitored and supervised broker conduct; and
- Failed to remedy or identify the firm’s lack of controls to prevent its brokers offering or receiving corrupt inducements.6
Caplin was found to have contributed to a culture at the firm that placed profit ahead of regulatory compliance and which neither rewarded compliant conduct nor penalized breaches of internal controls.7 The FCA described Caplin as considering compliance to be “unnecessary administration.”8
Kraft was the firm’s compliance officer for the period in which the FCA found Martin Brokers liable for manipulation of LIBOR. He, like Caplin, was responsible for ensuring the adequacy of the firm’s compliance systems and controls. The FCA found that Kraft failed to exercise such responsibility with due skill, care, and diligence.9
As with Caplin, the FCA concluded that Kraft’s failures and inadequate conduct helped create an environment that enabled wrongful LIBOR manipulation to occur. The FCA concluded that Kraft had:
- Inadequately assessed the risks arising out of the firm’s broking activities;
- Inappropriately delegated his compliance responsibilities to unqualified members of staff and inadequately trained his staff;
- Deferred to Caplin without challenging him;
- Failed to seek appropriate advice and support; and
- Not kept the FCA adequately informed of the firm’s compliance issues.10
The clear takeaway for management of all firms is that they are responsible for upholding a transparent compliance culture in which risks are identified, assessed, and addressed by way of structured compliance systems that are properly implemented. Furthermore, senior compliance