Senior Managers regime
The FCA and the PRA have published further material in relation to the implementation of the new provisions relating to individual accountability in banking, including the Senior Managers regime, the certification regime, and the conduct rules. The initial consultation paper was published by both regulators in July 2014, with a further consultation in relation to forms and transitional provisions in December 2014.
In the first half of this year, the FCA and the PRA have published:
Approach to non-executive directors in banking and Solvency II firms & Application of the presumption of responsibility to Senior Managers in banking firms
FCA CP15/5 and PRA CP7/15, February 2015
In this Consultation paper, the FCA and the PRA set out their revised approach to the application of the Senior Managers regime to non-executive directors. The PRA also consulted in relation to its approach to the presumption of responsibility.
Feedback on FCA CP14/13 and PRA CP14/14 and consultation on additional guidance
FCA CP15/9, March 2015
In this Consultation Paper, the FCA provided its comments on the feedback it had received to its original consultation of July 2014. It provided "near-final" text of some of the new Handbook content it will introduce, much of which was substantially reworked as compared with the version attached to the July 2014 CP. The FCA also provided draft guidance in relation to its approach to the presumption of responsibility.
UK branches of foreign banks
FCA CP 15/10, March 2015
In this Consultation Paper, the FCA set out its proposals for how the new regime for individual accountability would apply to the UK branches of foreign banks, including those based inside the EEA.
Strengthening accountability in banking and insurance: Responses to CP14/14 and CP26/14
PRA PS 3/15, March 2015
This Policy Statement contains the PRA's final rules in relation to much of the Senior Managers regime and certification regime. Importantly, the Policy Statement does not include some remaining aspects on which it needs to co-ordinate with the FCA, as well as issues in relation to which it is still considering the responses to its consultation. The latter category includes: transitional provisions and forms; non-executive directors; the presumption of responsibility; and application of the new regime to UK branches of foreign banks.
Corporate governance: Board responsibilities
PRA CP 18/15, May 2015
While not strictly part of the Senior Managers regime, this consultation by the PRA is expressly stated to complement it. In the consultation paper, the PRA seeks views on a draft supervisory statement setting out its expectations in relation to a wide range of issues, including the respective roles of executive and non-executive directors. This is a distinction which has been under some scrutiny in relation to the application of the Senior Managers regime to non-executive directors (it will now apply to a much smaller number than originally proposed). The short draft supervisory statement makes it clear that the PRA expects firms to provide non-executive directors with adequate training and practical resources, and that they must have unrestricted access to employees and information, in order to discharge their duties. The quality of management information has recently been a recurring theme from regulators, and the PRA sets out its expectation that boards insist on receiving neither too little nor too much management information.
Finalised Guidance 15/1
Retail investment advice: Clarifying the boundaries and exploring the barriers to market development
FCA FG 15/1, January 2015
The FCA published FG15/1 in order to consolidate existing sources of guidance on retail investment advice, and to clarify what does and does not amount to advice or a personal recommendation (which must comply with COBS 9) in that context. While the Guidance is helpful in many respects, particularly in terms of consolidating existing guidance, it leaves some difficult questions unanswered. It also serves, at times, to highlight some potentially significant differences in approach between the FCA and the common law approach to sales of financial products to retail customers.
Holmcroft Properties Limited
Holmcroft Properties Limited was held to have a sufficiently arguable case to be granted permission to bring judicial review proceedings against KPMG. KPMG is the skilled person appointed by Barclays pursuant to section 166 of FSMA in relation to its review of sales of interest rate hedging products. A transcript of the court's judgment at the permission stage does not appear to have been produced, but reports from those acting in the proceedings indicate that Holmcroft alleges that the process followed by KPMG was unfair and/or unlawful. Holmcroft's application for permission was apparently opposed by KPMG, Barclays and the FCA, and one very interesting aspect of its challenge will be whether it succeeds in persuading a court that a skilled person appointed in this way is amenable to judicial review.
Fall-out from the London Whale
R (on the application of Julien Grout) v. Financial Conduct Authority  EWHC 596 (Admin)
One of the traders involved in the London Whale trades, Julien Grout, who has been indicted in the US in relation to his role, applied for judicial review of the FCA's decision to terminate its investigation into his conduct. The challenge (which unsurprisingly failed) was apparently made in order that Mr Grout might have an opportunity to clear his name.
The Financial Conduct Authority v. Macris  EWCA Civ 490
The Court of Appeal also considered an appeal by the FCA from a decision of the Upper Tribunal on a preliminary issue in a reference of certain FCA notices made by Mr Grout's ultimate boss, Achilles Macris. Mr Macris alleged that the FCA's warning, decision and final notices to JP Morgan in relation to the London Whale trades (the Notices) identified him, and that under section 393 of FSMA, he should therefore have been provided with copies of them in advance of their promulgation. Both the Upper Tribunal and the Court of Appeal agreed that Mr Macris was identified in the Notice. The question of whether an individual person (other than the recipient of the notice) was identifiable from a notice was to be answered by reference to the notice alone. However, once it was clear that an individual was identifiable, documents and information external to the notice could be considered in determining whether those acquainted with the individual or operating in his or her professional sector would recognise him or her from the references in the notice. The decision has a number of interesting possible implications, including for the way in which the FCA drafts notices, and for its future conduct of investigations.
Conflicts of Interest
Aviva Investors, 24 February 2015
Aviva Investors is an asset management company. It was fined £17,607,000 by the FCA, in relation to breaches of Principle 3 ("a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems"); Principle 8 ("a firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client"); and COBS 11.3.2 and COBS 11.5.2 (in relation to execution of client orders and record keeping). Aviva Investors had, over a period of years, allowed its traders to favour one class of clients over another. Its systems and controls did not require traders to allocate investments as soon as they were purchased, allowing them to cherry-pick investments in order to favour funds paying higher performance fees.
Dealing with regulators
The FCA fined Bank of Beirut £2.1 million and restricted it, for a period of 126 days, from acquiring customers resident or incorporated in high-risk jurisdictions. The FCA's initial concern in relation to Bank of Beirut related to its implementation of AML and financial crime safeguards, but it was eventually penalised for breach of Principle 11 ("A firm must deal with its regulators in an open and co-operative way, and must disclose to the [FCA] appropriately anything relating to the firm of which the [FCA] would reasonably expect notice"). The FCA found that Bank of Beirut had not been open and cooperative with it in relation to the implementation of agreed remediation plans.
Responsibilities of Compliance officers
Stephen Bell, 14 March 2015
Mr Bell was Compliance Director for Financial Limited and Investment Limited, two affiliated firms which formed an adviser network, responsible for a number of Appointed Representatives (ARs) and Registered Individuals (RIs). He was fined £33,800 and prohibited from performing CF10 (Compliance Oversight function), as a result of being found to be knowingly concerned in the two firms' breach of Principle 3 (which requires a firm to organise and control its affairs responsibly and effectively, with adequate risk management systems). The firms' breaches related to their recruitment and supervision of RIs and ARs.
Responsibilities of Compliance officers
Both Mr Legerton and Mr Pope were directors of TailorMade Independent Limited (TMI) (in liquidation). TMI advised clients seeking to transfer their pension funds to unregulated investments using a SIPP. As well as being directors, Mr Legerton and Mr Pope both (at separate times) had responsibility for the compliance oversight function. TMI did not, contrary to the FCA's requirements, provide its clients with any advice as to the suitability of the investments underlying the SIPPs they proposed to enter into, only the suitability of the SIPP wrapper. TMI also failed to manage conflicts of interest appropriately. Mr Legerton and Mr Pope were found to have breached Approved Person Statement of Principle 7 (requiring an approved person performing a significant influence function to take reasonable steps to ensure that the business of the firm for which he or she is responsible in that controlled function complies with the requirements of the regulatory system).
Clydesdale Bank plc, 14 April 2015
The FCA fined Clydesdale £20,678,300 for failings in its handling of PPI complaints which amounted to a breach of Principle 6 (which requires a firm to pay due regard to the interests of its customers and treat them fairly). In particular, the FCA found that Clydesdale's complaint-handlers did not look for documents which might exist, because it was difficult to do so, or because the documents predated the bank's seven-year document retention policy. Some complaint-handlers (without Clydesdale's knowledge) also falsified documentary evidence in response to requests for information from the Financial Ombudsman Service. In addition to paying a fine, Clydesdale agreed that it would review all PPI complaints handled before August 2014, under the oversight of a skilled person.
The Bank of New York Mellon London Branch (BNYMLB) and The Bank of New York Mellon International Limited (BNYMIL), 14 April 2015
BNYMLB and BNYMIL were fined £126 million in relation to numerous breaches of the FCA's CASS rules and Principle 10, which says that a firm "must arrange adequate protection for clients' assets when it is responsible for them". At the heart of many of the failures identified by the FCA was the fact that both entities used group custody platforms which operated at a global, rather than an entity-specific, level. While records identified the name of the client and the assets, they did not record which BNY Mellon entity was party to the relevant custody agreement.
Transaction reporting failures
Merrill Lynch International (MLI), 22 April 2015
The FCA fined MLI £13,285,900 in relation to failures in transaction reporting in breach of SUP 17.1.4R and SUP 17.4.1 EU over a seven-year period. It identified 11 different breaches of reporting requirements. The Final Notice reiterates the importance of transaction reporting, in order to allow the FCA to perform market surveillance, and to inform investigations into insider trading and market manipulation. The FCA increased the relevant metric for the purposes of calculating penalties under DEPP in relation to transaction reporting from £1 to £1.50 per breach, in order to provide greater deterrent.
Deutsche Bank, 23 April 2015
Deutsche Bank was fined £226 million in relation to benchmark manipulation, in breach of Principles 3 (requiring firms to take reasonable care to organise and control their affairs responsibly and effectively, with adequate risk management systems), 5 (requiring firms to observe proper standards of market conduct) and 11 (requiring firms to deal with their regulators in an open and co-operative way). The FCA found that the direct involvement of managers and senior managers in the breaches identified aggravated the breaches.
In relation to Principle 5, the FCA found that Deutsche Bank traders had asked the firm's own submitters, and those from other firms, to influence IBOR submissions, and had occasionally offered or bid cash in the market in order to influence the submissions of other banks. The rates traders were found to have attempted to manipulate most frequently were JPY, CHF and USD LIBOR and EURIBOR, and less frequently GBP LIBOR. The FCA notes, however, that traders on FX Forward desks also made requests to influence other benchmarks.
In relation to Principle 3, the FCA found that Deutsche Bank did not have IBOR-specific systems and controls in place, and that its systems and controls for detecting trader misconduct were seriously defective, and had hampered the FCA's investigations.
In relation to Principle 11, the FCA identified that Deutsche Bank had recklessly (and incorrectly) told it that Deutsche Bank was prohibited by the German regulator, BaFin, from providing it with a report; that an individual at Deutsche Bank had drafted an attestation to the FCA confirming the adequacy of IBOR-related systems and controls, while knowing such attestation to be false; and that Deutsche Bank had failed to provide complete, accurate and timely information and documentary evidence.
The final notice refers repeatedly to shortcomings in the culture at Deutsche Bank, and highlights the importance of firms being practically able, as well as willing, to assist FCA investigations.
Barclays Bank, 20 May 2015
Barclays, which went first in relation to LIBOR settlements with the FCA, appears to have gone last in relation to FX manipulation and has received the largest fine ever imposed by the regulator. It has been fined £284,432,000 for failings occurring between 1 January 2008 and 15 October 2013. Unlike some other final notices, this one identifies not only manipulation of G10 spot rates, but also Emerging Markets spot FX trading, G10 and EM FX options, and sales operations associated with its FX business. Like other banks fined for manipulation of FX rates, Barclays was found to have been in breach of Principle 3, which requires firms to take reasonable care to organise and control their affairs responsibly and effectively, with adequate risk management systems. Too much reliance was placed on front office as the first line of defence, and such reliance was misplaced. As a result, Barclays was found to have colluded with other banks in order to manipulate spot rates for its own benefit; to have colluded in order to trigger stop-loss orders; and to have shared confidential information inappropriately.
The FCA proposes fining Stewart Ford, Mark Owen and Peter Johnson (£75 million, £4 million and £200,000 respectively) and banning them from performing any function in relation to any regulated activity carried on by an authorised person, exempt person or exempt professional firm, in relation to events surrounding the collapse of Keydata. The FCA's decision notices are dated 7 November 2014, but were only published on 26 May 2015.
The penalties proposed by the FCA are for breach of the Statements of Principle for Approved Persons 1 (which requires an approved person to act with integrity in carrying out his or her controlled function) and 4 (which requires an approved person to deal with regulators in an open and co-operative way and disclose appropriately any information of which the regulators would reasonably expect notice).
The decision notices set out the FCA's detailed reasoning (as well as a summary of the representations made by the individuals, and the FCA's response to them). At the heart of the failings identified is Keydata's continued sale of high-risk products, despite knowing that its product disclosures were inadequate; that not all the products offered would meet the requirements of the ISA Regulations; and that there were problems with the performance of the investments. The FCA also identified high, and in its view unearned, fees paid to entities beneficially owned by Mr Ford's family in connection with investments made by clients of Keydata, amounting to some £72.4 million, as well as undisclosed commissions of £2.5 million paid by Mr Ford to Mr Owen. In addition, the FCA found that all three individuals had failed to disclose information to it, or correct information they knew would be misleading.
All three individuals have referred the decision notices to the Upper Tribunal.
FCA's priorities for 2015-2016
FCA Business Plan, March 2015
The FCA produced its Business Plan for 2015-2016, including its Risk Outlook, and an appendix containing details of current and planned thematic work and market studies. In its Risk Outlook, the FCA retained some of its areas of forward-looking focus from last year, as well as adding new areas of particular scrutiny. Its list included the risks posed by poor culture to market integrity, including conflicts of interest. The Risk Outlook also discussed business conduct risk, risks posed by the identity and behaviour of consumers, conflicts of interest and the risks posed by financial crime.
We consider in our introduction to this edition of Financial Markets Disputes and Regulatory Updatewhat can be gleaned from the Business Plan in relation to areas to watch over the next six months.
"Risks to customers from performance management at firms" and "General guidance on the application of ex-post risk adjustment to variable remuneration"
In GC 15/1, the FCA consulted on guidance in relation to how firms' performance management (both formal and informal) of their customer-facing staff could cause detriment to customers if firms rewarded or promoted the wrong types of behaviour. While the FCA said that its work (particularly with whistleblowers) had detected some issues, it had not identified a widespread problem. The paper contains detailed discussion of practices which could have a negative effect, such as excessive focus on sales targets and publishing each employee's sales figures, as well as giving examples of good practice.
In GC 15/2, the FCA consulted on guidance to replace that previously appended to its joint consultation (CP 14/14) with the PRA in relation to remuneration, following the recommendations of the Parliamentary Commission on Banking Standards. Specifically, the guidance deals with ex-post risk adjustment to take account of specific crystallised risks or adverse performance outcomes.
The FCA has also been active in relation to insider dealing. In March 2015, Julian Rifat (formerly of Moore Capital) was sentenced to 19 months' imprisonment. The FCA secured two convictions for insider dealing in the first months of 2015, and 10 other individuals charged with insider dealing await trial.
Publication of terms of reference for investment and corporate banking market study
FCA MS 15/1.1, May 2015
The FCA has produced the terms of reference for its forthcoming study into whether competition for investment banking and corporate banking services is working well. The FCA will look primarily at Equity Capital Markets, Debt Capital Markets, mergers and acquisitions and acquisition financing. It will look at so-called "related activities" such as corporate lending and corporate finance and advice only to the extent that they touch on these primary activities. The FCA has identified three principal topics for consideration: choice of banks and advisers; limited transparency; and bundling and cross-subsidisation of investment and corporate banking services. It will not consider, as part of this study, two issues previously raised, which are: best execution of client orders; and barriers to entry in corporate banking.
The FCA's final report is not due to be published until spring 2016, but it has said that it intends to produce an interim report.