The FCA has for the first time exercised a new publication power which came into effect last October by publishing two warning notice statements. They relate to proposed enforcement action against two individuals involved in the submissions used to set interest rate benchmarks.
Warning notices are issued by the FCA to firms and individuals against whom the FCA is minded to take enforcement action. Following receipt of a warning notice, the subject has the opportunity to make written and oral representations to the FCA’s Regulatory Decisions Committee (the “RDC”) which will then make a decision as to whether enforcement action should proceed. Prior to October last year, the issuance of a warning notice was confidential and the FCA would not normally make any information regarding the investigation public, at least until after a decision by the RDC.
The new power to publish at an earlier stage was acquired under the Financial Services Act 2012. In its policy statement PS13/9 released on 15 October 2013 (the "Policy"), the FCA indicated that warning notice statements would contain a brief summary of the facts and would be published to enable consumers, firms and market users to understand the nature of the regulator’s concerns and to promote early transparency of enforcement proceedings.
In response to industry feedback, the FCA also confirmed that individuals would be treated differently from firms in that the starting point would be not to name individuals but to publish anonymous details. The FCA indicated that the circumstances in which identification of individuals would be appropriate would include where publication is necessary to avoid other individuals being mistakenly believed to be the wrongdoer or where it is desirable to quash market rumours. Those facing publication could make representations including in relation to unfairness and the disproportionate damage that might be suffered as a result.
Warning Notice Statement 14/1 – the Submitter
Warning Notice Statement 14/1 indicates that a trader at a bank who was involved in making interest rate benchmark submissions (the “Submitter”) has received an FCA warning notice because the FCA considers that the Submitter was knowingly concerned in the contravention by the bank of Principle 5 (Market Conduct) for significant failings in relation to an interest rate benchmark over a period of more than two years.
The FCA considers that the Submitter took into account the Submitter’s own trading position and requests from other traders at the bank, traders at another bank, and a broker when making submissions, and also made requests to traders at other banks in an attempt to influence their submissions.
Warning Notice Statement 14/2 – the Manager
Warning Notice Statement 14/2 indicates that a manager at a bank who was responsible for those making interest rate benchmark submissions (the “Manager”) received an FCA warning notice because the FCA considers that the Manager was knowingly concerned in the bank’s contravention of Principles 3 (Management and Control) and 5 (Market Conduct) for significant failings in relation to an interest rate benchmark over a period of more than three years.
The FCA considers that the Manager knew that submitters for whom the Manager was responsible were taking into account requests from traders to manipulate interest rate benchmark submissions and condoned this. The FCA also considers that the Manager was guilty of management failings, facilitated attempts by others to manipulate submissions and took no steps to address an absence of systems, controls or policies governing submissions or conflicts of interest in submitters also trading products linked to the benchmark.
The FCA has not named the individuals under investigation, nor is the firm named in either case. The fact that the FCA’s concerns relate to the individuals having been “knowingly concerned” in a breach by their firm (rather than in breach of a Statement of Principle or the Code for approved persons) suggests that the bank may already have been the subject of enforcement action.
Given the lapse of time between the warning notices having been issued (in November last year) and the publication of these statements, it may be that the individuals concerned have sought to make representations regarding publication and that the decision to publish anonymously has been made by the RDC (although the nature of any such representations and the reasons for publication remain confidential). This preservation of anonymity might not be maintained in the event of significant market speculation or rumours regarding their identity.
Although no press release has been issued by the FCA, the publication of these statements has nevertheless received some attention due to this being the FCA’s first use of a new power and their subject matter. However, in terms of the stated regulatory objective, it remains to be seen whether publication of this sort of “charge sheet” at such an early stage constitutes a deterrent, in circumstances where the individuals are yet to tell their side of the story by making representations to the RDC and where even a decision by the RDC can be referred to the Tribunal in order to determine the appropriate standard of behaviour. In the meantime, these statements meet the regulator’s current agenda, serving as a reminder that, where there are firm failings, senior managers are directly under the spotlight as the FCA seeks to hold them to account and to set an example to the rest of the industry.
Please see the following links to the FCA Warning Notice Statements: