At the end of another year, we reflect on the themes from key enforcement cases and consider likely trends for 2016.
Taking a step back, it is useful to look at the enforcement outcomes over time, for example total penalties in the 2008/9 financial year totalled £28 million compared with £1.4 billion for 2014/15, which is a 50-fold increase. Although it is difficult to imagine penalties continuing along the same trajectory over the next six years after the recognition of regulatory fatigue in the financial community and changes at the top of the FCA, we can expect the FCA to remain active in investigations and enforcement going forward with the increased resources at its disposal and enforcement staff being freed up from the large and complex investigations into benchmark manipulation.
Despite the growth in overall financial penalties, the FCA continues to emphasise an intention to use pre-emptive powers to avoid harm and find other, more effective forms of deterrent to misconduct than enforcement penalties.
Notably in 2015, the FCA exercised a rarely-used power to prevent Bank of Beirut taking on new customers for a period of 126 days.
With a view to the importance of pre-emptive action and remediation as an effective deterrent, the FCA is likely to continue to put in place redress schemes for financial products that have been mis-sold. The FCA's pipeline of thematic reviews and competition market studies is likely to identify conduct as well as competition issues that may result in enforcement action or guidance to firms.
A vital deterrent will continue to be enforcement against individuals, which will become easier for the regulators under the new senior management and certification regime, meaning that it is increasingly important for senior managers to record in writing the basis for key decisions.
Although the majority of enforcement outcomes arise from FCA investigations, it is notable that the PRA has completed four enforcement investigations in just over 12 months (two were joint investigations with the FCA).
Both the PRA and FCA issued a public censure for the Cooperative Bank in preference to a substantial financial penalty that could prejudice the bank's prudential soundness, which the PRA aims to promote. While the FCA will continue to be the primary enforcement authority, we anticipate that the PRA will investigate and publish further enforcement outcomes in pursuit of its own objectives.
The largest financial penalties relate to benchmark manipulation investigations. The FCA imposed large penalties on Barclays (£285 million for FX trading) and Deutsche Bank (£227 million for LIBOR setting). The FCA found breaches of Principles for Businesses primarily relating to the failure of the banks to have adequate systems in place to prevent the collusive behaviour and to manage the conflicts of interest that arose, however, the FCA made other findings during the investigations. The FCA commented that Barclays had failed to implement equivalent remedial controls in its FX trading business following investigations relating to LIBOR and gold price setting. And the FCA viewed Deutsche Bank as breaching Principle 11 for failing to cooperate sufficiently with the FCA during the investigation. Both provide useful lessons for firms.
When remedial action is taken in one area of the business, managers should consider if equivalent measures should be introduced for other business units. And when system improvements are to be implemented in a phased process or different measures taken, the strategy and timing need to be clearly communicated to regulators.
The FCA is also pursuing a number of civil and criminal enforcement actions against individuals for benchmark manipulation. The most notable was the conviction of Tom Hayes and his lengthy sentence of 14 years (reduced to 11 years on appeal) but there are at least 10 other individuals facing prosecution. In other cases, the FCA has coordinated with overseas regulators, for example putting regulatory enforcement on hold pending criminal prosecution overseas and then using the convictions to ban the individuals in question in the UK.
It has been a fairly quiet year in respect of mainstream market abuse cases although there have been a few convictions for insider dealing relating to the takeover of Logica plc and there is an ongoing investigation into an insider dealing ring in the City referred to as Project Tabernula that will go to trial this year. And on the civil enforcement side, the conspirator who gave evidence for the FCA in the Logica insider dealing trial received a penalty of approximately £35,000 instead of a criminal prosecution (Kenneth Carver).
Systems and controls
The FCA continues to emphasise the importance of transaction reporting by firms, which the FCA uses for surveillance and identifying potential market misconduct. The penalty of £13 million on Merrill Lynch is the latest in a series of cases relating to transaction reporting.
The FCA used an increased multiplier for calculating the penalty, showing the increasingly aggressive stance it is taking on this issue.
In its business plan this year, the FCA identified financial crime as a key emerging risk. Systems and controls are often identified by the FCA in enforcement actions against firms but financial crime prevention controls are a current focus. For example, Barclays was fined £20 million (plus disgorgement of an additional £52 million fee) for failing to exercise enhanced due diligence in response to higher AML risks from a large transaction even though there was no evidence of actual criminal conduct.
Barclays had agreed to enter a transaction involving politically exposed persons, multiple jurisdictions and currencies, involving £1.9 billion and agreed to enhanced confidentiality, but had not complied with Barclays' enhanced due diligence processes.
In another case, the FCA imposed £2.1 million on Bank of Beirut and prevented it taking on new customers temporarily for Principle 11 breaches because it provided inaccurate assurances that AML system improvements were implemented.
Two other areas identified as key priorities are custody of client assets and conflicts of interest. Bank of New York Mellon paid a £126 million penalty for failing to comply with CASS rules. At the time of the business plan, there were five other firms in enforcement for CASS breaches.
The FCA fined Aviva Investors £17.6 million for failing to have effective systems in place to prevent its traders from executing trades early in the morning and then, depending on how the market moved during the course of the day, allocating those trades late in the day to a specific fund on the basis of the highest performance fees. Aviva received a 40 percent discount in the penalty calculation for exemplary cooperation in addition to the final settlement discount of 30 percent.
Clydesdale Bank was fined £20.6 million and Lloyds Bank £117 million for failings in their handling of PPI complaints, both in breach of Principle 6 requiring firms to treat customers fairly. PPI remains the product with the highest level of consumer complaints, and complaints are likely to remain high over the next couple of years following the Supreme Court's decision in Plevin v Paragon Finance ( UKSC 61).
The FCA's recent consultation on PPI redress does include a two-year longstop date for PPI complaints, however, which may bring this long running issue to an end after a final flurry.
Redress for PPI and interest rate hedging products continues and fair treatment of borrowers in difficult financial circumstances will continue to be a focus for the FCA.
We have seen a number of enforcement cases this year against executives who have been involved in failures of management, often linked to enforcement actions against firms. For example, the FCA fined Martin Brokers (in relation to Libor setting) and also brought enforcement action against the CEO and compliance officer at the firm.
Neither were personally involved in the misconduct but the FCA found that the CEO hadn't taken steps to monitor brokers' conduct and had allowed a poor culture to develop. The compliance officer was held responsible for failing to challenge the CEO, failing to implement recommendations by an external consultant and acquiescing in relevant management decisions.
Another example is the action against Keydata executives. The firm itself is well-known as a seller of so called death bonds. The FCA fined the CEO and sales director who benefited directly from commissions, and the finance director, who allowed Keydata's own funds to be used to make a payment to investors when there had been a default by the bond issuer although he didn't personally benefit from the wrongdoing. The FCA did not find a lack of integrity, the finance director's failures were sufficient to justify a financial penalty and a ban.
Individuals are always keener to challenge FCA decisions and there are some important cases this year relating to third party rights, FCA publicity and similar treatment of related cases.
In the Macris case, the Court of Appeal determined that whether an individual has third party rights in an enforcement action is by reference to whether they can be identified from the content of the notice by someone with knowledge of the relevant market or someone who is acquainted with the individual. So the rights are not limited to people who are identified by name (see FCA v Macris  EWCA Civ 490 (19 May 2015); Christian Bittar v Financial Conduct Authority  UKUT 0602).
In future, the FCA has two ways of managing this issue. Either the FCA can give third party rights to individuals referred to in the detailed factual background in notices (which means cases are likely to be contested by individuals before the matter can be finally resolved, adding to the time and expense from the regulator's perspective and keeping the matter open from the firm's perspective). Or the FCA can strip out the factual detail that they include in warning, decision and final notices.
In relation to publicity, the FCA published a press release alongside a decision notice against Clive Rosier, who complained to the FCA that the press release was inaccurate and misleading. It omitted to mention that Rosier had referred the matter to the Upper Tribunal, contained an inaccurate headline and contained a quote supposedly (but not actually) made by enforcement staff.
The tribunal criticised the FCA's approach as inappropriate and fell well below what the FCA would expect of a regulated firm's complaint handling and public relations (Bayliss & Co and Rosier v Financial Conduct Authority  UKUT 265). Following the tribunal's recommendation, the FCA was obliged to review its publicity processes.
The tribunal has also reminded the FCA of the importance of treating like cases alike, which is potentially significant for both firms and individuals. The FCA brought enforcement action against two professionals involved in assisting or enabling a private investor, Goenka to commit market abuse (Tariq Carrimjee v Financial Conduct Authority  UKUT 0079 (TCC)). Carrimjee, a wealth manager, introduced Goenka to a broking firm and Vandana Parikh, a broker, executed the trades. The FCA found that Carrimjee had a lack of integrity but not Parikh. The tribunal used the FCA's findings against Parikh and considered whether the additional evidence against Carrimjee (beyond that available against Parikh) was sufficient to justify the difference in conclusion, which the tribunal held it did not.
Where will enforcement focus in 2016?
A growing area of focus is likely to be conduct and culture at, wholesale financial services firms, in contrast to the FCA's historic focus on market abuse and certain specific operational issues in the wholesale sector. Ensuring that communications and other dealings with customers are fair is likely to remain a focus. The extension of the fair, clear and not misleading rule to eligible counterparties, under MiFID 2, is likely to give rise to further risks in the wholesale sector.
Linked to its competition role, the FCA is likely to scrutinise more closely value for money of products as a method of identifying likely targets for competition and conduct issues. A pervasive trend in all of the FCA's work is a focus on individual responsibility for the conduct, culture and regulatory compliance of firms.
Through its cooperation with overseas regulators and coordinated settlements in benchmark investigations, the FCA has learnt how to work effectively with those regulators and growth in cross border investigations of conduct issues is likely to become the new norm for global financial institutions.