Credible Deterrence - Significant FCA Fines in 2014
So far this year, The Financial Conduct Authority (“FCA”), has levied fines amounting to £135,855,700.
In 2013, the total amount of fines issued amounted to £474,138,738, a somewhat drastic difference from previous years as in 2004 the total amount of fines issued by the Financial Services Authority (“FSA”) was in the sum of £24,769,000. The FCA aims to ensure that regulated firms put their clients at the heart of their business and have volumes of rules and regulations which businesses in the Financial Services Sector are required to comply with. The cornerstones of the FCA rules are situated within the Principles for Businesses.
Numerous final notices and fines have been issued since early 2014 resulting from failings which highlight the FCA’s expectations of firms with a clear message that there are meaningful consequences for firms or individuals who breach the Principles for Business.
On 19 June 2014, the FCA published its latest edition of its regulation round-up for smaller firms, focusing on enforcement. Firms are advised to look at the root cause of the failures and assess whether similar problems could arise in its business.
Tough penalties for infringements can range from civil and regulatory actions, in which the FCA can request High Court injunctions, orders for payment of restitution such as repayment of profits or compensation to victims for any loss and applications to the Court for insolvency orders, such as winding up, administration or bankruptcy orders if it is satisfied that the firm or person is insolvent.
Criminal prosecutions can also be brought, punishable by a fine or a maximum penalty of seven years imprisonment for matters such as insider dealing and market manipulation.
Firms should ensure prompt response when any issue arises as any delay to resolve could potentially be an aggravating factor when considering the level of penalty for breach of requirements. Similarly, many firms may opt to settle at an early stage resulting in qualifying for a discount, depending on the timing of the settlement can range from 10 – 30% reduction of the fine.
Effective Systems and Controls
FCA Principle for Business 3 states that ‘A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.’ On 15 May 2014, the FCA published the final notice issued to Martin Brokers (UK) Limited, an inter-dealer broker for misconduct relating to the London Interbank Offered Rate (“LIBOR”) in the sum of £630,000. Amongst other things, the fine was a result of the failure to have adequate risk management systems or effective controls in place to monitor and oversee activities. Tracey McDermott, the FCA’s director of enforcement and financial crime said “Firms must play their part in preserving the integrity of the UK financial system, including taking all steps necessary to prevent financial crime. Where we find firms failing to do so, we will take action”, as a result Besso Limited was fined £315,000 for their failure to take reasonable care to establish and maintain effective systems and controls for countering the risks of bribery and corruption for various breaches.
On 23 May 2014, the FCA issued final notices to Barclays Bank PLC and Daniel Plunkett, a former Barclay’s broker, for failings relating to London Gold Fixing. The FCA fined Barclays £26 million for breaches which occurred between June 2004 and March 2013, through inadequate systems and controls, Barclay’s failed to manage the way its traders participated in Gold fixing. In so doing, Mr Plunkett exploited these weaknesses and profited at the customer’s expense. Mr Plunkett breached Statement of Principle 1 by failing to act with integrity by placing his own interests ahead of the customer and breached Statement of Principle 3 by failing to observe the proper standards of market conduct. Mr Plunkett attempted to hide his conduct from FCA and received a personal £96,500 fine and a ban from performing any function in relation to any regulated activities. Tackling financial crime is a key part of the FCA’s remit. It should therefore not come as a surprise that anti-money laundering policies and procedures should be of vital importance for firms, following Standard Bank PLC receipt of a £7 million fine in January for failings to comply, resulting from their systems and controls posing an unacceptable risk to launder the proceeds of crime.
Suitable Advice & Financial Promotions
Suitability of advice and the need for firms to maintain adequate records is a key consideration under Principle for Business 9. Firms should ensure that all literature they produce adequately describes the product that it sells and that sales team members fully understand the products that they sell and provide advice on in order to be compliant.
In March 2014, Santander Plc. received a £12,377,800 fine after FCA uncovered serious failings to ensure that suitable advice was given to customers and that the financial promotion and communications was clear, fair and not misleading. Santander will contact all affected customers and will pay redress where due for any sales that were sub- standard.
On 16 June 2014, the FCA published the final notice it has issued to Credit Suisse International (CSI) and Yorkshire Building Society (YBS) for failing to ensure financial promotions for CSI’s Cliquet Product were clear, fair and not misleading. The FCA imposed fines on CSI in the sum of £2,398,100 and YBS in the sum of £1,429,000. Financial promotions marketed the potential maximum return on the product as a key promotional feature, despite the probability of achieving maximum returns being close to 0%.
This is the first time that the FCA has taken action against both the manufacturer of a product and its distributor simultaneously.
HomeServe Membership Limited was issued the FCA’s largest ever retail fine of over £30 million for miss-selling insurance policies after its Board and senior management were reluctant to investigate complaints adequately. Due to a significant proportion of its customers being of retirement age and ultimately more vulnerable, the FCA considered the failings to be particularly serious.
Canada Inc, formerly carrying on business as Swift Trade Inc was fined £8 million for engaging in market abuse by creating a false or misleading impression in order to achieve profit.
In addition, State Street Bank Europe Ltd; and State Street Global Markets International Ltd were fined over £22 million for developing and executing a deliberate and targeted strategy to charge substantial mark-ups on certain transitions that were deliberately not disclosed or agreed with clients. Tracey McDermott stated “The findings we publish today are another example of a firm that has acted with complete disregard for the interests of its customers”.