Briefing
UK enforcement round up and looking ahead
By Tom Clark and Sharon Grennan.
This article was first published on 24 January 2022 by Thomson Reuters Accelus Regulatory Intelligence.
The sum of the Financial Conduct Authority (FCA) regulatory enforcement fines imposed in 2021 brought the number back closer to 2019 levels, but with the same number of fines as we saw last year. The overall penalty number is however significantly increased when you take into account the landmark fine imposed against NatWest following the FCA's first criminal prosecution of a bank under the Money Laundering Regulations 2007 (MLRs).
Financial crime has remained a key area of focus for the FCA, but we have also seen fines imposed in other focus areas too, including market conduct and interactions with retail customers.
|
Calendar Year |
2017 |
2018 |
2019 |
2020 |
2021 |
|
Total Fines (£) |
229,515,303 |
60,467,212 |
391,773,187 |
192,570,018 |
*576,865,219 (approx. 312m) |
|
Total of Fines |
229,079,424 |
59,104,112 |
312,245,700 |
192,470,018 |
*576,628,419 (approx. 312m) |
|
Total of Fines |
435,879 |
1,363,100 |
79,527,487 |
100,000 |
466,837 |
|
Number of Fines overall |
13 |
15 |
17 |
11 |
12 (11) |
|
Number of Fines |
8 |
8 |
5 |
1 |
4 |
|
Largest Fine (£) |
163,076,224 |
32,817,800 |
102,163,200 |
64,046,800 |
*264.8M(147.2M) |
|
Financial Year |
2017 - 2018 |
2018 - 2019 |
2019 - 2020 |
2020 - 2021 |
2021 - 2022 |
|
No. of Cases |
410 |
496 |
647 |
646 |
593 |
|
Top 5 Case Types |
1. Insider Dealing (84) |
1. Retail Conduct (78) |
1. Unauthorised Business (142) |
1. Unauthorised |
N/a |
*Figures include fine of NatWest in criminal prosecution. Figures in brackets reflect the position if we limit the data to regulatory enforcement.
Simply looking at the enforcement outcomes never gives the full picture though – also important is the FCA's own investigation workload and the areas of focus. The top five types of cases at the end of the 2020-2021 FY remains the same – with pensions advice and financial crime swapping fourth and fifth positions in the rankings. The number of open investigations has now started to reduce from a high point in 2019, indicating that the FCA has been closing more investigations and many without a public enforcement outcome.
Although we focus here on the FCA's enforcement activity, it would be remiss to avoid noting that the UK's Prudential Regulation Authority (PRA) also imposed two penalties on banks in relation to prudential reporting in 2021, including its highest ever fine in a PRA-only enforcement case.
The PRA imposed a penalty of £46.6 million on Standard Chartered for failing to have adequate systems and controls in place for liquidity reporting in relation to a tailored PRA liquidity expectation. Standard Chartered made five errors reporting the liquidity metric to the PRA. In addition, the PRA penalised the bank for failing to promptly report one of the mistakes until after an internal investigation lasting four months. This point emphasises the need for prompt reporting to comply with a firm's obligations, which is also emphasised by the FCA in several past enforcement actions for breach of FCA Principle 11.
The accuracy of information provided to the PRA was also the subject of the £5.37 million fine imposed on Metro Bank for failing to take due care and skill (Fundamental Rule 2) and failing to have effective governance and oversight (under Fundamental Rule 6) as regards particular capital reporting to the PRA. Although the bank remained compliant with its regulatory capital requirements, the use of the incorrect risk weight for some commercial loans meant that the bank gave the PRA an inaccurate picture of its capital position.
Financial crime
Financial crime, and anti-money laundering (AML) in particular, has been a perennial topic for the FCA, and 2021 was no exception.
The key development this year has been the NatWest case - the FCA's first criminal prosecution of a bank and first prosecution for offences under the MLRs. The case signals the FCA's increasing appetite to use its criminal powers to prosecute AML offences.
NatWest pleaded guilty and was sentenced to a fine of £264.8 million. The charges brought against NatWest involved failings in the monitoring of a commercial customer which was a buyer and seller of gold. This customer deposited increasingly large sums of cash in contrast to the bank's initial expectation of not handling any cash for it.
The failings identified included the adequacy of the investigation of suspicions reported by employees, and the bank's automated transaction monitoring system (which recognised certain cash deposits as cheques). A separate police investigation has led to 11 people pleading guilty to charges relating to the cash deposits and three cash couriers being charged. A further 13 individuals are awaiting trial. This was therefore a case which involved actual underlying money laundering.
Separately, as in previous years, the FCA continues to use its civil enforcement powers to investigate and take action in systems and controls cases which do not involve actual money laundering but rather the risk of money laundering. In April 2021, Mark Steward commented that the FCA had 42 open investigations (25 against firms) relating to various weaknesses in AML systems and controls.
Steward's remarks suggest that there are likely to be more AML system and controls cases to come in 2022 (there was one published decision for HSBC at the end of last year).
The FCA also expects firms to undertake adequate due diligence on transactions to avoid other financial crime risks, such as corruption or tax evasion schemes. The FCA imposed a penalty of £147.2 million on Credit Suisse for due diligence failings relating to loans of more than $1.3 billion and a related bond exchange relating to infrastructure projects for the government of Mozambique. The FCA found that there was insufficient internal challenge and scrutiny of the transactions given the warning signals raised by the inherent risk of bribery in Mozambique, lack of public scrutiny or a formal tender process and the reputation of a third party involved in the transactions. Notably, the bank offered debt forgiveness of $200 million to the Republic of Mozambique, and the FCA reduced the proposed penalty by an equivalent sum.
In the first case involving a sanction by the FCA for involvement in a cum-ex or withholding tax scheme, Sapien Capital was fined £178,000 (after a reduction for financial hardship) for failing to identify the risks involved in trading introduced by the Solo Group. This trading was characterised by a circular pattern of extremely high value trades undertaken to avoid the normal need for payments and delivery of securities in the settlement process. The trading pattern involved the use of over the counter equity trading, securities lending and forward transactions, involving EU equities, on or around the last day securities were cum dividend.
There was no evidence of change in ownership of the equities or change in custody. The FCA found failings in the firm's systems and controls in relation to the trading activity and clients introduced by the Solo Group. The FCA has also imposed a penalty of £642,000 on Sunrise Brokers for similar AML and financial crime control deficiencies and has indicated that investigations are ongoing against other parties.
Wholesale and market conduct
The FCA continues to focus on market cleanliness, and has used its criminal prosecution powers in a steady series of insider dealing prosecutions. Mohammed Zina (who worked at an investment bank) and his brother, Suhail Zina (who worked at a law firm) were charged with offences of insider dealing in relation to trading in a number of stocks (they were also charged with fraud for procuring personal loans – ostensibly for home improvements – to fund the alleged insider dealing). Stuart Bayes and Jonathan Swann have also been charged with improper disclosure of inside information of a corporate acquisition and trading ahead of an announcement about
the transaction.
The FCA also continues to use its civil enforcement powers in this area, illustrated by the decision to impose a ban and market abuse penalty of £52,500 on Adrian Horne, who undertook a series of 129 wash trades. His motive for the trading was to benefit the relationship between his corporate client and his employer by boosting the number of trades in the client's shares. Horne placed buy orders in his corporate client's shares which traded with his existing sell orders (and vice versa), and entered the trades in such a way as to conceal the wash trades.
The fact that there was no profit identified from the trading did not deter the FCA from taking action, but it is notable that Horne obtained a 25% mitigation discount for cooperation (in particular, he made "significant admissions" to his employer and the FCA early in the investigation in a voluntary interview, which "significantly expedited" the FCA's investigation).
The FCA has also focused on a range of issues in fund management. Following a review, the FCA found that some fund managers did not meet the FCA's expected standards in governance structures, managing conflicts of interest, operational resilience and the required annual assessment of value against fees and charges.
The FCA decided to impose a penalty of £40.8 million on Bluecrest Capital Management for failing to manage conflicts of interest. It is notable in this case that the firm has taken the relatively unusual step of referring the case directly to the Upper Tribunal, without making representations to the FCA's Regulatory Decisions Committee. The FCA's findings are therefore provisional at this stage.
The FCA considers that, between October 1, 2011 and December 31, 2015, BCMUK failed to manage fairly a conflict of interest created by allocating portfolio managers working on an external fund, open to investors outside BlueCrest, to an internal fund, open only to its partners and employees. The FCA found that systems and controls did not manage the risk that portfolio managers could be allocated in a way that favoured investors in the internal fund over those of the external fund. This resulted in a sub-standard investment management service being provided to the external fund and its investors.
The FCA has also decided to require the fund to offer redress to disadvantaged customers as a result – this decision has also been referred to the Upper Tribunal.
In another enforcement action involving conflicts of interest, the FCA fined GAM International Management £9.1 million and Timothy Haywood £230,037. There is limited information publicly available at the moment (Final Notices have not yet been published pending the resolution of a potential third party rights issue) but the FCA found that the investment manager breached Principles 2 and 8 by failing to take sufficient care to ensure that systems were adequate to manage conflicts of interest generally and in the context of three specific investments.
Haywood breached Statement of Principle 2 (in particular, by failing to comply with his employer's Gifts and Entertainment Policy) and
Statement of Principle 7 (in relation to conflicts of interest).
Protecting customers
The FCA has committed to be more proactive in protecting consumers and to use a range of tools to do so. Throughout the pandemic the FCA has reminded firms to treat customers fairly, especially those in financial difficulty and the FCA has engaged in various initiatives in pursuit of this objective.
In terms of enforcement, the largest outcome is a penalty of £90.7 million on Lloyds Bank General Insurance and other group companies for Principle 3 and Principle 7 breaches in relation to home insurance renewal letters. Some renewal letters stated that renewal was at "competitive pricing" without steps being taken to check this was accurate, and some renewal letters purported to apply a discount that was not available. In both cases the FCA found that the wording was not clear, fair and not misleading.
The FCA also found that procedures to review communications were not adequate. The FCA did not impose a customer remediation requirement on LBGI; LBGI has paid voluntary remediation of £13.5 million to customers who received communications which referred to a discount when none was applied, and this was one of the mitigating factors for which the FCA awarded a 25% discount in penalty.
The FCA has, over a number of years focused on fraudulent investment schemes and obtained redress for consumers where possible, and also focused on tackling poor investment and pensions advice from authorised firms. One example in 2021 is the successful civil proceedings against Avacade to obtain restitution of remaining funds to consumers who were persuaded to invest in high risk products that lost most of their value.
Individuals
The FCA imposed only a few financial penalties on individuals during 2021. In addition to a couple of penalties mentioned above, the FCA banned and fined Simon Varley for continuing to provide investment advice without the required qualifications or approval, and Omar Hussein for giving unnecessary and unsuitable advice to customers to switch pensions to a SIPP investing in high-risk investments. Both of these fines and many other prohibitions directly relate to the FCA's work to protect consumers in the retail sector.
The FCA has faced a couple of setbacks in extending sanctions for misconduct by those working in the regulated sector arising from conduct taking place outside of work. John Frensham, a financial adviser, was convicted of an offence that did not involve dishonesty.
The FCA decided to ban him from working in the financial sector on the basis that the offence involved an abuse of trust of a child, indicating that there was a risk of an abuse of trust in his work as a financial adviser. The Upper Tribunal determined that the FCA was not able to draw this analogy to justify a prohibition.
Ultimately, the FCA was able to impose a prohibition, but this was on the basis of his concealment of a number of matters from the FCA (his conviction and imprisonment preventing him from performing his controlled function, amongst other things) and his conduct during the Tribunal hearing, rather than any lack of integrity justified by the original offence.
In another decision referred to the Upper Tribunal, the FCA and PRA were required to drop financial penalties and reconsider prohibitions against Stuart Forsyth. The regulators alleged that Forsyth had shown a lack of integrity by deliberately allocating an excessive amount of his remuneration to his wife for administrative and other duties in order to reduce his own tax liability, and concealed this from the remuneration committee (among other claims).
The Upper Tribunal rejected all of the allegations made, whilst acknowledging (as did Forsyth) that the legitimate arrangement should have been better documented. In addition, the tribunal criticised the FCA and PRA for serious issues in their disclosure and other investigation processes.
Looking ahead to 2022 and beyond
There has been a fair amount of consistency in the FCA's areas of focus in recent years and we can expect that to continue, with financial crime, market conduct and consumer protection as likely candidates for fines this year. We may in particular see more activity around fund management and pensions advice following the reviews undertaken by the FCA.
The move of some decisions away from the RDC at the end of last year may have an impact on the speed of contested enforcement cases going forward, although it should be borne in mind that the partial settlement option has led to more firms challenging aspects of a case (e.g., on penalty alone) where in the past they might have settled at stage one.
In the longer term, the FCA is setting a higher standard for firms dealing with retail customers by introducing a new consumer duty. So, beyond 2022, we may see more retail sector investigations and enforcement where the FCA believes firms have fallen below the expected standard of care.
