Partner expulsion case offers lessons to LLP firms and their partners
A healthy and successful financial system
The report sets out the FCA’s work in “ensuring we have the right rules and policies in place to ensure that the UK has a healthy and successful financial system. A financial system where financial markets are fair, efficient and transparent, firms can thrive and consumers have trust in open and transparent markets.”
Reflecting on the fact that the FCA has been in operation for three years, the Chairman’s introduction to the report states how “we have become clearer about those areas which require our priority focus and how we can best use our powers and resources to deliver the best results.”
Throughout the report the FCA underlines its proportionate regulatory approach based on assessment of risk. Indeed, one of the priorities for the year 2015/16 was to address risks to the objective of enhancing market integrity. A number of risk were identified including; individual accountability, enhancing wholesale market integrity, international engagement, and, preventing financial crime.
The report sets out how markets need to be underpinned by the right rules and policies to encourage investment and a level playing field. Alongside effective action where rules are broken. The FCA reviewed over 8,400 reports of potential unauthorised activity, issued 185 consumer alerts and supported law enforcement agencies’ action against criminal activities by firms and individuals.
£884.6m worth of penalties imposed on firms and individuals – 24 individuals banned and jail sentences totalling 32 years and 9 months imprisonment being handed down. (Though this penalty figure is down from £1,409.8m in 2014/5). Fines issued against individuals totalled £4.2 m.
The report confirms that the FCA has established itself as a “capable and expert prosecutor”.
The report recalls the Fair and Effective Markets Review (2014/15) - where the FCA worked with the Bank of England and the Treasury to conduct a review into the way wholesale Fixed Income, Currencies and Commodities markets operate – and reminds us of the 21 recommendations that were set out for the UK authorities, the UK Government, international standard setters and the financial industry. It underlines the significant progress made against the report’s recommendations this past year. Highlights include the following.
Regulating benchmarks – LIBOR and more
The FCA has been working to improve governance and controls around regulated benchmark activities. Following the regulation of LIBOR in 2013, 7 further benchmarks were brought within the FCA regulatory sphere this past year. A dedicated supervisory team for this area was set up with 20 “LIBOR – submitting” banks having their systems and controls assessed. A thematic review into financial benchmarks and controls was published in July 2015. This suggested that “although firms have made some positive changes to improve their governance and controls….significant further work is needed to ensure all risks are managed appropriately.” In addition the FX Remediation Programme was completed. The FCA is working with international partners to develop a single global FX code.
The FCA considers that “failures in wholesale conduct can undermine the integrity of the wholesale market, cause systemic harm, and have a serious impact on confidence in the UK financial system”. With that in mind, the largest ever fine in this area was issued this past year when the FCA fined Deutsche Bank £227 million for manipulating the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR) over a period of more than five years and for misleading the FCA.
The FCA stated that “Deutsche Bank’s failure to deal with us in an open and cooperative manner undermined the regulatory regime” and “the significance of this misconduct was recognised by a £100m fine in that respect alone”. This fine also highlighted the risks of signing attestations both for individuals and financial institutions (link to blog https://www.kingsleynapley.co.uk/news-and-events/blogs/criminal-law-blog/deutsche-bank-227m-fine-highlights-the-risks-of-signing-attestations-for-individuals-and-financial-institutions).
A “Market Cleanliness” statistic is published which gives an indication of possible insider trading prior to takeover announcements. From 2005-9 this remained “close to 30%” reducing to and “average level” from 2010 of 14.3%. Though there was an increase in 2015 up to 19%. The recent Market Abuse Regulation which revised the market abuse regime (3 July 2016 – see our related blog) is seen by the FCA as a robust tool to challenge behaviour in this area.
In October 2015, in response to the recommendation of the Parliamentary Commission on Banking Standards, the FCA introduced new rules on whistleblowing. These rules aim to encourage a culture in firms where individuals feel able to raise concerns and challenge poor practice and behaviour. The report states that in 2015/16 there were 1014 intelligence cases containing information from whistleblowers – leading to information being shared with other UK authorities and overseas regulators in 260 cases.
Culture and good governance
The report highlights the “step change” delivered by the Senior Managers and Certification Regime. In force from March 2016, 41,000 people working in 1000 firms are now covered by the regime. The FCA has the power to extend the regime to all regulated firms by 2018, bringing in over 55,000 firms and 100,000 individuals.
The report sets out how future confidence in financial services will depend on senior individuals in positions of responsibility taking personal accountability for how their firms operate and the consequences of misconduct.
Financial Crime – a strategic priority
The report sets out how the FCA has a key role to play in ensuring that firms have adequate safeguards to prevent themselves from being used to facilitate financial crime, particularly money laundering. It profiles the work the FCA has been doing with international partners and UK Government on implementing the Fourth Anti-Money Laundering Directive (26 June 2017) and the Market Abuse Regulation (3 July 2016). The FCA is part of the multi- agency task force on the Panama Papers and the Joint Money Laundering Intelligence Task Force.
The report underlines that firms must have effective systems in place to avoid being used to further financial crime and must mitigate the risk of such. Indeed the FCA held Barclays to account for failing to minimise risk in connection with a £1.88bn transaction it arranged during 2011 and 2012 for a number of ultra-high net worth clients who were politically exposed persons (PEPs). The FCA found that Barclays had not conducted its business with due skill, care and diligence and on 26 November 2015, imposed a fine of £72m. This is the largest fine imposed by the FCA and its predecessor, the FSA, for financial crime failings.
However the FCA sounds a cautious note about in terms of effective money-laundering risk management and has made clear that this need not result in wholesale de-risking. It confirms that there should be relatively few cases where it is necessary to decline business relationships solely because of anti-money laundering requirements. The appropriateness of firms’ de-risking strategies, including whether they could lead to competition issue is now under review.
On the horizon
Over the last 9 months or so, the former chancellor George Osborne made it plain that the age of banker-bashing must come to an end, realigning himself with the financial services industry and asking them to become part of the solution rather than the problem. This narrative has already been taken up by his successor Phillip Hammond who has acknowledged the significance of the finance industry to the City of London and the UK economy and the challenges the industry will face with Brexit. However the FCA are unlikely to see that this should mean a refocus of its objectives set out in its 2016/17 Business Plan [http://www.fca.org.uk/your-fca/documents/corporate/business-plan-2016-17] which include to continue to pursue a strategy of credible deterrence, taking action against firms and individuals, individual accountability, cultural change, reinforcing proper standards of market conduct and combating financial crime, including money-laundering, scams, market abuse and insider trading.
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