Financial Services Update: 2014
The FCA's stated objective is to "continue to take tough and meaningful action against firms and individuals who fail to follow our rules" and to "put conduct in the Board Room".
The FCA has taken over the regulation of 50,000 consumer credit firms from the OFT.
Nine individuals are currently being prosecuted for insider dealing with the full impact of LIBOR and FOREX manipulation yet to come out. Large numbers of senior employees from financial institutions have been suspended pending investigation.
In 2014, 18 firms have been fined £305m and 10 individuals were fined £2m.
The average length of investigations which conclude in settlement is 20 months, after referral to the Regulatory Decisions Committee is 32 months and after reference to the Tribunal 62 months.
Settlements make up 97% of fines collected by the FCA indicating that there is little desire in the marketplace to challenge investigatory findings.
Systems and Controls
A number of financial advice firms were fined in 2013 for failing to exercise adequate oversight of the selling practices of their appointed representatives. The FCA is now focussing on AML and ABC policies, procedures, training and monitoring. Standard Bank has been fined £7.6m in relation to its treatment of "politically exposed persons". JLT Specialty Limited was fined £1.876m for failing to conduct proper due diligence before entering into relationships with overseas introducers and specifically, the risk of bribes having been paid. A "deep dive" assessment of smaller firms at risk of money laundering and bribery is taking place. Besso Limited, an insurance broker, was fined £315,000 for operating weak systems and controls relating to the sharing of commission and risk of bribery.
A new regime to improve individual responsibility and accountability in the banking sector is being introduced in 2015. It is targeted at senior management whose behaviour and decisions have the potential to bring about a bank failure or cause serious harm to customers.
All employees carrying out banking functions will be subject to new FCA Conduct Rules. In addition, persons carrying out "significant harm functions" will have to satisfy the fit and proper test and be subject to annual certification. Furthermore, senior managers will be subject to a statement of responsibilities and reverse burden of proof – they will be presumed guilty of misconduct in the event of a regulatory breach unless they can show they took reasonable steps to prevent the breach from happening. A new criminal offence of taking a decision which causes a financial institution to fail punishable by seven years prison has also been introduced.
The trickle-down effect is higher standards of documentation and record keeping, increasing levels of internal bureaucracy and anxiety amongst senior management. The challenge facing the sector is maintaining audit trails explaining how decisions were debated, considered and taken. The regime is likely to apply to all banks that operate in the UK including branches of foreign banks.
It is unclear how far insurers and underwriters are willing to extend standard D&O insurance cover to cover these risks. D&O is not typically made available to employees who would require their own legal representation and whose interests may conflict with a defence of their firm. In the short term, it is possible notifications under existing policies will probably increase whilst insurers consider the ongoing scope of coverage and policy wording relating to regulatory investigations.
The Prudential Regulation Authority is also in the process of developing a similar framework for senior managers of life and non-life insurance companies including senior actuaries, CEOs, Chairmen and CFOs which it will consult upon in 2015.
New Competition Powers
One of the FCA's operational objectives is to promote effective competition in the interests of consumers. This is in addition to its competition powers under the Competition Act 1998 (to combat anti-competitive agreements and abuse of dominance) and statutory powers to conduct market studies or refer markets to the Competition & Markets Authority under the Enterprise Act 2002.
The FCA's now has concurrent powers are designed to allow it to take advantage of its sector knowledge by identifying competition issues at an earlier stage and have flexibility as to how to react. These powers come into force in April 2015 and will include consideration of competition related complaints, taking interim measures to prevent damage to the market and customers, search and seize of documents, financial penalties, give directions and settle cases with firms under investigation.
The Consumer Rights Bill currently being debated before Parliament currently has an opt-out for competition based claims which is being further debated but consumer claims relating to, for example, LIBOR fixing or running a cartel remain a possibility.
For more information please contact Andrew Oldland QC, Head of the Financial Services team and Head of the Regulatory team on firstname.lastname@example.org or 01392 687690 or Jonathan Kitchin, Associate in the Commercial & Regulatory Disputes team on email@example.com or 01392 687635.