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Briefing

UK enforcement round up and looking ahead

By Tom Clark and Sharon Grennan.
This article was first published on 21 January 2021 by Thomson Reuters Accelus Regulatory Intelligence.

COVID-19 may have stopped many things in 2020 but it failed to stop the Financial Conduct Authority (FCA) from issuing a number of substantial financial penalties. That is not to say that it did not have any impact at all, however. There were fewer enforcement actions resulting in fines than in the previous three years, and financial penalties were down from £391.8 million in 2019 to £192.6 million in 2020.
   
This probably reflects at least in part the disruption experienced particularly at the start of the first UK lockdown, with most of the notable enforcement outcomes published from June onwards. There was also much work to be done to prepare for the end of the Brexit transition period.
   
Of particular note is that only one individual faced a financial penalty, and that was for market abuse. This is fewer than in recent years despite implementation of the Senior Managers and Certification Regime. Even taking into account the disruption, this is a surprisingly low number.
   
The FCA's investigation caseload remained at a consistent and record high level between April 2019 at 647 and 2020 at 646. More recent figures for investigations opened and closed are not available, but again the pandemic may have had an impact. The majority of the investigations caseload in April was divided between unauthorised business/scams, retail misconduct, pensions advice, financial crime and insider dealing – all of which feature in the FCA's enforcement and other work throughout 2020.
   
Two of the ten companies facing enforcement decisions used the partial settlement procedure to challenge the financial aspects before the FCA’s Regulatory Decisions Committee (RDC). Lloyds Bank and others challenged the size of a financial penalty and Blue Gate challenged the imposition of a restitution order (see below). The RDC increased the case team's proposed penalty in the Lloyds case by removing a reduction for proportionality, and upheld the enforcement team's decision on Blue Gate’s restitution order. The table below sets out some of the key statistics in more detail, and we will then go on to explore the types of decisions we have seen from FCA enforcement over the last year.       
        

FCA Enforcement Statistics 2017 - 2020  

Calendar Year

2017

2018

2019

2020

Total Fines

229,515,303

60,467,212

391,773,187

192,570,018

Total of Fines
(Companies)

229,079,424

59,104,112

312,245,700

192,470,018

Total of Fines
(Individuals)

435,879

1,363,100

79,527,487

100,000

Number of Fines overall

13

15

17

11

Number of Fines
(Individuals)

8

8

5

1

Largest Fine

163,076,224

32,817,800

102,163,200

64,046,800

Financial Year

2017 - 2018

2018 - 2019

2019 - 2020

2020 - 2021

No. of Cases
Open at 01 April

410

496

647

646

Top 5 Case Types
Open at 31 March

1. Insider Dealing (84)
2. Unauthorised Business (69)
3. Retail Conduct (66)
4. Financial Crime (55)
5. Wholesale Conduct (38)

1. Retail Conduct (78)
2. Unauthorised Business (77)
3. Financial Crime (76)
4. Insider Dealing (73)
5. Culture/Governance (61)

1. Unauthorised Business (142)
2. Retail Conduct (134)
3. Insider Dealing (88)
4. Financial Crime (71)
5. Advice - Pensions (61)

Statistics Unavailable

                                                                                                                                                         
      

Retail conduct and advice

In a speech in February 2020, Mark Steward, director of enforcement, noted that the FCA intends to use financial penalties as a general deterrent to others, but also to obtain a "just outcome" in that disgorgement and/or remediation play a large part in the outcome (a theme that has become increasingly prevalent in recent years). He emphasised that it was possible to obtain a larger discount on financial penalty through prompt, voluntary, complete remediation. All of these points are borne out to a certain extent by the enforcement outcomes in the retail sector, in particular.
   
The fair treatment of customers in financial difficulty has long been a focus of the FCA, but the economic consequences of the pandemic and the associated restrictions make the focus particularly pertinent. As Jonathan Davidson, executive director of supervision, highlighted, an additional 1.5 million adults in the UK exhibited characteristics of vulnerability by July 2020, and 23% of adults had low financial resilience.

The FCA imposed a financial penalty in three cases in 2020 where it found breaches of high-level principles in this area. Although the conduct in these enforcement decisions long pre-dates the current pandemic, the FCA sought to emphasise the importance of treating customers fairly and considering vulnerable customers in particular in the current circumstances.

Barclays Bank and others paid a penalty of £26 million and around £273 million in customer redress relating to treatment of consumer credit customers in arrears or financial difficulty. Lloyds Bank and others paid a penalty of £64 million and around £300 million in customer redress to mortgage customers in arrears or financial difficulty. The FCA requires consumer credit firms to take adequate measures to properly understand customers' financial difficulties.

It also requires firms to show forbearance and due consideration to customers in arrears or in financial difficulties. The decisions noted failures to invest in adequate staff training and effective information gathering to monitor customer outcomes, which led, for example, to unaffordable repayment plans. The FCA commented in particular on changes at Lloyds Bank and others so that experienced collection staff left, leaving the majority of call handlers new to their role and with inadequate experience.

The FCA also fined a small car finance consumer credit firm £2.7 million for treatment of customers in financial difficulty, many of whom were vulnerable. The firm made redress to all affected customers voluntarily. In addition to unfair treatment of customers in financial difficulty, Moneybarn also did not communicate the likely financial consequences of failing to keep up with payments to customers in a way which was clear, fair and not misleading, and so breached Principle 7. More than 1,400 customers, many of whom were vulnerable, subsequently defaulted after entering into unsustainable short-term repayment plans.

Enforcement actions against financial advisers in relation to unsuitable pension transfer advice is not a new area of focus either, and the FCA anticipates more enforcement and redress in the future. In this vein, the FCA imposed a penalty of £107,200 for unsuitable advice in relation to recommendations to switch pensions to self-invested personal pensions (SIPPs) without any advice on the underlying investments. These investments were often high-risk, esoteric and illiquid.

In making its recommendations to customers, an adviser is required to consider not only whether a SIPP is a suitable investment vehicle for the customer based on their individual circumstances, but also whether the investments held within the SIPP are suited to the customer's needs and appetite for risk.

In this case, the adviser did not take reasonable care to give suitable advice. The financial adviser also failed to manage a conflict of interest between its recommendations and its own shareholdings. As in other cases already mentioned, the financial adviser is making redress to affected customers.

On a different topic, the FCA continues to look at higher risk investments and funds that result in losses for retail investors. The FCA concluded enforcement action against the operator of an investment fund resulting in a public censure in lieu of a £10 million penalty for reasons of serious financial hardship, but the FCA did order payment of restitution equivalent to the profit from operating the CIS over the three years.

The FCA found that, in breach of Principle 2 (skill and care), Blue Gate failed to conduct adequate due diligence on the fund prior to taking it on, failed to investigate potentially serious issues with the fund of which it was aware and failed, throughout its tenure as operator, to establish that the Fund was operating as it was supposed to. And in breach of Principle 7 (customer communications), it failed to communicate clearly with investors.

The FCA also imposed a penalty of approximately £9 million on a firm for failing to have adequate organisational arrangements, reconciliations and records to safeguard retail customer assets. In addition, the relevant group company did not have the correct
permissions for custody of assets and the FCA also found a breach of Principle 11 in that communications with the FCA were not completely accurate.

     
Financial crime

During the course of 2020, the increase in fraud against consumers has been highly publicised. The FCA's continued effort to tackle investment and other financial services scams is evident, in part from the high number of unauthorised business investigations and warnings issued. There are also two other notable enforcement penalties, which highlight the continuing focus by FCA enforcement on systems and controls to prevent the financial services sector being used to facilitate financial crime.

Anti-money laundering (AML) controls have been the subject of several enforcement decisions in recent years, and the latest is a £37.8 million financial penalty on a bank for failing to implement improvement in its procedures in the light of FCA warnings and the other publicised enforcement actions. The FCA found that, in breach of Principle 3 (adequate systems and controls), amongst other things, the bank failed to undertake timely periodic due diligence on existing customers and continued to undertake business for them in its absence. The FCA also found that the bank identified that certain high-risk countries and individuals were missing from its transaction monitoring tool in 2015 but only amended the tool in 2017. The bank took its own remedial action by temporarily restricting new business relating to high risk customers and trade finance, and assessing historical transactions for suspicious activity using the modified tool.

The FCA and the Prudential Regulation Authority (PRA) (as part of a global resolution) imposed a financial penalty of £96.6 million (£48.3 million from each of the FCA and PRA) on an international bank in relation to its involvement in three bond issues by 1MDB. Between 2009 and 2014 it is alleged that billions of dollars were misappropriated and fraudulently diverted from 1MDB in the course of 1MDB raising money to fund its projects.
   
The UK regulators found that the bank failed to take sufficient care in assessing the risks involved in three bond transactions and in managing allegations of bribery and misconduct. The PRA investigates fewer cases than the FCA but it is clear from its press release that the PRA views management of financial crime risk in large transactions as a prudential matter, which it is willing to investigate.

     
In the wholesale sector

In terms of enforcement in the wholesale sector, the FCA remains focussed on the integrity of markets through disclosure and the prevention of abusive conduct.

The FCA imposed its first financial penalty on a firm for breaches of the Short Selling Regulations 2012, which provide for disclosures when financial thresholds are reached in short positions of certain investments. This can be viewed as a continuation of the series of cases brought for other transaction reporting failures.

The FCA published a censure against an AIM-listed IT company who issued unaudited interim results and audited final year results which materially misstated its net debt position and overstated its true asset position in circumstances where it knew, or ought to have known that the information was false and misleading. As a result of the breaches, investors were misled for about a year until the corrected information was disclosed. Redcentric voluntarily set up a compensation scheme for affected investors. This and the fact that Redcentric provides services to the NHS, influenced the decision to censure rather than fine the company.

The FCA also censured Aviva for making a misleading announcement that wrongly gave the impression that it was going to cancel certain preference shares at par value. The preference shares were trading above par value at the time so there was a significant fall in value as shareholders sold out. The misleading statement was viewed as serious but unintentional.

In contrast, the FCA sought to impose a penalty of £658,000 on the former CEO of Worldspreads in relation to misleading announcements that were viewed as deliberate, although his financial hardship resulted in a censure instead of a financial penalty.

The FCA also published two enforcement outcomes against market sector professionals for market manipulation/abuse:

  • The first of these involved a fine of £3.4 million against an FX options broking firm for breaches of Principles 2,3 and 5. The FCA found brokers carried out the practice of 'printing' trades communicating to their clients that a trade had occurred at a particular price and/or quantity when no such trade had taken place. The position was viewed as particularly serious because multiple brokers across different trading desks used this practice over a period of seven years.
  • In the second case, the FCA imposed a financial penalty of £100,000 on an individual trader for the manipulative practice of spoofing. Cases of market manipulation are often viewed as more challenging than insider dealing cases for the regulators to pursue, but the FCA and regulators in the US and elsewhere are building up their surveillance and data analysis capability with the aim of detecting manipulation more readily. We can expect to see more of these cases in future years.

The year ended with a Court of Appeal decision upholding the convictions of Abdel-Malek (a former compliance officer who improperly disclosed inside information to a friend) and Walid Choucair (the friend who traded on that information) for insider dealing. The FCA data shows 88 open insider dealing investigations at the end of March 2020, but the FCA views cases involving market professionals such as this as a particular priority to create a deterrent effect whether the FCA pursues a criminal prosecution or civil enforcement action.

      
Looking ahead

Looking ahead to enforcement this year, it is likely that some of the same themes will persist but there are likely to be more enforcement outcomes than in 2020 now that working arrangements for firms and the regulators have adapted to periods of remote
working.

The continuing economic impact of the pandemic means that there will be a continued need for firms to manage interactions with customers in financial difficulty or becoming vulnerable, so conduct in that regard will be scrutinised. Interest rates are likely to remain low, with investors seeking out higher returns, so the FCA will be on the look out for mis-selling in addition to the pensions advice and switching cases that it is already looking at.

We can also expect a continued emphasis on the importance of financial crime risk management. Finally, the FCA is expected to continue to focus on the proper operation of the markets through its surveillance and analytics capabilities (among other things), and is likely to scrutinise conduct during the pandemic carefully given the potentially greater opportunities for misconduct while working remotely.