UK enforcement round up and looking ahead to 2023
This article highlights key decisions from financial services enforcement in the UK in 2022, looking at the themes emerging from those decisions and what we might expect in 2023.
The table below shows some key statistics from Financial Conduct Authority (FCA) enforcement decisions in recent years.
In 2022, the overall number of FCA fines increased significantly, although the total amount of fines by value was less than half that in 2021. Given the way that the FCA goes about calculating financial penalties, this indicates that while they have had more success than in previous years in bringing investigations to a conclusion, the average size and scale of 2022's cases was lower than it was in 2021.
|Total fines (£)||229,515,303||60,467,212||391,773,187||192,570,018||576,865,219||214,250,056|
|Total fines: companies (£)||229,079,424||59,104,112||312,245,700||192,470,018||576,628,419||212,544,193|
|Total fines: individuals (£)||435,879||1,363,100||79,527,487||100,000||466,837||1,705,863|
|Number of fines: overall||13||15||17||11||11||24|
|Number of fines: individuals||8||8||5||1||4||10|
|Largest fine (£)||163,076,224||32,817,800||102,163,200||64,046,800||264,772,619||107,793,300|
When the FCA published details of its open investigations early in 2022, these indicated that 2022's enforcement decisions would follow a similar trend to those in more recent years. The most common categories of open investigations were unauthorised business, retail misconduct, insider dealing, pensions advice and financial crime. These trends can be seen in 2022's published enforcement decisions.
This article will focus on FCA enforcement decisions. The Prudential Regulation Authority (PRA) has also published a couple of enforcement decisions in 2022 but the one we have highlighted was also investigated by the FCA.
There were relatively few enforcement decisions in the retail sector in 2022 but this does not mean that the FCA is not prioritising this area. The impact of the macro-economic environment on the cost of living has heightened the FCA's concerns about the treatment of vulnerable customers at a time when the number of customers exhibiting characteristics of vulnerability will increase.
The FCA has published a series of 'Dear CEO' letters to insurers, banks and other firms, and will be on the lookout for breaches in this area before and after the implementation date for the new consumer duty (enforcement cases on the consumer duty itself will of course take a bit of time to work their way through).
The largest penalty in the retail sector in 2022 was the combined penalty of £48.7 million by the PRA and FCA on TSB for operational risk management and governance failures, including management of outsourcing risks, relating to the bank's IT upgrade programme and data migration.
While the data itself migrated successfully when the new system went live in 2018, from an early point the bank encountered serious issues which affected account usage and access. These included certain data breaches, failures with digital (internet and mobile) banking services, failures in telephone banking, branch technology failures, and consequential issues with payment and debit card transactions.
The bank received more than 220,000 complaints from customers, and paid £32.7 million in redress.
Sam Woods, chief executive of the PRA, said: "Although the PRA's current, overarching operational resilience framework was introduced in 2021, which was after the IT migration, the PRA's requirements and expectations as regards to managing operational resilience consolidate many longstanding and well understood areas of prudential regulation that have formed part of the PRA Rulebook for several years. These areas include governance, operational risk management, business continuity planning and the management of outsourced relationships."
Following a familiar theme in recent years, the FCA fined a consumer credit firm £811,900 for failing to conduct adequate affordability tests for guarantors of consumer credit loans and charging excessive late payment fees for customers in financial difficulty (TFS Loans). The FCA concluded that the firm failed to treat customers fairly and failed to organise its affairs responsibly and effectively.
"The FCA's affordability rules protects both consumer credit borrowers and guarantors from unaffordable risks. These requirements are high priority areas for the FCA especially as families face overall increases to their cost of living," said Mark Steward, enforcement director at the FCA.
In the pensions advice area, following an Upper Tribunal decision the FCA banned and fined five advisers and their employers for unsuitable advice to customers to invest their entire pension funds in high risk investments (see FCA press release). Also, in an ongoing investigation of several advisers, the FCA fined one advisory firm c.£2.4 million for unsuitable advice to customers to transfer their pensions out of defined benefit pension schemes.
The FCA found that many of the relevant customers were vulnerable and under significant time pressure to make a decision. The firm made more than £2 million in transfer and advisory fees from this advice (Pembrokeshire Mortgage Centre).
In 2021 the FCA publicly censured Premier FX for failing to safeguard its customers' money and misrepresenting the services that it was authorised to provide. In a related investigation, the FCA imposed a financial penalty of £783,800 on Barclays, which provided banking services to Premier FX, relating to Barclays' oversight of this relationship. The penalty imposed on the bank considered Barclays' agreement to voluntarily cover the losses of Premier FX customers whose claims have been accepted by Premier FX's liquidators (Barclays).
The FCA continues to focus on the need for regulated firms to have robust systems and controls in place to prevent being used to facilitate financial crime. It was therefore unsurprising to see that money laundering and anti-bribery and corruption (ABC) were the subject of enforcement decisions in 2022.
Following on from its landmark prosecution of NatWest in 2021 and other regulatory enforcement decisions relating to anti-money laundering (AML) policies, the FCA identified failings in the AML policies of Ghana International Bank and imposed a penalty of £5.8 million relating to its correspondent banking relationships. The FCA did not identify any examples of actual money laundering but the bank's failure to ensure adequate initial checks on the counterparty banks, adequate staff training and annual reviews meant that the risk of financial crime was significant. The FCA also fined Gatehouse Bank £1.6 million for failing to conduct sufficient checks on customers setting up accounts in higher risk countries or customers classified as politically exposed persons. A financial penalty of £101.8 million was also imposed on a bank for AML control failings relating to business customer accounts (Santander).
The FCA fined a private wealth firm £18 million in relation to its anti-bribery policies (Julius Baer). The decision focused on finder's fees, including the use of FX transactions which the FCA viewed as uncommercial where profits were shared with the finder.
The FCA found that the firm did not have adequate policies and procedures in place to identify and manage the risks arising from relationships with finders. The FCA also found a Principle 11 breach, noting that the firm had suspicions about the transactions in 2012, but the FCA was notified in 2014.
In the same vein, the FCA fined an insurance broker £7.8 million in relation to introducing commissions paid to a third party in Panama that resulted in £3 million payments to public officials in South America between 2013 and 2017 (JLT Specialty). The FCA concluded that the policies in place at the time were inadequate to manage the risk of bribery. Actual corrupt payments were identified, in contrast to many enforcement actions based purely on inadequate policies creating a risk of financial crime. The self-report from the firm and assistance during the FCA's investigation were mitigating factors in determining the financial penalty.
And, finally, the FCA issued its third penalty in a series of enforcement decisions relating to cum ex trading. In this decision, the FCA imposed a penalty of just over £2 million on a trading firm for failings in its systems to prevent financial crime and money laundering in breach of Principles 2 and 3 (The TJM Partnership in liquidation).
Market conduct, reporting and disclosure
The FCA has boosted its market monitoring capability in recent years but this capability relies on transaction and order data from firms, which is why the FCA continues to bring enforcement actions for mistakes or omissions in transaction reporting. Sigma Brokers failed to report or report accurately 56,000 CFD contracts and 97 suspicious trades between December 2014 and August 2016, and the FCA fined them £530,000. The FCA fined Citigroup Global Markets £12.8 million in relation to Market Abuse Regulations (MAR) trade surveillance requirements, and BGC Brokers and two others £4.8 million for failing to have adequate systems to detect market abuse across all asset classes covered by MAR.
The FCA published decisions involving two banks in relation to Listing Rule breaches in 2022. Linked to the PRA's decision at the end of 2021, the FCA fined Metro Bank £10 million for failing to take reasonable care to ensure that an announcement about the bank's risk weighted assets in October 2018 was accurate and did not omit any important information.
The FCA has also decided to fine Barclays £50 million in relation to disclosures around its capital raisings announced on June 25, 2008 and October 31, 2008. Barclays is challenging this decision, and has referred this matter to the Upper Tribunal.
The large number of open investigations into insider dealing was not reflected by a commensurate number of public outcomes. There was one selective disclosure enforcement case. And in relation to market manipulation, the FCA followed up on two investigations of listed companies with convictions of two directors of Redcentric plc for publishing false and misleading statements and commenced prosecutions of five directors and officers of Worthington plc, including for a "pump and dump scheme" intended to increase the share price.
Other wholesale sector issues
An investment manager and a former head of business were fined in relation to managing conflicts of interest. The FCA considered that GAM International Management had inadequate systems in place and failed to manage conflicts of interest properly, and that one of the senior managers failed to comply with the firm's internal policies.
The firm received a fine of £9.1 million and the individual a fine of £230,000.
"The FCA expects asset managers and their staff to be scrupulous in identifying and managing conflicts and their risks. This case should send a clear warning to the market," Mark Steward said.
We anticipated an uptick in enforcement decisions against individuals under the SMCR last year but the majority of enforcement decisions in 2022 relate to conduct pre-dating the SMCR implementation.
Data published by the FCA shows plenty of open investigations although still only the minority of investigations post-date SMCR. Of the 370 open investigations against individuals in April 2022, 47 involved senior managers and 16 others under the new individual conduct rules, whereas 108 related to breaches of the previous rules for senior managers.
That leaves 199 open investigations, presumably against more junior employees prior to SMCR or against people outside the financial services regime, for example investigations into unauthorised investment scams, listed company breaches or market abuse.
It may still be some time before we see a significant number of enforcement decisions under the SMCR regime, including in particular because individuals tend to challenge regulatory decisions rather than settling early on.
So what are we likely to see in 2023?
We are likely to see enforcement in similar areas given the FCA's focus on protection of vulnerable customers, concerns about pension advice, and the detection and mitigation of the risk of financial crime. Firms will need to implement changes resulting from the consumer duty but it is likely to be some time before we see any enforcement action for breach of that duty.
In addition, the FCA is likely to target investigations on any high-profile examples of market misconduct, advice given to retail investors on crypto-assets or other high risk investments, and potential green-washing.
Another important question will be who replaces Mark Steward this year and the impact this will have on the future direction of enforcement.
This article was first published by Thomson Reuters Regulatory Intelligence on 17 January 2023.