UK: Regulatory Developments - June 17, 2015

SENIOR MANAGERS REGIME

The FCA and the PRA have published further material in relation to the implementation of the new provisions relating to individual accountability in banking, including the Senior Managers regime, the certification regime, and the conduct rules. The initial consultation paper was published by both regulators in July 2014, with a further consultation in relation to forms and transitional provisions in December 2014.

In the first half of this year, the FCA and the PRA have published:

Approach to non-executive directors in banking and Solvency II firms & Application of the presumption of responsibility to Senior Managers in banking firms

FCA CP15/5 and PRA CP7/15, February 2015

In this Consultation paper, the FCA and the PRA set out their revised approach to the application of the Senior Managers regime to non-executive directors. The PRA also consulted in relation to its approach to the presumption of responsibility.

Feedback on FCA CP14/13 and PRA CP14/14 and consultation on additional guidance

FCA CP15/9, March 2015

In this Consultation Paper, the FCA provided its comments on the feedback it had received to its original consultation of July 2014. It provided "near-final" text of some of the new Handbook content it will introduce, much of which was substantially reworked as compared with the version attached to the July 2014 CP. The FCA also provided draft guidance in relation to its approach to the presumption of responsibility.

UK branches of foreign banks

FCA CP 15/10, March 2015

In this Consultation Paper, the FCA set out its proposals for how the new regime for individual accountability would apply to the UK branches of foreign banks, including those based inside the EEA.

Strengthening accountability in banking and insurance: Responses to CP14/14 and CP26/14

PRA PS 3/15, March 2015

This Policy Statement contains the PRA's final rules in relation to much of the Senior Managers regime and certification regime. Importantly, the Policy Statement does not include some remaining aspects on which it needs to co-ordinate with the FCA, as well as issues in relation to which it is still considering the responses to its consultation. The latter category includes: transitional provisions and forms; non-executive directors; the presumption of responsibility; and application of the new regime to UK branches of foreign banks.

Corporate governance: Board responsibilities

PRA CP 18/15, May 2015

While not strictly part of the Senior Managers regime, this consultation by the PRA is expressly stated to complement it. In the consultation paper, the PRA seeks views on a draft supervisory statement setting out its expectations in relation to a wide range of issues, including the respective roles of executive and non-executive directors. This is a distinction which has been under some scrutiny in relation to the application of the Senior Managers regime to non-executive directors (it will now apply to a much smaller number than originally proposed). The short draft supervisory statement makes it clear that the PRA expects firms to provide non-executive directors with adequate training and practical resources, and that they must have unrestricted access to employees and information, in order to discharge their duties. The quality of management information has recently been a recurring theme from regulators, and the PRA sets out its expectation that boards insist on receiving neither too little nor too much management information.

FINALISED GUIDANCE 15/1

Retail investment advice: Clarifying the boundaries and exploring the barriers to market development

FCA FG 15/1, January 2015

The FCA published FG15/1 in order to consolidate existing sources of guidance on retail investment advice, and to clarify what does and does not amount to advice or a personal recommendation (which must comply with COBS 9) in that context. While the Guidance is helpful in many respects, particularly in terms of consolidating existing guidance, it leaves some difficult questions unanswered. It also serves, at times, to highlight some potentially significant differences in approach between the FCA and the common law approach to sales of financial products to retail customers.

HOLMCROFT PROPERTIES LIMITED

Holmcroft Properties Limited was held to have a sufficiently arguable case to be granted permission to bring judicial review proceedings against KPMG. KPMG is the skilled person appointed by Barclays pursuant to section 166 of FSMA in relation to its review of sales of interest rate hedging products. A transcript of the court's judgment at the permission stage does not appear to have been produced, but reports from those acting in the proceedings indicate that Holmcroft alleges that the process followed by KPMG was unfair and/or unlawful. Holmcroft's application for permission was apparently opposed by KPMG, Barclays and the FCA, and one very interesting aspect of its challenge will be whether it succeeds in persuading a court that a skilled person appointed in this way is amenable to judicial review.

FALL-OUT FROM THE LONDON WHALE

R (on the application of Julien Grout) v. Financial Conduct Authority [2015] EWHC 596 (Admin)

One of the traders involved in the London Whale trades, Julien Grout, who has been indicted in the US in relation to his role, applied for judicial review of the FCA's decision to terminate its investigation into his conduct. The challenge (which unsurprisingly failed) was apparently made in order that Mr Grout might have an opportunity to clear his name.

The Financial Conduct Authority v. Macris [2015] EWCA Civ 490 

The Court of Appeal also considered an appeal by the FCA from a decision of the Upper Tribunal on a preliminary issue in a reference of certain FCA notices made by Mr Grout's ultimate boss, Achilles Macris. Mr Macris alleged that the FCA's warning, decision and final notices to JP Morgan in relation to the London Whale trades (the Notices) identified him, and that under section 393 of FSMA, he should therefore have been provided with copies of them in advance of their promulgation. Both the Upper Tribunal and the Court of Appeal agreed that Mr Macris was identified in the Notice. The question of whether an individual person (other than the recipient of the notice) was identifiable from a notice was to be answered by reference to the notice alone. However, once it was clear that an individual was identifiable, documents and information external to the notice could be considered in determining whether those acquainted with the individual or operating in his or her professional sector would recognise him or her from the references in the notice. The decision has a number of interesting possible implications, including for the way in which the FCA drafts notices, and for its future conduct of investigations.

FINAL NOTICES

Conflicts of Interest

Aviva Investors, 24 February 2015

Aviva Investors is an asset management company. It was fined £17,607,000 by the FCA, in relation to breaches of Principle 3 ("a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems"); Principle 8 ("a firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client"); and COBS 11.3.2 and COBS 11.5.2 (in relation to execution of client orders and record keeping). Aviva Investors had, over a period of years, allowed its traders to favour one class of clients over another. Its systems and controls did not require traders to allocate investments as soon as they were purchased, allowing them to cherry-pick investments in order to favour funds paying higher performance fees.

Dealing with regulators

Bank of Beirut, Anthony Wills and Michael Allin, 4 March 2015

The FCA fined Bank of Beirut £2.1 million and restricted it, for a period of 126 days, from acquiring customers resident or incorporated in high-risk jurisdictions. The FCA's initial concern in relation to Bank of Beirut related to its implementation of AML and financial crime safeguards, but it was eventually penalised for breach of Principle 11 ("A firm must deal with its regulators in an open and co-operative way, and must disclose to the [FCA] appropriately anything relating to the firm of which the [FCA] would reasonably expect notice"). The FCA found that Bank of Beirut had not been open and cooperative with it in relation to the implementation of agreed remediation plans.

Responsibilities of Compliance officers

Stephen Bell, 14 March 2015

Mr Bell was Compliance Director for Financial Limited and Investment Limited, two affiliated firms which formed an adviser network, responsible for a number of Appointed Representatives (ARs) and Registered Individuals (RIs). He was fined £33,800 and prohibited from performing CF10 (Compliance Oversight function), as a result of being found to be knowingly concerned in the two firms' breach of Principle 3 (which requires a firm to organise and control its affairs responsibly and effectively, with adequate risk management systems). The firms' breaches related to their recruitment and supervision of RIs and ARs.

Responsibilities of Compliance officers

Peter Legerton and Lloyd Pope, 20 March 2015

Both Mr Legerton and Mr Pope were directors of TailorMade Independent Limited (TMI) (in liquidation). TMI advised clients seeking to transfer their pension funds to unregulated investments using a SIPP. As well as being directors, Mr Legerton and Mr Pope both (at separate times) had responsibility for the compliance oversight function. TMI did not, contrary to the FCA's requirements, provide its clients with any advice as to the suitability of the investments underlying the SIPPs they proposed to enter into, only the suitability of the SIPP wrapper. TMI also failed to manage conflicts of interest appropriately. Mr Legerton and Mr Pope were found to have breached Approved Person Statement of Principle 7 (requiring an approved person performing a significant influence function to take reasonable steps to ensure that the business of the firm for which he or she is responsible in that controlled function complies with the requirements of the regulatory system).

Complaint handling

Clydesdale Bank plc, 14 April 2015

The FCA fined Clydesdale £20,678,300 for failings in its handling of PPI complaints which amounted to a breach of Principle 6 (which requires a firm to pay due regard to the interests of its customers and treat them fairly). In particular, the FCA found that Clydesdale's complaint-handlers did not look for documents which might exist, because it was difficult to do so, or because the documents predated the bank's seven-year document retention policy. Some complaint-handlers (without Clydesdale's knowledge) also falsified documentary evidence in response to requests for information from the Financial Ombudsman Service. In addition to paying a fine, Clydesdale agreed that it would review all PPI complaints handled before August 2014, under the oversight of a skilled person.

CASS breaches

The Bank of New York Mellon London Branch (BNYMLB) and The Bank of New York Mellon International Limited (BNYMIL), 14 April 2015

BNYMLB and BNYMIL were fined £126 million in relation to numerous breaches of the FCA's CASS rules and Principle 10, which says that a firm "must arrange adequate protection for clients' assets when it is responsible for them". At the heart of many of the failures identified by the FCA was the fact that both entities used group custody platforms which operated at a global, rather than an entity-specific, level. While records identified the name of the client and the assets, they did not record which BNY Mellon entity was party to the relevant custody agreement.

Transaction reporting failures

Merrill Lynch International (MLI), 22 April 2015

The FCA fined MLI £13,285,900 in relation to failures in transaction reporting in breach of SUP 17.1.4R and SUP 17.4.1 EU over a seven-year period. It identified 11 different breaches of reporting requirements. The Final Notice reiterates the importance of transaction reporting, in order to allow the FCA to perform market surveillance, and to inform investigations into insider trading and market manipulation. The FCA increased the relevant metric for the purposes of calculating penalties under DEPP in relation to transaction reporting from £1 to £1.50 per breach, in order to provide greater deterrent.

Benchmark manipulation

Deutsche Bank, 23 April 2015

Deutsche Bank was fined £226 million in relation to benchmark manipulation, in breach of Principles 3 (requiring firms to take reasonable care to organise and control their affairs responsibly and effectively, with adequate risk management systems), 5 (requiring firms to observe proper standards of market conduct) and 11 (requiring firms to deal with their regulators in an open and co-operative way). The FCA found that the direct involvement of managers and senior managers in the breaches identified aggravated the breaches.

In relation to Principle 5, the FCA found that Deutsche Bank traders had asked the firm's own submitters, and those from other firms, to influence IBOR submissions, and had occasionally offered or bid cash in the market in order to influence the submissions of other banks. The rates traders were found to have attempted to manipulate most frequently were JPY, CHF and USD LIBOR and EURIBOR, and less frequently GBP LIBOR. The FCA notes, however, that traders on FX Forward desks also made requests to influence other benchmarks.

In relation to Principle 3, the FCA found that Deutsche Bank did not have IBOR-specific systems and controls in place, and that its systems and controls for detecting trader misconduct were seriously defective, and had hampered the FCA's investigations.

In relation to Principle 11, the FCA identified that Deutsche Bank had recklessly (and incorrectly) told it that Deutsche Bank was prohibited by the German regulator, BaFin, from providing it with a report; that an individual at Deutsche Bank had drafted an attestation to the FCA confirming the adequacy of IBOR-related systems and controls, while knowing such attestation to be false; and that Deutsche Bank had failed to provide complete, accurate and timely information and documentary evidence.

The final notice refers repeatedly to shortcomings in the culture at Deutsche Bank, and highlights the importance of firms being practically able, as well as willing, to assist FCA investigations.

Benchmark manipulation

Barclays Bank, 20 May 2015

Barclays, which went first in relation to LIBOR settlements with the FCA, appears to have gone last in relation to FX manipulation and has received the largest fine ever imposed by the regulator. It has been fined £284,432,000 for failings occurring between 1 January 2008 and 15 October 2013. Unlike some other final notices, this one identifies not only manipulation of G10 spot rates, but also Emerging Markets spot FX trading, G10 and EM FX options, and sales operations associated with its FX business. Like other banks fined for manipulation of FX rates, Barclays was found to have been in breach of Principle 3, which requires firms to take reasonable care to organise and control their affairs responsibly and effectively, with adequate risk management systems. Too much reliance was placed on front office as the first line of defence, and such reliance was misplaced. As a result, Barclays was found to have colluded with other banks in order to manipulate spot rates for its own benefit; to have colluded in order to trigger stop-loss orders; and to have shared confidential information inappropriately.

Keydata

Stewart Ford, Mark Owen and Peter Johnson, 26 May 2015 (decision notices dated 7 November 2014)

The FCA proposes fining Stewart Ford, Mark Owen and Peter Johnson (£75 million, £4 million and £200,000 respectively) and banning them from performing any function in relation to any regulated activity carried on by an authorised person, exempt person or exempt professional firm, in relation to events surrounding the collapse of Keydata. The FCA's decision notices are dated 7 November 2014, but were only published on 26 May 2015.

The penalties proposed by the FCA are for breach of the Statements of Principle for Approved Persons 1 (which requires an approved person to act with integrity in carrying out his or her controlled function) and 4 (which requires an approved person to deal with regulators in an open and co-operative way and disclose appropriately any information of which the regulators would reasonably expect notice).

The decision notices set out the FCA's detailed reasoning (as well as a summary of the representations made by the individuals, and the FCA's response to them). At the heart of the failings identified is Keydata's continued sale of high-risk products, despite knowing that its product disclosures were inadequate; that not all the products offered would meet the requirements of the ISA Regulations; and that there were problems with the performance of the investments. The FCA also identified high, and in its view unearned, fees paid to entities beneficially owned by Mr Ford's family in connection with investments made by clients of Keydata, amounting to some £72.4 million, as well as undisclosed commissions of £2.5 million paid by Mr Ford to Mr Owen. In addition, the FCA found that all three individuals had failed to disclose information to it, or correct information they knew would be misleading.

All three individuals have referred the decision notices to the Upper Tribunal.

OTHER DEVELOPMENTS

FCA's priorities for 2015-2016

FCA Business Plan, March 2015

The FCA produced its Business Plan for 2015-2016, including its Risk Outlook, and an appendix containing details of current and planned thematic work and market studies. In its Risk Outlook, the FCA retained some of its areas of forward-looking focus from last year, as well as adding new areas of particular scrutiny. Its list included the risks posed by poor culture to market integrity, including conflicts of interest. The Risk Outlook also discussed business conduct risk, risks posed by the identity and behaviour of consumers, conflicts of interest and the risks posed by financial crime.

We consider in our introduction to this edition of Financial Markets Disputes and Regulatory Update what can be gleaned from the Business Plan in relation to areas to watch over the next six months.

"Risks to customers from performance management at firms" and "General guidance on the application of ex-post risk adjustment to variable remuneration"

GC 15/1 and GC 15/2, March 2015

In GC 15/1, the FCA consulted on guidance in relation to how firms' performance management (both formal and informal) of their customer-facing staff could cause detriment to customers if firms rewarded or promoted the wrong types of behaviour. While the FCA said that its work (particularly with whistleblowers) had detected some issues, it had not identified a widespread problem. The paper contains detailed discussion of practices which could have a negative effect, such as excessive focus on sales targets and publishing each employee's sales figures, as well as giving examples of good practice.

In GC 15/2, the FCA consulted on guidance to replace that previously appended to its joint consultation (CP 14/14) with the PRA in relation to remuneration, following the recommendations of the Parliamentary Commission on Banking Standards. Specifically, the guidance deals with ex-post risk adjustment to take account of specific crystallised risks or adverse performance outcomes.

Insider dealing

The FCA has also been active in relation to insider dealing. In March 2015, Julian Rifat (formerly of Moore Capital) was sentenced to 19 months' imprisonment. The FCA secured two convictions for insider dealing in the first months of 2015, and 10 other individuals charged with insider dealing await trial.

Publication of terms of reference for investment and corporate banking market study

FCA MS 15/1.1, May 2015

The FCA has produced the terms of reference for its forthcoming study into whether competition for investment banking and corporate banking services is working well. The FCA will look primarily at Equity Capital Markets, Debt Capital Markets, mergers and acquisitions and acquisition financing. It will look at so-called "related activities" such as corporate lending and corporate finance and advice only to the extent that they touch on these primary activities. The FCA has identified three principal topics for consideration: choice of banks and advisers; limited transparency; and bundling and cross-subsidisation of investment and corporate banking services. It will not consider, as part of this study, two issues previously raised, which are: best execution of client orders; and barriers to entry in corporate banking.

The FCA's final report is not due to be published until spring 2016, but it has said that it intends to produce an interim report.

To read the complete Financial Markets Disputes and Regulatory Update - Summer 2015, click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions