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26 Jul 2018

FCA Enforcement Annual Report 2017/2018: The year in review

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On 19 July 2018 the Financial Conduct Authority ("FCA") published its latest Enforcement Annual Performance Report (the "Enforcement Report"), providing an overview of its enforcement activities over the past year. So what has the regulator been doing?

Enforcement actions: an overview

The FCA issued 269 Final Notices in 2017/18, imposing a total of £69.9 million in penalties across 16 cases (6 involving firms and 10 individuals). This represents a dramatic drop against 2016/17 (£181 million) and is a mere 8% of 2015/16's figure (£884.6 million), albeit that figure was bloated by exceptional fines for LIBOR and foreign exchange (FX) manipulation.

The financial consequences for firms caught up in enforcement actions do not, however, end with fines. In many cases, compensation or restitution schemes dwarf the financial penalty imposed by the FCA. The figure of £69.9 million does not, therefore, include the amount that Vanquis Bank ("Vanquis") agreed to pay to customers in compensation for failing to disclose the full price on one of its add-on products (£168.8 million)1. Nor does it include the £66 million that Capita Financial Managers Limited ("CFM") agreed to repay customers for failings in its unregulated collective investment scheme.2

Case breakdown

Retail

We have previously noted the FCA's renewed focus on the retail sector3, the enforcement actions against Vanquis and CFM being stark examples. This is borne out in the Report's case breakdown. Of the 504 cases open at 31 March 2018, 81 related to retail conduct and lending.

The FCA's Annual Report and Accounts ("Annual Report"), published alongside the Enforcement Report, also highlights the regulator's emphasis on retail consumer protection. For example, firms involved in binary options trading in the UK must now be authorised by the FCA. There are also now restrictions on contracts for difference (CFDs), including leverage limits and negative balance protection, in order to reduce the risk of consumers suffering exponential losses.

Financial crime

Financial crime also features prominently, with 86 cases open at 31 March 2018 (compared with 55 last year). High-profile enforcement actions against Canara Bank, Deutsche Bank, Sonali Bank UK and Barclays Bank for various AML-related control failings have given practical demonstration of the regulator's intent. With a separate FCA anti-money laundering update for 2017/20184 confirming that around 75 firms and individuals are currently under investigation for AML issues (under the Financial Services and Markets Act 2000 and the Money Laundering Regulations 20175), there are no signs of let up.

Culture and Governance

It is also worth highlighting the 61 live cases relating to culture and governance issues. The Annual Report provides more detail on the FCA's work in this area, making particular reference to the Senior Managers and Certification Regime ("SM&CR"), which is now fully embedded into the FCA's authorisation, supervision and enforcement processes for banks and other dual-regulated firms.

The recent enforcement action by the FCA and the Prudential Regulation Authority ("PRA") against Jes Staley, Barclays Group CEO, was the first under SM&CR. Fining Mr. Staley £642,460 for interfering in an internal whistleblowing investigation, the authorities' Final Notices emphasised the vital role senior managers (CEOs in particular) play in instilling compliant cultures within their firms.

A CEO is…expected to demonstrate the highest standards of integrity and to act with due skill, care and diligence in carrying out their functions…Given the crucial role of the CEO, the standard required of Mr Staley under ICR2 [Individual Conduct Rule 2] is more exacting than for other employees...This is consistent with the CEO's responsibility for setting an example to the firm's employees…6

You have been warned.

With SM&CR due to be rolled out across the financial services sector on 9 December 2019, solo-regulated firms need to start considering how the new regime will affect their businesses.7

Unauthorised business

2017/18 also saw a significant increase in the number of victims reporting potential unauthorised activity in the UK, with the FCA receiving a record 13,309 reports. These included pension scams, investment and insurance fraud, boiler room schemes and unauthorised collective investment and deposit-taking businesses.

The FCA conducted three large criminal trials, securing 14 convictions totalling 14 years and 4 months imprisonment. Eight of these convictions resulted from Operation Cotton, an investigation into the sale of agricultural land at inflated prices through cold-calling investors. The FCA also managed to obtain confiscation orders amounting to £2.2 million, securing compensation for scammed customers.

The FCA also prosecuted four individuals for operating an investment scheme that led to more than 300 investors in Symbiosis Healthcare plc losing over £1.4 million. Between 2009 and 2014, each of the defendants played an instrumental role in the systematic and prolonged misleading of investors, many of whom were vulnerable or retired individuals. These investors were induced to buy shares through a combination of cold calling, pressure selling and wholly misleading claims about the company’s value. Despite promises to investors of large profits, and extravagant claims about the expansion of a network of medical clinics in Dubai and elsewhere, in reality the shares in the company were effectively worthless. They were convicted and sentenced to a total of six years and nine months’ imprisonment.8

Enforcement investigations: the short and the long game

The average length of cases concluded by settlements now stands at 32.3 months. This represents quite a significant jump from last year (23.2 months). It is, however, substantially briefer than cases referred to the Regulatory Decisions Committee i.e. cases where a Warning Notice has been issued. Those are currently running at an average of 59.4 months.

Even when one factors in cases that the FCA has dropped with no further action, the average regulatory case length for 2017/18 is 19.1 months, which is still substantial. Speaking of discontinuations, the Enforcement Report states that the FCA closed 208 investigations in the past year. As indicated above, only 16 of these cases resulted in enforcement action, meaning that 192 ended with no further action.

The high incidence of drop-hands is a necessary corollary to the FCA's commitment to open more investigations (itself arguably an over-reaction to Andrew Green QC's rebuke of previous enforcement policy in his November 2015 report into the collapse of HBOS9).

International cooperation

One of the principal regulatory developments in recent years has been the increase in cooperation between the FCA and foreign regulators and law enforcement bodies. Indeed, the Enforcement Report states that in 2017/18 the FCA received 1,064 requests from over 80 different regulatory and law enforcement authorities in 63 countries.

Among these, the coordinated action by the FCA and US Department of Justice ("DoJ") against Beaufort Securities Limited ("BSL") and Beaufort Asset Clearing Services Limited takes centre stage. Both firms were placed into insolvency on the application of the FCA on 1 March 2018. On the same date, the DOJ indicted a number of firms and individuals, including BSL and one UK-based individual connected with BSL, on securities fraud and money laundering charges. The action also involved the British Columbia Securities Commission and Alberta Securities Commission of Canada, the German Bundesanstalt Finanzdienstleistungsaufsicht (BaFin), the Danish Finanstilsynet and the US Securities and Exchange Commission.

As regulatory and criminal misconduct becomes ever more cross-border in nature, international cooperation will need to increase to meet the challenge. The number of requests received from and transmitted to other agencies will only grow.

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1 https://www.fca.org.uk/publication/final-notices/vanquis-banklimited-2018.pdf
2 https://www.fca.org.uk/publication/final-notices/capita-financialmanagers-limited-2017.pdf
3 Please see our previous alert on the Vanquis Bank Final Notice, available here
4 Available here 
5 Please see our previous alert on the Money Laundering Regulations 2017, available here.
6 Available here
7 Please see the FCA's Policy Statement 18/14 for near final rules on the SM&CR extension. Available here
8 Available here 
9 Available here 

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