2014 was certainly a bumper year for the FCA in terms of the level of enforcement fines it imposed. A total of over £1.4 billion was levied in fines by the FCA in 2014, dwarfing the total figure of just under £500 million in 2013. It was also a year of firsts, with the first enforcement action taken by the PRA, the first use of the FCA’s suspension power and the first publication of a warning notice.

However, while it was no doubt a busy year for FCA enforcement, this was largely driven by the actions taken against the banks in relation to their foreign exchange trading operations. While not to diminish the significance of these actions and the important cultural messages they send to the industry particularly following hot on the heels of the fines imposed for Libor misconduct, it does mean that the FCA’s policy of “credible deterrence” was less in evidence for the rest of the financial services industry.

In this article, I review the enforcement actions of 2014 and consider what they mean, both for regulated firms and in relation to how enforcement powers are exercised by the FCA and PRA. I also look ahead to what we can expect in 2015.

Highlights from the article are extracted and included below

Looking ahead in 2015

1.    2014 was certainly a bumper year for the FCA in terms of the level of enforcement fines it imposed.  A total of over £1.4 billion was levied in fines by the FCA in 2014, dwarfing the total figure of just under £500 million in 2013.  It was also a year of firsts, with the first enforcement action taken by the PRA, the first use of the FCA’s suspension power and the first publication of a warning notice.  However, while it was no doubt a busy year for FCA enforcement, this was largely driven by the actions taken against the banks in relation to their foreign exchange trading operations.  While not to diminish the significance of these actions and the important cultural messages they send to the industry particularly following hot on the heels of the fines imposed for Libor misconduct, it does mean that the FCA’s policy of “credible deterrence” was less in evidence for the rest of the financial services industry.

Enforcement in 2014

1.    The FCA levied 40 fines in 2014 with 27 of these being imposed on firms and 13 on individuals as well as imposing bans on 40 individuals. This compares to a total of 48 fines in 2013 and 53 in 2012, the last full year of the FSA, with a broadly similar number of those penalties being imposed on firms. So, the FCA has not so far proved itself to be a more active enforcer in least in terms of the number of disciplinary cases it brings. While this may be partly due to the resource heavy bank investigations in 2014, it may also be partly due to the way in which the FCA exercises its early intervention policy and enforcement increasingly collaborates with supervision to achieve good consumer outcomes.

2.    Despite its tough words on senior management responsibility, we have yet to see this policy translating into an increase in actions against senior individuals although 2015 may be the year this changes. However, for those firms and individuals who do find themselves subject to enforcement action, the penalties have soared under the new regime and since the new penalty framework introduced for breaches post 2010 has taken effect. 2015 will see the FCA review its penalty policy to assess whether it is working in terms of justice and promoting the right behaviours.

TCF: a continuing theme

3.    One of the key drivers for the FCA in deciding to take enforcement action is actual or potential customer detriment and a failure to treat customers fairly. As in other years there was therefore a steady stream of cases brought against regulated firms for breaches of Principle 6 (the requirement to treat customers fairly). In the retail markets this included the largest ever retail fine against Homeserve in February 2014 of over £30 million for mis-selling home emergency and repairs insurance policies and not dealing with complaints fairly. Stonebridge was also fined over £8 million for its failings in the telephone sales of its accident policies.

4.    The FCA has also turned its attention this year to misconduct in the wholesale markets which disadvantages retail customers, so the year began with the fine of £22 million against State Street for mark-ups on transactions that had not been agreed with or disclosed to the customer. This was a significant case as the FCA found it to be at the most serious end of the spectrum of misconduct determining it to be the highest level of seriousness, level 5, under its penalty setting framework, the same level as for the FX fines. Similarly, the FXCM Group was also fined for allowing profits to be withheld that should have been passed to UK customers.

5.    2014 also saw the FCA making it clear that when it focuses on good customer outcomes, the fault does not just lie at the end of the distribution chain, the manufacturer also has a responsibility. In fining both Credit Suisse and Yorkshire Building Society for financial promotions failures, the first time the FCA has fined the producer and distributor of a product at the same time, Tracey McDermott, then FCA Director of Enforcement and Financial Crime, warned that:

a.     “It is crucial that firms consider the needs of their customers from the time that products are being designed through to their marketing and sale.”

Systems and controls failings

6.    More action is taken for breach of Principle 3 (the requirement to have appropriate systems and controls) than any other of the FCA’s Principles.

7.    It was the breach of this Principle which was the foundation of the action against the banks for their FX trading operations and often Principle 3 cases involve breaches of other Principles, such as Principle 6 and 7. 2014 was no different and the FCA imposed a number of fines for controls failings for a variety of issues ranging from IT system failings to a lack of anti-money laundering (AML) and bribery controls.

8.    One of the most significant fines of the year in this area was the fine imposed on Invesco Perpetual in April 2014 of over £18 million for breaches of Principles 3 and 7.

a.     The FCA found that it had failed to take reasonable care to ensure that the systems and controls that it put in place around the front office of its fixed income business were sufficient to record trades on a timely basis and to enable it to value the funds it managed accurately.

b.    This included a failure to invest adequately in the systems and controls around its front office.

c.     The case is also significant in that it is an example of FCA taking enforcement action when it identifies a risk rather than actual detriment.

d.    As the FCA stressed in a press release when announcing the fine: “As a forward looking regulator, the FCA takes action where we see risks to consumers, not just after they suffer losses.”

Other themes

9.    In keeping with its credible deterrence agenda, the FCA continued to take enforcement action in 2014 in other key areas, demonstrating the importance it places on firms complying with its rules on:

a.     Client money and assets.

b.    Financial promotions.

c.     Dealing with conflicts of interest.

d.    Transaction reporting.

e.    Senior management responsibility

f.      2014 did, however, see the introduction of the new individual regulation regime for banks, with particular significance for senior management, which once it comes into force is likely to result in more actions being brought against banks’ management, and the introduction of a modified, less far-reaching, regime for the insurance sector.

Widening the role of Enforcement and early intervention

10.  The move to the FCA from FSA heralded a change to the way in which the FCA regulates to a more proactive, interventionist, judgment-based approach. We are starting to see this change take effect in the way that Enforcement operates.

11.  I am seeing Enforcement getting involved earlier in a firm’s issues and a closer working relationship between Enforcement and their colleagues in Supervision. Previously, Enforcement focused only on investigating and taking action for past misconduct; it now takes a more proactive “early intervention” approach to issues and gets involved with Supervision in advising on consumer contact exercises, remediation projects and voluntary variations of permission.

12.  This more constructive approach may mean fewer firms are being referred to Enforcement for investigation, allowing firms to focus on putting things right and remediating any customers impacted. It also means that Enforcement can concentrate its resources on the more serious cases and where fines and the public notices will support its credible deterrence policy and send out the right messages to the industry. Having said that, in my experience, the Enforcement decision to investigate a particular firm still remains somewhat of a lottery, with some firms being allowed to put things right below the radar and others having the book thrown at them. The Treasury’s recommendations, considered in HM Treasury review of enforcement: some important changes below, may go some way to addressing this concern.

13.  This new approach is not just seen on a firm specific level, but also where wider issues are involved such as in the interest rate hedging product (IRHP) review and the CPP redress scheme, which became effective in 2014 and, as at last October, had paid out £450 million.

14.  Enforcement has also made use of the other tools it has at its disposal, using its suspension power for the first time, banning two of the Financial Group’s subsidiaries from recruiting new appointed representatives and individual advisers for a period of four and a half months.

Looking ahead in 2015

15.  We can expect to see the FCA continue to bring a steady stream of cases and impose hefty fines particularly where firms have failed to respond to previous regulatory warnings or learn the lessons of previous enforcement action and make the necessary changes to culture to put customers at the heart of their businesses. It is no coincidence that the theme for the FCA’s first enforcement conference was culture and governance, and we can expect this focus to be pursued in 2015.

16.  As the FCA will no longer be occupied with the resource intensive FX and LIBOR investigations, we may see an increased number of cases being brought this year but with a consequent reduction in the size of penalties.

17.  Short of another banking scandal, it is unlikely that the total fines imposed in 2015 will match the £1.4 billion of 2014. However, more actions against individuals are likely as the FCA continues in its determination to hold senior management to account and as the cases brought against individuals involved in the LIBOR and FX misconduct progress through the RDC and criminal courts. 2015 is also likely to see the outcome of the joint PRA and FCA investigation into the activities of the Co-operative Bank.

18.  We can also expect to see more enforcement activity in the consumer credit sector as the FCA seeks to get its conduct and cultural messages across both in terms of fines, bans and refusals and variations of permissions. Early intervention and the use of alternative regulatory responses through proactive supervision is also likely to be an ongoing theme of 2015 and the FCA is likely to seek more publicity for its actions in this area.

19.  In terms of processes, the FCA will welcome a new Director of Enforcement and Market Oversight with Tracey McDermott having moved to become Director of Supervision and Authorisations. The new FCA structure, following its own strategic review, and announced just prior to publication of the Davis report at the end of 2014, will also seek to sharpen the FCA’s focus and increase its effectiveness. The Treasury review may also lead to changes in the enforcement processes which should help improve the transparency, fairness and effectiveness and provide more opportunity for constructive outcomes at earlier stages.

20.  2015 will also see the FCA review its penalty setting framework which was introduced in 2010 with the aim of improved transparency and more certainty. It has fallen far short of this, as the framework provides for so much discretion within each of the five steps that predicting the level of fine is not very different to the finger in the air approach of the previous regime.

So there is no doubt that 2015 will be another busy year for enforcement activity. As the outgoing FCA Director of Enforcement commented in a speech made at the end of 2014, enforcement may be a “blunt tool” but it is “a vital one in making plain to all the firms we regulate … the consequences for those who fail to meet our standards”. However, I hope that alongside the necessary and inevitable enforcement activity, the FCA also shows it is prepared to engage constructively with firms who show willingness to put things right and achieve good outcomes.

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