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End Update 2012 – Fines imposed by the Financial Services Authority (FSA) since 1 January 2012 (through 20 December) have totalled £310 million, more than four times the total for 2011 (see Figure 1). This increase is due to a handful of very large fines, including the £160 million fine against UBS for LIBOR manipulation announced 19 December, which is the largest-ever FSA fine by a substantial margin.

The number of fines assessed against firms, 25, was in line with last year. In contrast, the number of fines against individuals fell to its lowest level since 2009, and the aggregate fine amount imposed on individuals fell slightly compared to 2011.

The dramatic increase in aggregate fines is the result of a few headline-grabbing penalties against banks, notably those against UBS and Barclays for manipulation of LIBOR and EURIBOR, and against UBS for failing to prevent unauthorised trading by a rogue trader, Kweku Adoboli. Those three fines alone totalled nearly £250 million. The size of fines against banks, of which there were nine in 2012 as compared to seven in 2011, largely explains the £244 million jump in the annual totals.
The 10 largest FSA fines of all time now include five 2012 cases against firms. The fines imposed on Barclays and UBS for interest rate manipulation were the largest of the FSA’s record four fines in excess of £10 million this year; 2010, with two such fines, is the only other year which saw multiple fines of that magnitude.
The £160 million UBS fine and the £59.5 million Barclays fine are the FSA’s largest fines ever levied. Both were the culmination of cross-border investigations undertaken in cooperation with authorities in the US, which also imposed fines. Altogether, UBS was fined a total of $1.5 billion and Barclays was fined $450 million.1 Further large fines are expected to result from ongoing investigations of other banks involved in the LIBOR scandal.2

The UBS rogue trading fine of £29.7 million in November was imposed as a penalty in relation to accumulated losses of $2.3 billion through unauthorised trading. This dwarfs the previous highest fine for a Failure to Prevent Misconduct,3 of £1.2 million in November 2006 against General Reinsurance UK Ltd for failing to identify two illegitimate reinsurance transactions. Card Protection Plan Ltd was fined £10.5 million, ordered to pay an estimated £14.5 million in redress to those whom the firm had mis-sold insurance products, and charged with paying investigation-related expenses that it estimates will bring its total cost to £33.4 million.4

BlackRock Investment Management Ltd was fined £9.5 million for Mishandling Client Assets; the firm failed to obtain “trust letters” from third-party banks with which it invested money market deposits.5 This is the largest fine this year for Mishandling Client Assets but pales in comparison to the largest ever fine in this category, against J. P. Morgan for £33.32 million, which is now the third-largest to date.

Fiscal Year Results to Date

Nearly three-quarters of the way into the 2012/13 fiscal year, which ends 31 March 2013, the FSA has already surpassed its previous high-water mark for total fines against firms in a fiscal year. To compare the partial 2012/13 year to previous full fiscal years, we scale up 2012/13 fines to date.6

Excluding the major fines, fines against firms are down With £284 million in fines imposed already, fines against firms have already exceeded the combined total from all previous fines against firms in the FSA’s history (see Figure 3). Of the 2012/13 total, 95 percent is composed of the five fines among the FSA’s all-time top 10. Setting aside these largest fines, the size of more typical fines, measured by the median, has dropped to the 2010/11 level of £600,000.

While the FSA has made waves with the very large fines, the number of fines against firms is similar to the number in recent fiscal years. The FSA has levied 19 fines in the 2012/13 fiscal year to date. At this rate, the FSA will eventually issue 26 fines against firms in 2012/13, which would just exceed the annual average of 24.7 fines against firms over the prior three fiscal years (see Figure 4).

The Market Manipulation fines against UBS and Barclays were not classified as Market Abuse7 even though the alleged manipulation of LIBOR rates clearly had the potential to affect markets.8 The February 2012 fine against Greenlight Capital Inc. for Insider Dealing remains the only fine against a firm in the last two fiscal years classified by the FSA as relating to Market Abuse.

After not fining a single firm for Transaction Reporting, Record-Keeping & Pricing Failures during 2011/12, the FSA issued four fines for such misconduct this fiscal year. The largest of these was against Bank of Scotland for £4.2 million in relation to errors in its records pertaining to 250,000 mortgage customers. Ten firms faced fines for records and reporting rule breaches during either 2009/10 or 2010/11.

Fines against individuals have dropped dramatically

This year has witnessed a sharp decline in the number and aggregate amount of fines against individuals. There has been a particular paucity of large fines; the £1.25 million fine against former UBS desk head Sachin Karpe is the only fine this fiscal year in excess of £500,000, and even that fine was in connection with a Decision Notice issued two years prior and more recently heard by the Upper Tribunal. Last year, there were six fines assessed for more than £500,000, four of which were for £2 million or more.

The absence of very large fines has reversed the prior pattern of year-over-year growth in aggregate fines against individuals (see Figure 5). Aggregate fines had doubled or nearly doubled every year since 2008/09—from £1.4 million in 2008/09 to nearly £20 million last year—but have totalled just £3.2 million so far in 2012/13 and are projected to reach £4.8 million.

The number of fines against individuals is also on pace to fall to its lowest level since 2008/09 (see Figure 6). A combined 90 fines were levied against individuals during the previous two years, but there have been only 16 fines to date in 2012/13.

A driving factor behind both the reduction in total fines and the reduction in very large fines is the reduced number of fines for Market Integrity9 violations. Only two individuals—Jay Alan Rutland and John Blake—have received Market Integrity fines this year, and neither fine exceeded £100,000. In contrast, 12 Market Integrity fines accounted for over £15 million in fines against individuals in 2011/12. There were even more Market Integrity fines the prior year, although more than half were for £100,000 or less.

The drop-off in the number of cases against individuals may also in part reflect an allocation of enforcement resources to the development of LIBOR cases that will result in fines at a later date. The FSA is reportedly pursuing criminal and civil cases. According to the Financial Times, the FSA recently expanded its probe into individuals sending at least five notices of investigation to people in the last two weeks.10 A particular focus of investigations is the role of interdealer brokers.11 The Serious Fraud Office has already arrested a UBS trader and two employees of the interdealer broker, RP Martin.12

The absence of fines for Mortgage Fraud also contributed to the sharp decline in fines. After accounting for 22 of the 32 fines in the Fraud or Other Deliberate Misconduct category over the prior four years, there have been no fines for mortgage fraud so far this fiscal year. The volume of mortgage fraud cases that arose in connection with the recent decline in housing prices appears to have been largely resolved.

There was also a notable absence of fines for Failure to Prevent Misconduct. Six individuals were fined for Failure to Prevent Misconduct in each of 2010/11 and 2011/12, but no individuals have received fines in that category this year.13

As always, we will be following and updating our analysis, so be on the lookout for our 2012/13 fiscal year end report.

http://www.nera.com/nera-files/PUB_FSA_Trends_A4_0113.pdf

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