THE FCA ISN’T FINISHED WITH BANKING ENFORCEMENT YET

By Peter Wright, partner, Fox Williams & Sona Ganatra, Legal Director Fox Williams

According to weather experts, the eye of a tropical storm is typically 30 to 60 kilometres wide. Standing in it can be surprisingly pleasant compared to what’s happening all around, with low winds and clear skies the norm.

Sadly, stepping outside the eye means encountering the strongest winds and worst weather the storm has to offer. Right now, the banking industry might be forgiven for thinking it’s stuck somewhere inside such a weather system.

Between 2012 and 2015, banks and other financial firms were fined a total of more than £3 billion by the UK’s Financial Conduct Authority (FCA). Libor and other rate-fixing investigations saw the level of enforcement against financial services in Britain reach record highs.

In 2016 though, everything changed. The level of fines handed out fell to just £22 million. There were no fines related to rate-rigging, and no fines at all for the big banks who had been the focus of activity for the recent past.

Then, on 31^st January this year, things changed once more. Deutsche Bank received a £163 million fine in relation to anti-money laundering failures. That’s nearly eight times the entire total of fines in 2016. The fine came only days after the FCA’s director of enforcement, Mark Steward, had declared that his organisation has “not gone soft” on enforcement.

Faced with this pattern of events, what should banks believe? Is the era of blockbuster fines largely over, with normal weather returning? Or was 2016 simply the eye of the storm, with more bad weather to come?

While last year was exceptionally quiet for enforcement, the activity that did occur offered clues to the future. Even if blockbuster penalties don’t return, the 97% reduction infines was almost certainly an anomaly – an eye of the storm moment.

To think and act otherwise could be an expensive mistake for three reasons.

Firstly, Libor and other rate-rigging enquiries have not disappeared entirely. Fresh criminal investigations have recently been launched by both the FCA and the Serious Fraud Office (SFO), meaning further enforcement action is likely. Banks may be weary of this line of investigation, but it appears it isn’t done just yet.

Secondly, the FCA has started to widen its investigative lens. For the last few years, rate-rigging cases like Libor have been the FCA’s primary focus. As analysis of 2016 demonstrates, that is no longer the case. Consumer credit, handling of client monies, and especially financial crime all became the focus of attention – and of fines.

The last of these should perhaps be the biggest concern for banks.

The fines levied against Sonali Bank late last year and Deutsche Bank this year are early examples of the FCA’s new focus – and desire to enforce – different kinds of financial crime. In fact, their most recent business plan referred to this being a priority for the organisation to address.

If Libor was the poster child of enforcement activity for the past few years then, financial crime is shaping up to be its heir.

Finally, banks have (yet more) regulation to deal with that directly relates to the level of enforcement action we could see.

Market Abuse Regulation (MAR) was introduced halfway through 2016, designed to strengthen and broaden the scope of the rules on this issue.

The longer it is in place, the more likely the FCA will start using it to bring cases of insider dealing and unlawful disclosure of information to bear. High frequency and algorithmic trading cases could be pursued in particular under the new rules.

Alongside MAR, the Senior Managers Regime (SMR) also came into effect in 2016, placing greater onus and culpability on executives to prevent illegal activities from occurring.

Again, as it nears its one year anniversary, we will start to see cases being brought using it. In fact, in September the FCA stated it was already concerned about firms which allow junior managers to share this responsibility.

Even without fines specifically based on SMR yet, 2016 showed the balance is tipping away from pursuing companies and towards individuals. Last year, 63% of fines were levied on individuals, an increase from 53% in 2015. That figure could creep further upwards this year.

Looking ahead, the FCA also wants to extend its reach other financial firms like hedge funds and asset managers, and to non-executive directors (NEDs) too. That will add a further dimension to possible enforcement activities, as well as probably decreasing the appetite to take on a NED role in the first place.

More to come on Libor, a wider set of areas to investigate, especially on financial crime, and two significant new pieces of regulation that will increase the FCA’s options for enforcement.

Collectively, these are the reasons why 2016 will be seen as a rare period of quiet in enforcement.

Bank compliance departments, already well up to speed in some areas, have a host of new things to consider and cater for this year.

As Mark Steward was at pains to point out in his January speech, “light touch has not returned”. Taken in combination with the factors noted above, it feels like the industry could be about to leave the eye and move back into the storm.

By Peter Wright, partner, Fox Williams & Sona Ganatra, Legal Director Fox Williams

According to weather experts, the eye of a tropical storm is typically 30 to 60 kilometres wide. Standing in it can be surprisingly pleasant compared to what’s happening all around, with low winds and clear skies the norm.

Sadly, stepping outside the eye means encountering the strongest winds and worst weather the storm has to offer. Right now, the banking industry might be forgiven for thinking it’s stuck somewhere inside such a weather system.

Between 2012 and 2015, banks and other financial firms were fined a total of more than £3 billion by the UK’s Financial Conduct Authority (FCA). Libor and other rate-fixing investigations saw the level of enforcement against financial services in Britain reach record highs.

In 2016 though, everything changed. The level of fines handed out fell to just £22 million. There were no fines related to rate-rigging, and no fines at all for the big banks who had been the focus of activity for the recent past.

Then, on 31^st January this year, things changed once more. Deutsche Bank received a £163 million fine in relation to anti-money laundering failures. That’s nearly eight times the entire total of fines in 2016. The fine came only days after the FCA’s director of enforcement, Mark Steward, had declared that his organisation has “not gone soft” on enforcement.

Faced with this pattern of events, what should banks believe? Is the era of blockbuster fines largely over, with normal weather returning? Or was 2016 simply the eye of the storm, with more bad weather to come?

While last year was exceptionally quiet for enforcement, the activity that did occur offered clues to the future. Even if blockbuster penalties don’t return, the 97% reduction infines was almost certainly an anomaly – an eye of the storm moment.

To think and act otherwise could be an expensive mistake for three reasons.

Firstly, Libor and other rate-rigging enquiries have not disappeared entirely. Fresh criminal investigations have recently been launched by both the FCA and the Serious Fraud Office (SFO), meaning further enforcement action is likely. Banks may be weary of this line of investigation, but it appears it isn’t done just yet.

Secondly, the FCA has started to widen its investigative lens. For the last few years, rate-rigging cases like Libor have been the FCA’s primary focus. As analysis of 2016 demonstrates, that is no longer the case. Consumer credit, handling of client monies, and especially financial crime all became the focus of attention – and of fines.

The last of these should perhaps be the biggest concern for banks.

The fines levied against Sonali Bank late last year and Deutsche Bank this year are early examples of the FCA’s new focus – and desire to enforce – different kinds of financial crime. In fact, their most recent business plan referred to this being a priority for the organisation to address.

If Libor was the poster child of enforcement activity for the past few years then, financial crime is shaping up to be its heir.

Finally, banks have (yet more) regulation to deal with that directly relates to the level of enforcement action we could see.

Market Abuse Regulation (MAR) was introduced halfway through 2016, designed to strengthen and broaden the scope of the rules on this issue.

The longer it is in place, the more likely the FCA will start using it to bring cases of insider dealing and unlawful disclosure of information to bear. High frequency and algorithmic trading cases could be pursued in particular under the new rules.

Alongside MAR, the Senior Managers Regime (SMR) also came into effect in 2016, placing greater onus and culpability on executives to prevent illegal activities from occurring.

Again, as it nears its one year anniversary, we will start to see cases being brought using it. In fact, in September the FCA stated it was already concerned about firms which allow junior managers to share this responsibility.

Even without fines specifically based on SMR yet, 2016 showed the balance is tipping away from pursuing companies and towards individuals. Last year, 63% of fines were levied on individuals, an increase from 53% in 2015. That figure could creep further upwards this year.

Looking ahead, the FCA also wants to extend its reach other financial firms like hedge funds and asset managers, and to non-executive directors (NEDs) too. That will add a further dimension to possible enforcement activities, as well as probably decreasing the appetite to take on a NED role in the first place.

More to come on Libor, a wider set of areas to investigate, especially on financial crime, and two significant new pieces of regulation that will increase the FCA’s options for enforcement.

Collectively, these are the reasons why 2016 will be seen as a rare period of quiet in enforcement.

Bank compliance departments, already well up to speed in some areas, have a host of new things to consider and cater for this year.

As Mark Steward was at pains to point out in his January speech, “light touch has not returned”. Taken in combination with the factors noted above, it feels like the industry could be about to leave the eye and move back into the storm.