In this issue of Signature’s Financial and Regulatory Disputes Update, the last for 2015, we review the Financial Conduct Authority’s enforcement activity since January. In particular, we highlight the top ten fines levied so far this year and consider the more supervisory, but no less intrusive, mechanisms successfully being deployed. Our next article probes whether the Serious Fraud Office is fit for purpose and looks at the steps the organisation is taking to leave some heavy criticism behind it. Lastly, we take a closer look at the recent decision in the Property Alliance Group v the Royal Bank of Scotland Plc action and comment on the further developments surrounding legal privilege.
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The Financial Conduct Authority (“FCA”) is now over two years into its tenure, having taken the baton from the Financial Services Authority (“FSA”) in April 2013. There is a more intrusive approach to supervision and enforcement, which is evident from the increasing level of fines, and the elevation of regulation and enforcement to the top of the agenda for regulated businesses.
When Martin Wheatley (until recently, the Chief Executive Officer (“CEO”) of the FCA) was first appointed to his position in 2013, he was quoted as saying that the new approach of the FCA would be to “shoot first, ask questions later”. This raised eyebrows at the time, and set the scene for the intense enforcement activity which followed, but did things go too far? There does seem to be a shift in the dynamics, with Martin Wheatley leaving the FCA, and Tracey McDermott being appointed as acting Chief Executive. Taking over from McDermott as Director of Enforcement is Mark Steward, who was previously the Head of Enforcement at the Hong Kong Securities and Futures Commission. He will no doubt be keen to establish himself in this role and build on the work of the FCA’s enforcement division over the past few years. What are we likely to see from the enforcement function going forward?
Round up of enforcement action
Naturally there tends to be a great deal of focus on the level of fines levied. By way of a general overview of the fines imposed so far this year, the total amount currently stands at £826,910,767. That compares to £1,471,431,800 in 2014 and £474,263,738 in 2013. The 2014 peak is attributable to LIBOR and other benchmark rigging breaches.
For a comparison to the old days, under the FSA regime, the highest fine ever imposed by the FSA was £160 million against UBS in December 2012 for LIBOR rigging. That compares to the £284 million fine against Barclays in May 2015 in respect of FX trading.
With five of the top 10 fines this year being against banks, this shows that the FCA’s focus has been on the banking sector in recent years (as opposed to the insurance sector). Full details of the top 10 fines imposed by the FCA this year are set out in Table 1.
Aside from enforcement actions and fines, there are other weapons in the FCA’s arsenal of a more supervisory nature, but just as intrusive. We are seeing regular use of the Skilled Person Review under Section 166 of Financial Services and Markets Acts 2000 (“FSMA”) to obtain an independent view on aspects of a firm’s activities. Another impactful mechanism is the attestation. An attestation is used to ensure clear accountability of and a focus from senior management on addressing issues. This involves someone making a personal commitment to take action.
The latest edition of the “FCA Data Bulletin” (now on issue 4) was published on 2 October 2015 and shows that between April 2014 and March 2015, a total of 61 attestations were given. The FCA guidance on attestations states that the most usual scenarios in which it will require an attestation are:
- Notification – where a firm is asked to attest that they will notify the FCA of any future change in risk.
- Undertaking – where the FCA wants a firm to take specific action within a particular time scale, but the risk is unlikely to result in material harm to consumers.
- Self-certification – for more significant issues but where the FCA is confident that the firm can resolve the issues themselves, the FCA may ask for the firm (via its senior managers) to attest that the risks have been mitigated or resolved.
- Verification – where the FCA wants a firm to resolve issues or mitigate risks, and they also want verification that certain actions have been carried out.
For senior managers, being asked to sign an attestation to the effect that action has been or will be carried out can be a terrifying prospect. If an attestation turns out to be wrong, further regulatory action may follow. Faced with the choice of giving the attestation or risking a prolonged regulatory investigation, senior managers can be placed in a difficult position.
This adds to the growing pressure on senior managers. The FCA has been working towards a tighter regulatory framework to hold senior managers accountable for failings in firms. This will be achieved through the implementation of the senior managers regime (the “SMR”), the rules of which have now been finalised, and will come into effect in March 2016. Under the new regime, senior managers will be subject to a different approvals regime, with firms being required to certify that senior managers are fit and proper for their roles on an ongoing basis, formally confirming this annually. It will apply to senior managers who are currently performing a significant influence function under the existing regime. For now the SMR applies to banks only, but there are plans afoot to extend it to all FSMA authorised persons.
Under the SMR regime, it had previously been proposed that the burden of proof would be reversed. This meant that if a firm was deemed to have breached regulations, then the senior managers in place during the time of those breaches would be deemed personally culpable, unless they could demonstrate that they had taken reasonable steps to avoid the contravention occurring or continuing. Thankfully senior managers can breathe a (small) sigh of relief, as that provision was changed following an announcement by the Government in October 2015. Instead, there will be a statutory duty on senior managers to take reasonable steps to prevent regulatory breaches in their areas of responsibility. This may be interpreted as being consistent with a move to ease the regulatory burden on firms, after a period of relentless pressure.
What next for enforcement?
The challenge for the regulator is clearly in finding the right balance. In a speech by Tracey McDermott, on 22 October 2015, she noted that:
“…the intensity and volume of regulatory activity over recent years is not sustainable – for regulators or for the industry…We are often told that boards are now spending the majority of their time on regulatory matters. This cannot be in anyone’s interests. If that continues indefinitely we will crowd out the creativity, innovation and competition which should present the opportunities for growth in the future.”
In an analogy to a referee (following the recent Rugby World Cup), she added that the regulator should be “at the centre of the action without being the centre of attention.” Not an easy thing to accomplish.
The new Director of Enforcement will have a point to prove, and enough to work with in terms of a revamped framework with significant changes in the enforcement regime still to come through. Mr Steward has a track record of making imaginative and groundbreaking use of enforcement weapons. From the enforcement function, we expect it to be business as usual – no holds barred.
It has been a difficult few years for the SFO. The organisation has faced criticism from various quarters and suffered a number of serious blows in some of the cases it has handled, all of which have cast the very future of the agency into doubt. For example, in 2010 a Court of Appeal judge described the US$12.7 million penalty handed out in the Innospec case as “wholly inadequate,” and in 2012 the same judge later described aspects of the handling of the Tchenguiz investigation as “sheer incompetence.” These were damning verdicts. Coupled with only a handful of successful prosecutions under the much heralded Bribery Act 2010, many began to question whether the agency was fit for purpose.
Defiant, the SFO’s director, David Green QC, offered a positive outlook at a speech in October 2014. “It is as if the oil tanker has completed its turn, and is now on the right course and making headway,” he said.
The LIBOR and FX scandals were always, however, going to prove a difficult test for the SFO, not least because of the scale of the alleged wrongdoing and the resources needed to make headway. How has the SFO fared in responding to those scandals?
Ultimately the litmus test for any investigatory and prosecutorial body is its ability to bring and pursue investigations to a successful conclusion. On this front, the ship appears to be on the right course and is indeed making headway.
Perhaps most notably, on 3 August 2015 a jury at Southward Crown Court found 35-year-old Tom Hayes, the former UBS and Citigroup trader, guilty on eight counts of conspiring to manipulate LIBOR. He was sentenced to 14 years in prison. The SFO is understood to have pursued its prosecution of Mr Hayes vigorously. For example, it reportedly obtained a court order against Mr Hayes’ wife, freezing her assets shortly after he withdrew from a so-called plea bargain. All in all, it was a much needed public victory on the SFO’s part.
It also demonstrated that the SFO was prepared not only to show its teeth, but also use them to devastating effect for those mixed up in wrongdoing in this particular scandal. The public would of course expect nothing less.
Bringing things back into perspective, however, the Tom Hayes prosecution represents just one individual’s prosecution in a scandal which unquestionably involved many. Is there more to come?
The simply answer is “yes.” The trial of some of Hayes’ alleged co-conspirators began over a month ago. A further trial of individuals charged with the manipulation of US Dollar LIBOR begins in January 2016. One individual has reportedly already pleaded guilty. We understand that a sizeable number of the individuals currently under investigation are other traders named by Mr Hayes during his 82 hours of questioning by the SFO. On 13 November 2015 the SFO issued the first criminal proceedings against ten former employees of Deutsche Bank and Barclays accused of manipulating EURIBOR.
Then there are the various possible investigations and prosecutions into FX rigging. A number of FX traders have already, we understand, been interviewed under caution. More prosecutions may follow.
It is more difficult to predict whether we will see investigations and prosecutions into the conduct of more senior bank executives who were not directly involved in the rigging of the rates. The inherent challenge with prosecuting offences against such senior individuals is proving, as a matter of evidence, that such rigging was carried out with those senior individuals’ consent or connivance. That will never be an easy task in an environment where senior bank executives are often several steps removed from day-to-day trading activities.
For an organisation whose funding and resources have come under increasing strain in recent years, many have questioned the SFO’s ability to fund and resource investigations and prosecutions into such complex matters which involve so many people in so many institutions. Government support is essential.
On the face of it the SFO has that support. The UK Chancellor, George Osborne, has pledged to provide whatever funding the SFO needs to “pursue criminal wrongdoing at the highest level.” He appears to have been good to his word. In 2013/14, the SFO’s coffers were boosted by £19m, and in October 2014 the SFO revealed it had asked for an additional £26.5m of funding to cover significant investigations including LIBOR. This will no doubt be welcomed by those who wish to see those responsible for the rigging scandals brought to justice.
Dig a bit deeper, however, and the SFO’s future may not be so rosy. It has been widely reported that the UK Home Secretary, Theresa May, wishes to abolish the agency altogether and fold its activities into the National Crime Agency, an organisation formed in 2013 to fight serious and organised crime (dubbed by some as the “British FBI”). Mr Green has – unsurprisingly – come out fighting when the SFO’s future has been called into question. Whether he will be able to win that particular fight remains to be seen.
The Government’s recent decision to abandon work on developing a new corporate crime offence has been seen by many as a further blow to the SFO. The law would have created a new offence of ‘failing to prevent economic crime’, such as fraud or money laundering. It was intended to build upon the existing corporate offence of failing to prevent bribery. Where historically there have been very few successful prosecutions of corporates for criminal offences, the law would have made it easier for the SFO to prosecute corporates for financial and economic crime offences. No wonder Mr Green was a firm advocate of the new law.
It follows that, for the foreseeable future at least, the law on corporate liability in financial and economic crime cases remains based on the ‘identification principle’. Under this premise, the ‘directing mind and will’ of the company needs to be found criminally culpable in order for the corporate to be found criminally liable. In practice this tends to require the involvement of one or more board members and can be very difficult to prove.
When Mr Green took over the SFO Director role in 2012, he had his work cut out. He made no secret of his desire to make the SFO more feared and hungry to tackle the most complex and difficult cases. The financial markets sector has dished up its fair share of such cases in the last few years and the SFO’s response suggests that it has regained some momentum. The half term progress report would therefore read “so far so good”. But the SFO is not clear of the choppy waters yet. There is still more work to be done, all against the backdrop of possibly the biggest fight for the SFO yet – its own future.
Earlier this year, the Royal Bank of Scotland PLC (RBS), in its litigation with Property Alliance Group Limited (PAG), failed in its argument that privilege operated to obviate the need to disclose documents relating to without prejudice negotiations with the Financial Services Authority (as it was then) over the bank’s fine for LIBOR manipulation (see July issue for our previous article on the case). In a further procedural ruling on this case, the extent of legal advice privilege has been determined by the court as being broader than simply documents comprising actual legal advice provided by a solicitor to its client. The court has rejected a strict interpretation of the law on legal advice privilege and acknowledged the need to protect the willingness of solicitors and their clients to communicate openly and freely for the purposes of giving and receiving legal advice and without fear of the content of such communications being disclosed to third parties without their consent.
PAG’s claim against RBS involves allegations that it was induced to enter into various interest rate hedging products by misrepresentations made by RBS – to the effect that RBS was not engaging in any LIBOR manipulation. As part of the disclosure process, in June 2015, the court ordered RBS to provide to the court the “ESG High Level Documents”, being those documents which had been prepared by RBS’ external lawyers relating to meetings at the bank’s Executive Steering Group (ESG) and which RBS contended were subject to privilege. The court needed to determine whether any of RBS’s claims to privilege in respect of these documents were properly made. RBS duly produced 81 ESG documents for inspection by the court, along with a witness statement setting out the background facts.
The documents produced by RBS in complying with the order consisted of two categories of documents:
- The first comprised confidential memoranda in tabular form prepared by Clifford Chance, one of a number of firms advising the bank on regulatory investigations in various jurisdictions. The court said that these tables informed and updated the ESG on the progress, status and issues arising in the regulatory investigations and formed the basis of discussions at the ESG meetings regarding the bank’s strategy and Clifford Chance’s advice. Much of the content was brief reference to matters in the public domain, such as the launch of investigations by regulators or litigation by clients, or to matters which although not public, such as meetings and correspondence with different regulators, would not, by their nature, have constituted privileged information.
- The second category comprised confidential notes and summaries drafted by Clifford Chance concerning the discussions between the ESG and its legal advisors at the ESG meetings, reflecting Clifford Chance’s views on the regulatory investigations, and were circulated by Clifford Chance to the ESG following ESG meetings.
The court described the structure of the ESG as being comprised of a number of legal advisers in different jurisdictions who gathered at the ESG meetings to advise the bank and to represent it before the numerous regulators conducting regulatory investigations in various jurisdictions commencing in April 2010 for the purpose of overseeing the regulatory investigations and related litigation, liaising with the bank’s legal advisors and providing instructions accordingly.
In setting out the basic legal requirements for establishing legal advice privilege,
the court made reference to the Three Rivers District Council v Bank of England¹
(No.6) and Balabel v Air India² cases. In summary, legal advice privilege attaches
to all communications between a solicitor and his client relating to a transaction
in which the solicitor has been instructed for the purpose of obtaining legal
advice, notwithstanding that they do not contain advice on matters of law or
construction, provided that they are directly related to the performance by
the solicitor of his professional duty as legal adviser of his client. Importantly,
where information is passed by the solicitor or client to the other as part of a
continuum of communications aimed at keeping both parties informed so that
advice may be sought and given as required, privilege may attach.
Application of legal principles to facts
Against this background, the court went on to consider how these principles apply in the circumstances.
The court was satisfied that Clifford Chance, as the author of the ESG High Level Documents, were engaged by their client in a relevant legal context. It was clear from the evidence before the court that RBS was facing regulatory investigations in a number of jurisdictions that could have had (and did have) the consequence that RBS was subjected to very large regulatory penalties and consequent private actions for very significant sums of money. Clifford Chance were engaged to provide advice and assistance as to the rights, liabilities and obligations of RBS.
The court was also satisfied that both types of ESG High Level Documents formed part of a continuum of communication and meetings between Clifford Chance and RBS, the object of which was the giving of legal advice as and when appropriate.
- the tabular memoranda prepared for the ESG meetings fell precisely into the type of documents described by Lord Taylor in Balabel v Air India as, “information … passed by the solicitor or client to the other as part of the continuum aimed at keeping both informed so that advice may be sought and given as required”;
- the summary minutes of the meetings of the ESG showed that the lawyers from different jurisdictions supplemented the contents of the tables with reports and references to some of the meetings which they had attended and the communications which they had exchanged with regulators on behalf of RBS, with the role of the lawyers at such meetings being to convey information to the members of the ESG and to provide them with legal advice.
PAG had submitted that even if legal advice attached to some parts of the ESG High Level Documents, references in the documents concerning public events or to any dealings with regulators would not be privileged. Accordingly, whilst any direct references in documents to legal advice received from Clifford Chance or any of the other lawyers could be redacted, the remainder of the documents should be provided to PAG. The court considered that PAG’s argument might have been relevant if the ESG High Level Documents had been prepared by the ESG itself. But there was no basis to say that a litigant has to perform the exercise of redacting and disclosing privileged communications sent in confidence by its lawyer
Drawing on Three Rivers (No.6) again, the court, for completeness, added that the communications in the ESG High Level Documents fell squarely within the policy underlying the justification for legal advice privilege, being the need to encourage open and frank communications between a lawyer and its clients.
The court’s confirmation of the wide application of legal advice privilege, particularly as to the continuum of communications, is helpful. Disclosure exercises can be approached in the knowledge that the court has confirmed that redaction in respect of solicitor/client communication is not normally going to be required. Note also that the fact that the ESG appeared to have been established specifically for the purposes of overseeing the regulatory investigations and related litigation, and liaising with the lawyers, worked in the bank’s favour in establishing privilege. This confirms the need for a structured approach to establishing the “client” entity within a large corporate, in order to be able to maintain a strong claim to legal advice privilege. We anticipate that there remains scope for further argument in these types of cases on the application of litigation privilege to communications with witnesses and/or other third parties.
-  BCLC 583, 588d-e.
-  Ch 317
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