Rory Spillman comments in CDR re the rise of FCA fines against individuals

By Signature Litigation
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Signature Litigation

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The value of FCA fines against individuals has more than doubled in a year as fines against companies fall by a third. Why?

The greater reach of regulatory authorities has been a consistent theme of the post-global financial crisis settlement in the financial services sector. Those attending CDR’s Litigation Symposium last year will well remember the discussions that took place about regulatory reach and how in-house counsel were reacting to the debate.

While respectful of their regulatory duties, and mindful of their responsibilities, they were also in no doubt as to the need to manage compliance, both at an institutional and individual level.

Research carried out by London-headquartered law firm Clyde & Co, shows that while both remain important to the United Kingdom financial services regulator, the Financial Conduct Authority (FCA), the value of FCA fines against individuals had more than doubled over the last year, whereas the value of fines against companies has dropped by 37%.

FCA fines against individuals came to a total of GBP 17 million this year, compared to GBP 7 million in 2014/15, whilst fines against companies dropped to GBP 880 million from GBP 1,403 million the previous year.

John Whittaker, partner at Clyde & Co, said, in a statement: “Although it is difficult to draw firm conclusions from just three years of statistics, it does suggest that the regulator now appears to be turning its focus towards individuals. This is supported by recent regulatory changes which are aimed at holding individuals to account for any behaviour that strays outside of the regulator’s rule book.”

Alongside the existing use of the FCA’s Principles for Enforcement, the new Senior Managers Regime has placed the onus on managers to take responsibility for their own actions and those of their staff.

Managers are expected to approach the new regime cautiously until the new regime’s impacts are seen and felt, given its scale; it is an enormous task, one in which the ways in which individual accountability will manifest itself in the decision-making process is a moot point.

The risks of not covering oneself adequately with a protective ‘paper-trail’ is severe enough; senior managers and key non-executive directors risk fines or bans from the industry unless they can show they took all reasonable steps to prevent wrongdoing within their teams.

There is also a parallel criminal offence of recklessly mismanaging a financial institution that fails. Add in new whistleblowing provisions, and the onus on individuals, and those who manage them, is not just significant, but absolute; an increase in personal liability will arguably discourage talent yet further, encouraging them to work in less regulated industries.

The new rules came into effect in March 2016. They currently apply to banks, building societies credit unions and insurers but are expected to be extended across the entire financial services sector by 2018.

Whittaker commented: “The Senior Mangers Regime has sent shockwaves throughout the financial services industry. In the past senior figures at financial services companies have largely managed to avoid punishment for their own and their team’s actions. That has now all changed.”

“Companies will be hoping that the new rules help to ensure employees play by the book but are not put off from taking calculated risks in order to boost profits.”



The number of fines handed out by the FCA is now evenly split between companies and individuals, 17 each this year. In previous years fines against companies have always outweighed those against individuals. With the banks under a duty to self-report compliance failures, and individuals also subject to more stringent compliance measures, the regulatory climate is a stern one.

The FCA has seen considerable change in personnel and strategies in its relatively short existence, but of late seems to have settled down and focused on tackling misconduct wherever it has detected it. It has new leadership, and a fresh approach to its work.

Rory Spillman, an associate at Signature Litigation, told CDR that he agreed with the survey, saying: “There appears to have been more of a concentration and emphasis on individuals by the FCA than corporates and I can see this continuing to develop in the future with the new regime.”

Spillman added: “The recent downturn in fines against corporates and increase in fines against individuals could very well be the normal flow of investigations. The FCA has investigated and settled (generally at a discount) with the corporate entity first and will then continue its case against the individuals.”

Such incentives, with significant discounts available, can be a significant issue for the individuals involved, while he says that the position of individuals may “become more difficult in the context of the new Senior Manager Regime and the introduction of Deferred Prosecution Agreements”.

He adds: “In the future I would expect to see the FCA investigate both the company and the relevant individuals at the same time and possibly even issue findings and fines (if applicable) at the same time.”

He warned: “It is therefore even more important now for individuals to be independently represented from the very beginning, even if it would seem that there is a common interest and possibly defence between the corporate and the individual.”



The research also showed that the total value of fines handed out by the FCA has dropped by over a third (36%) this year. The FCA imposed fines amounting to a total of GBP 898 million in 2015/16 compared with a record GBP 1.41 billion in 2014/15, a 36% decrease. This year’s total is still over double that of 2013/14’s GBP 421 million.

One reason for the sharp drop in the value of fines may be because the fallout from major banking scandals is now drawing to an end; if so that will cap a remarkable run for the FCA’s chief counsel for retail banking conduct, Mark Thriepland, and Simon Brindley, the FCA’s chief counsel.

2014/15’s total was bolstered by a number of large fines because of the investigations into whether foreign-exchange and Libor benchmarks were rigged.

JP Morgan, Citibank, HSBC, RBS and UBS each received fines of over GBP 200 million in 2014/15, for failing to take reasonable care to organise and control their affairs responsibly and effectively with adequate risk management systems in relation to FX voice trading.

This year there were just two fines against companies, which related to Forex or Libor. The most recent was in May 2015, a GBP 284m record fine for Barclays Bank. Whittaker commented: “The big ticket fines from the recent banking scandals look to have dried up, but other cases may be in the pipeline.”

One other explanation for the drop may also be due to the way in which law firms have skilfully adopted settlement strategies to mitigate the costs of any fine. Spillman points out that “corporate entities are generally incentivised for various reasons to bring the investigations to a close early, and settle the case with up to a 30% discount on any fine issued by the FCA”.

For example, Lloyds Bank’s early settlement of an FCA investigation into its handling of PPI complaints, in 2015, was estimated to have saved the bank in excess of GBP 50 million, having been ultimately fined GBP 117 million, in a deal brokered by Linklaters.

Even so, the penalties remain stern ones, as Whittaker acknowledged: “This year’s fines are still over double that of two years ago and there are no signs that the FCA is taking its foot off the gas. The record fine handed out to a company this financial year shows that the regulator still has teeth and is not afraid of breaking records in order to punishing businesses that operate outside of the rules.”



In support of such objectives, the FCA released its 2016/2017 business plan in March 2016, making the regulation of wholesale financial markets new priorities, alongside existing concerns such as financial crime and money-laundering, as part of a drive to “showcase itself as a steady state regulator”, according to Simon Morris of CMS.

With new threats emerging, such as the risks arising from ‘spoofing’, the risks managed by regulators are growing; there are those who have warned the FCA that it needs to do more to manage them, such as combatting money-laundering, so new opportunities for misconduct persist.

UK financial services regulators, however, have not always had it their own way. The increased use of judicial review by affected parties is but one response to the sanctions, like fines, handed down to individuals, as the recent Holmcroft decision shows, in which the FCA’s predecessor, the Financial Services Authority (FSA), was taken to task.

Other cases, like the Pottage litigation, in which John Pottage, who was sanctioned by the FSA as a senior manager, for the inadequate supervision of traders, have been important test cases, as widely reported in the financial press. Pottage was represented by Stephenson Harwood, while UBS was represented by Herbert Smith Freehills.

Pottage was completely exonerated by the Upper Tribunal in April 2012; that case, and the 2013 Wilford litigation, which is now one of the leading cases on the susceptibility of FCA decisions to judicial review, as handed down by the Court of Appeal, show that individuals and entities, have remedies against their punishments, too.


This article was originally published in CDR and can be found here.

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