NERA Economic Consulting has recently published an analysis of the penalties imposed by the UK financial regulator since April 2012. The startling headline is that the level of fines in the 18 months since April 2012 is over £1bn, whereas in the previous decade fines totaled less than £320m. What is the reason behind this massive increase? Has the FCA (which took over from the FSA in April 2013) just got tougher, or has it been easier to impose fines because the ‘accused’ have been major firms and High Street banks with long pockets and a propensity to settle, and because the issues under consideration since 2012, mainly the benchmark cases of Libor and Forex, have provided ample excuse for large fines? In addition, has the even higher level of fines imposed in the US for similar misconduct prompted an escalation in both tariff and expectation?
It is tempting to see the high level of fines against firms set out in the NERA report as representing relatively easy pickings. This is not to say that the investigations into Libor and Forex have been anything other than massively complex, or that fixing the level of penalty is easy, but there is an element of the domino effect – as soon as Barclays settled with the SEC and the FSA in June 2012, it was inevitable that the other major banks, and related financial businesses, who participated in Libor rate fixing would soon follow suit. One may anticipate the same if it emerges, as expected, that there has been serious misconduct in the Forex market.
It is also tempting to see all this against a backdrop of the fall-out from the global financial crisis. Regulatory action against the banks for their failings leading up to October 2008 was relatively limited, and there has been a public thirst for some level of revenge. The delayed response to PPI mis-selling, other mis-selling cases, the ‘London Whale’, and the benchmark fines, have given the regulator something to crow about, at a time when its response to the crisis in general, and to the RBS and HBOS failures in 2008 in particular, is under attack.
Another interesting headline is that, by contrast, the numbers and levels of fines against approved individuals have fallen ‘sharply’. Is this because the FCA has found it easier to pursue firms which will, as stated above, seek to settle, both to take advantage of the discount, and to get the problem off the balance sheet? And because individuals will tend to tough it out, and rarely settle? The answer to these questions is a qualified ‘yes’, the qualification being that, as the NERA report makes clear, the fact of criminal proceedings for Libor misconduct, and other cases, has caused delays in finalizing regulatory cases against individuals. Final notices against individuals cannot generally be published until related criminal proceedings have concluded. There is therefore something of a log jam of penalties against individuals.
Nevertheless, the numbers and levels of fines against senior individuals for regulatory misconduct outside the benchmark arena remain relatively low. This is partly because it has proved very difficult to pin the blame for large failings on specific members of the boards of financial firms, and partly, as stated, because individuals tend to contest allegations, often with a degree of success. The regulator is, however, seeking to take more enforcement action against individuals, and has emphasised this ambition. It has sought to reinforce its position by introducing ‘attestations’ and the senior persons’ regime, as well as new criminal offences such as section 36 Financial Services (Banking Reform) Act 2013 – reckless banking – which should make it easier to prove misconduct against individuals. It will nevertheless be interesting to see whether these new powers will prove to be effective.
Over the next 18 months we may expect to see the levels of fines against firms remain high. It is also likely that enforcement action against individuals will result in significant fines during this period, and that penalty levels will exceed those in recent years. Both results will in large part be due to the benchmark cases, and therein lies a challenge for the FCA: there has been much comment about the extent to which the Libor and Forex cases have taken up Enforcement resources, to the possible detriment of other types of enquiry. It is difficult to know whether this is true, and it will no doubt be hotly denied by FCA management, but the numbers to watch in the next year or so will be those that do not relate to benchmarks.
At the same time, the NERA report rightly stresses the extent to which the FCA views its consumer protection objective as a core value, and it is likely that statistics relating to this area of endeavour, in particular, for example, early intervention into the mis-selling of products, investigating Pay-Day loan providers, and restrictions on financial promotions, while not necessarily producing large penalties, will demonstrate that the FCA has teeth.
 ‘Trends in Regulatory Enforcement in Uk Financial Markets. 2014/15 Mid-Year Report, by Robert Patton. Published 20 October 2014.