Fines – it’s the principle
No one involved in the UK financial services industry could have failed to notice the recent increase in level of fines issued by the UK’s City Regulator, the Financial Conduct Authority. Here Mary Stevens, from risk and regulatory technology company Wolters Kluwer Financial Services, analyses what the fines mean for the industry.
When the FCA took over regulation of the financial services industry back in April 2013 it certainly had a tough job in trying to convince consumers that it could change the industry’s reputation and reinstall confidence.
In fact, it appears to have been a tougher challenge than anyone imagined. No matter how high the level of fines are the penalties keep rising and, it seems, for the same reasons.
This article examines the ‘Principles’ that continue to be breached and the level of fines issued by regulators since the birth of the FSA back in 2001 and includes data provided by the Wolters Kluwer Financial Services Regulatory Analysis team.
So, what do the yearly financial penalties show?
The FCA and Prudential Regulation Authority’s (PRA) predecessor, the Financial Services Authority (FSA), took over regulation of the industry back on 1 December 2001 (Date known as N2). The first financial penalties started to roll in in the early months of 2002.
After the financial crisis of 2007/08 and a large dose of ‘banker bashing’ there was cry for a complete overhaul of the industry. As a result changes were made to the Financial Services and Markets Act 2000 which then saw the introduction of ‘twin peaks’ regulation in the UK in the form of two new regulators: The Financial Conduct Authority (FCA); and the Prudential Regulation Authority (PRA). Both new regulators took over regulatory powers and oversight from the FSA on 1 April 2013 (Date known as LCO – Legal Cutover).
The fines issued by all three regulators (FSA, FCA and PRA) combined since 1 December 2001 to date display a clear change in attitude from the economic crisis trigger years (2007/08) with a sharp increase in fines overall in 2013 when ‘twin-peaks’ regulation was brought in. The reaction of the regulators to the financial crisis has been to increase the financial penalties issued against firms and individuals as a deterrent for wrong-doing. However, this may not be in the interests of the industry as a whole as, whilst this is a popular with consumers keen to see heads roll, it may have had a detrimental effect on the industry, undermining confidence from those who may wish to invest in the UK.
So has the increase in financial penalties worked?
The figures show that the FSA gradually increased the number of fines over a period of nine years until 2010 when the number of fines started to decrease. The trend for the number of fines since this date is still downward in caparison to the level of fines which has increased significantly overall.
Since the FCA took over regulatory oversight of financial conduct within the industry the reason for financial penalties consistently show that Principles for Businesses 3 is the top reason for penalty against regulated firms. Principle 3 specifically relates to a firms Management and Control of its business.
Principle 7 (Communication with clients) and Principle 6 (Customer’s interests) figure next in the data but comparatively low in volume against Principle 3. All remaining breaches of Principles for Businesses remain fairly insignificant with Principle 4 (Financial Prudence) not figuring at all. The lack of penalty against firms for breach of Principle 4 may suggest firms are now organising their affairs more carefully or indeed that only the financially stable firms survived the financial crisis. Time will tell if this is the case in years to come as the UK’s economy continues to recover.
There were five additional financial penalties issued against firms not documented as breaches of Principles for Businesses.
Statements of Principle for Approved Persons
With regard to Approved Persons, Statement of Principle 1 has the highest level of enforcement for the period 1 April 2013 to 31 July 2015.
Statement 1 confirms:
“An approved person must observe proper standards of market conduct in carrying out his accountable functions.”
This penalty seems to be issued against individuals more likely to be involved in providing financial advice for smaller organisations as opposed to senior managers within larger Tier 1 and 2 firms.
Given the level of penalties against individual firms for breaches of Principles for Businesses within the Tier 1 and 2 category, especially the banking industry, it is noticeable that there is a lack of penalties against those individuals holding a significant influence function. Particularly noticeable is the lack of breaches identified for Statement of Principle 5 which states that:
“An approved person performing an accountable significant-influence function must take reasonable steps to ensure that the business of the firm for which he is responsible in his accountable function is organised so that it can be controlled effectively.”
Statements of Principle 6 & 7 also relate to those performing a ‘significant influence function’. Statement 6 has had no instances of breach during 2015 to date and very little in the previous year. Principle 7 is also fairly insignificant in number.
Statements of Principle for Approved Persons
|Statement of Principle 1|
|An approved person must act with integrity in carrying out his accountable functions.|
|Statement of Principle 2|
|An approved person must act with due skill, care and diligence in carrying out his accountable functions.|
|Statement of Principle 3|
|An approved person must observe proper standards of market conduct in carrying out his accountable functions.|
|Statement of Principle 4|
|An approved person must deal with the FCA, the PRA and other regulators in an open and cooperative way and must disclose appropriately any information of which the FCA or the PRA would reasonably expect notice.|
|Statement of Principle 5|
|An approved person performing an accountable significant-influence function must take reasonable steps to ensure that the business of the firm for which he is responsible in his accountable function is organised so that it can be controlled effectively.|
|Statement of Principle 6|
|An approved person performing an accountable significant-influence function must exercise due skill, care and diligence in managing the business of the firm for which he is responsible in his accountable function.|
|Statement of Principle 7|
|An approved person performing an accountable significant-influence function must take reasonable steps to ensure that the business of the firm for which he is responsible in his accountable function complies with the relevant requirements and standards of the regulatory system.|
So who is being punished?
The banking sector has borne the brunt of the financial penalties and, unsurprisingly, received the most press.
Martin Wheatley, chief executive of FCA, famously once said the FCA would “shoot first and ask questions later”. This message was not favourably received by the industry. From this point onward Wheatley was seen as an unpopular figurehead.
George Osborne, Chancellor, recently revealed to Wheatley that he would not be renewing his contract past March 2016 and as a result Wheatley announced he would be leaving the FCA on 12 September 2015. Tracy McDermott, who is currently director of Supervision at the FCA will act as interim CEO whilst the search for Wheatley’s replacement is ongoing.
Osborne suggested that whilst Wheatley had done a great job of launching the new regulator he was not tough enough to lead the FCA in to the future saying “Britain needs a tough, strong financial conduct regulator……Now this phase [transition from FSA to FCA] is complete, the government believes that different leadership is required to build on these foundations and take the organisation to the next stage of its development.” It remains to be seen what “different leadership” means.
Speed seems to be at the core of Osborne’s disappointment and decision though and something McDermott has also previously raised as a concern herself suggesting the regulator is slow to react.
It has additionally been suggested that had Wheatley stayed in his position of CEO the level of financial penalties would have continued to rise. This clearly would not have helped Wheatley’s popularity in the industry.
Wheatley’s early exit demanded by Osborne is seen as a move to regain financial organisation’s trust and confidence thus making the UK an attractive, trusted and reliable place to do business.
However, the attempts to regain confidence in the industry may have to do battle with the Bank of England Governor, Mark Carney, who last year said that top bank executives had “got away without sanction”. This could mean that instead of large financial penalties being imposed on organisations, we might start to see more financial penalties for those holding a ‘significant influence function’ with the penalties shown in Figure 6 of this article shifting more to breaches of Statements of Principle 5, 6 and 7, (See Figure 6.), which up until now have seen little or no penalisation.
The financial sector has long been seen as the main supporting sector for the UK’s economy with banks still accounting for some 450 per cent of the nation’s gross domestic product but its reputation has been damaged and at some point this has to change if the UK is to recover fully. We will watch with interest to see who will replace Wheatley and how the FCA will develop its relationship with consumers and organisations.
Mary Stevens is manager of regulatory analysis Europe at Wolters Kluwer Financial Services.