Blog 28th Nov 2014

Determined deterrence: What next?

The FCA’s Penalty Notices in the recent Spot FX Trading Investigation totalling £1.1 Bn set out very careful and thorough explanations of how the respective Penalties have been reached, identifying the relevant guidance and breaches of Principle. In the FCA’s Final Notice for Citibank for example, following the principles and guidance in the FCA’s Decision Procedures and Penalties Manual, the FCA expressly referred to five criteria: the need for “credible deterrence”, the nature, seriousness and impact of the breach, failures to respond adequately as regards conduct against the context of the LIBOR enforcement actions, Citibank’s previous disciplinary record and the discount applicable for settling terms “at an early stage of the Authority’s investigation”.

Deterrence is the key concern. The Citibank Notice states that “The principle purpose of a financial penalty is to promote high standards of regulatory conduct by deterring firms who have breached regulatory requirements from committing further contraventions, helping to deter other firms from committing contraventions and demonstrating generally to firms the benefits of compliant behaviour” [Annex D paragraph 4.2], and that the need for deterrence means that a very significant financial penalty is appropriate. Citibank received a total financial Penalty of £225,575,000, discounted down by 30% in recognition of the early cooperation and agreement in settlement.

What is particularly striking is the express recitation of the FCA’s consideration that Citibank’s response to “well publicised enforcement action” concerning LIBOR failed adequately to address root causes in its G10 spot FX business that gave rise to the failings the FCA now identify [Annex D Penalty Analysis paragraph 5.18]. In other words the FCA has taken a failure to set the house in order wholesale in the light of other market scandals as an aggravating feature of this latest episode of market rigging. This can only mean that if in future yet further occurrences of market rigging are uncovered, the financial penalties are presumably going to go even higher, simply on this basis alone.
The uncomfortable truth in this is the recognition that there remain concerns that there are elements within any given Bank or Institution’s personnel that did not – and therefore may still not – have learned to curb their practices. Ross McEwan, RBS Chief Executive was quoted in the Independent as saying, “To say that I am angry would be an understatement. We had people working at this Bank who did not know the difference between right and wrong.” However, given the amount of training and the efforts now deployed by external lawyers and in-house teams to address fundamental attitudes of behaviour amongst the traders, there must be real scepticism that another scandal is not so far away from being unearthed. Prevention is of course always better than a cure, but as in other fields of regulation, there seems to be what Healthcare Regulators describe as a “deep seated attitudinal problem”. It would seem that just as there are such problems in some Hospitals (or elements of the Police Service), there is in parts of the City, acknowledged implicitly by the FCA.

In its Press Release the FCA has announced that it will commence an industry wide supervisory remediation programme for firms to drive up standards “across the market”. Firms will be required to conduct reviews and senior management will be asked to attest that steps have been taken as regards systems and controls to manage the risks of abuse and the sharing of confidential information. The emphasis seems still, then, to be on internal regulation and senior and/or institutional accountability, rather than individual accountability.

But given that “where there is a will there is a way” the real deterrent comes in what happens when you are caught – not so much as an Institution – but as an individual. The time must be coming when, assuming that there is another market manipulation scandal, the real powers of enforcement and the true deterrent will come not from fines but from criminal prosecutions.

The emphasis so far in terms of regulation appears to reflect concerns about public confidence and the integrity of the City as national asset. It seems less to reflect actual or potential loss to others. An indictment in the criminal courts alleging conspiracy to defraud requires the infringement of a proprietary right or interest of another to be actually or potentially injured [R v Evans [2014] 1 WLR 2817] – but if so identified, and the requisite unlawfulness is established (including dishonesty) then a maximum ten year sentence of imprisonment is available, as well as powers under the Proceeds of Crime Act for confiscation of the criminal benefit. Under the Sentencing Council’s Guideline for offences of fraud, money laundering and bribery falling to be sentenced after 1st October 2014 an offender deemed to have high culpability at a loss of £1m has as a starting point at around seven years imprisonment in a range from five to eight years (before any discounted plea): heavy deterrent sentencing indeed, potentially.

The clear exasperation expressed institutionally and individually at this latest scandal, the clear acknowledgment that neither lessons were learned nor cultures changed, and the acknowledgment therefore that such Institutions cannot be trusted to have changed should inevitably mean that the next round of deterrence will need to be escalated in seriousness and effectiveness; in other words to involve both the Banks and its individuals. Investigating and prosecuting such cases should not be so very much harder than it already is: the evidence will likely be left littered behind on the internet. If efforts are made to identify in evidence a real financial loser by the rigging of the market, then there is no reason to think that the individual prosecutions will not follow. No wonder that regulatory and market training of the traders needs now to take on that extra edge.

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