This briefing discusses the new approach of the UK's regulator, the FCA, to regulatory enforcement of wholesale markets, as revealed by the recent settlements between the agency and five banks relating to FX manipulation. These are the largest regulatory settlements in UK history, a total of £1.1 billion (or $1.72 billion), the largest slice of a $4.3 billion total figure across four international regulators. The size of the penalties, and, perhaps more importantly, the FCA's methodology in arriving at the final figures, should be of real concern for UK-regulated entities.
The bottom line is that there is now very little room for error in compliance, especially in relation to contributing to benchmarks or other conduct affecting wholesale markets.
A study of the relevant FCA Notices in the FX cases reveals a lot about the current approach of the agency. A few points stand out:
The FCA is not shy about basing very large penalties on a narrow jurisdictional base. In each of these cases, the sole foundation for the penalty is Principle 3 of the FCA's Principles for Business, the requirement to have proper risk-management controls. Of course, alleged failures under Principle 3 do not imply any lack of integrity or failure to meet standards of market conduct (as was the case in the LIBOR cases, for example). The FCA made no findings of actual harm or detriment to customers or third parties, stating merely that the conduct in question gave rise to the "potential" for such harm. The FCA was unable to determine whether the firms in question made illicit profits as a result of the behaviour. In none of the cases does the FCA find that the firm in question "acted deliberately or recklessly" in relation to the breach. The industry as a whole is being required to take further compliance measures. The FCA is imposing a remediation programme on dozens of other UK-regulated banks "to ensure firms address the root causes of these failings and drive up standards across the market". Senior management at these firms will be required to provide attestations as to the completion of remediation work in improving compliance standards. This will be a major task for in-house counsel and heads of compliance in the coming year. So what justifies these very large penalties, not to mention a compulsory remediation programme for firms which have not even been found wanting? How can non-deliberate systems and control failures, with no identified customer detriment...