On April 1, the long-awaited handover of power from the FSA to the “twin-peaks system,” consisting of the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA), took place. The PRA, a branch of the Bank of England, will supervise 1,700 banks, insurers and large investment firms. Its independent co-regulator, the FCA, will supervise all other financial services firms as well as be the conduct regulator and listing authority. The Financial Prudential Committee, whose members will include the heads of the FCA and PRA as well as the Governor of the Bank of England, has also been formed. It will have the task of monitoring the health of the financial system as a whole and has powers to force the other regulators to implement policies.
The fine has been levied for Prudential’s failure to inform the FSA that it was seeking to acquire the Asian arm of AIG at an appropriate time, in breach of FSA Principles and UKLA Listing Principles. Prudential should have notified the FSA of its intentions at the earliest opportunity, so that the regulator could decide whether to approve or reject the deal on regulatory grounds. But according to an FSA news release, Prudential failed to reveal its intentions to the FSA even when quizzed on its plans for expansion in Asia. The delay in notification, which finally came after a press leak, meant that the FSA was forced to rush its analysis of the proposed deal.
In addition to the fine, the FSA also censured Prudential CEO Tidjane Thiam, although it stopped short of finding any lack of fitness or propriety on his part.
Coming as part of a UK government initiative to increase competition within the banking sector, the joint review covers reforms to the authorization process and prudential requirements for new banks. Authorizations will be divided into two pathways, one suitable for firms which already have the means to set up a bank quickly, and the other involving a 3 stage incremental process intended for firms with fewer resources. This will mean that less well resourced firms can receive an initial (although restricted) authorization without having to commit to assembling the onerous capital, IT and infrastructure requirements.
Turning to prudential requirements, the UK’s forthcoming prudential regulator, the PRA, will take a pragmatic view towards setting the capital requirements for new banks. This will involve temporarily allowing new banks to hold leaner capital barriers than their larger, more established competition, in recognition of the lower systemic risk they pose.
A number of the reforms set out in the review have already been implemented by the FSA, and the remainder will be implemented after the UK financial regulation legal cutover date on April 1, 2013.
On March 18, the FSA published a consultation paper (CP13/8) setting out proposals on how the Financial Conduct Authority (FCA) will use its new power under section 391(1)(c) of the Financial Services and Markets Act 2000 (FSMA) to publish information about the matter to which a warning notice relates.
The consultation paper stated that the FCA will consider each case on its merits but will generally publish a statement where it has issued a warning notice to which the power under section 391(1)(c) applies. When considering whether a publication would be unfair to the person against whom the action is proposed to be taken, the FCA will consider whether the person is an individual or a firm and to what extent they have been made aware of the case against them. Information about the warning notice will be published in a statement by the FCA. The statement will not normally contain details of any proposed sanctions, and if the FCA does intend to publish a warning notice statement, the person to whom the notice is given or copied will be consulted.
Following a prosecution brought by the FSA, Richard Joseph was found guilty at Southwark Crown Court of six counts of conspiracy to deal as an insider. Joseph received inside information from a print room manager at JP Morgan Cazenove and used it to place spread bets. He made a profit of £591,117 from the deals.
In a press release the FSA stated that “This conviction once again underscores our determination to take the strongest possible action against anyone involved in insider dealing.”
The FSA is currently prosecuting six other individuals for insider dealing and has so far secured convictions for 22 others since the start of 2009.
On March 5, The FSA published a report and management response concerning the manipulation of LIBOR. The report finds that the FSA was aware of disruption in the LIBOR market during the period between summer 2007 and early 2009, but such disruption may have been solely caused by volatile market conditions at the time. Nevertheless, the report concludes that the FSA should have considered whether manipulation of the benchmark interest rate was taking place.
The report recommends improvements in the sharing of intelligence between the soon to be established new financial regulatory authorities (FCA and PRA), to ensure that future indications of misbehavior in the LIBOR market are not ignored or missed.
An investigation by the Serious Fraud Office into the manipulation of LIBOR, which has so far resulted in the arrest of three men, is ongoing.
On February 27, the FSA published a statement announcing an immediate temporary ban on the short selling of shares in four Italian companies – Banco Popolare, Mediolanum, Intesa and Banca Carige. The prohibition was announced in light of a similar measure introduced by CONSOB, the Italian regulator, and following significant drops in the share price of the affected companies. In explaining its decision to impose the ban, the FSA noted that the move was justified in order to prevent disorderly falls in the share price.
Leading up to the prohibition, the price movements in all four companies’ shares crossed one of the thresholds set out in the Short Selling Regulation (Regulation 919/2012), which sets out criteria for determining a significant fall in price.
On February 19, the FSA published a final notice announcing that it had fined Lloyds Banking Group (LBG) a total of £4,315,000 for failing to make payment protection insurance (PPI) redress payments promptly. Between May 2011 and March 2012, LBG decided to make redress payments to 582,206 customers, and aimed to make each payment within 28 days of taking the decision to pay. Due to failings in LBG’s systems and controls, however, up to 140,209 of these payments were not made promptly. During its investigation the FSA found that LBG:
- Neither established an adequate process, nor engaged staff with sufficient experience, for dealing with the very large volumes of PPI redress payments.
- Did not track PPI redress payments effectively.
- Failed to monitor effectively whether it was making all payments of PPI redress promptly.
- Adopted an approach to risk management when preparing redress payments to send to PPI complainants that was ineffective.
The FSA stated that since its investigation LBG has completed a comprehensive review of PPI redress payments to ensure that all customers due PPI redress have been paid the correct amount and compensated for any delay in receiving their payment.
On February 21, the Treasury Select Committee published the FSA’s response in relation to its August 2012 report on LIBOR. The report had criticized the FSA for being behind the US regulator in formally investigating market rumors relating to the artificial rigging of LIBOR rates and made several recommendations for improvement in the future.
In its response, the FSA challenges accusations that it was too slow to investigate the manipulation of LIBOR rates, stating instead that it had worked closely with the Commodity Futures Trading Commission since 2008 to examine allegations of rate-rigging. The FSA noted that it has increased the intensity of its supervision since 2008, and will continue to do so following the separation into a “twin peaks” regulatory system. The FSA also disputes the view that it interpreted its powers to initiate criminal proceedings for fraud in relation to rate-fixing too narrowly, and instead reiterates its mandate to consult with the Serious Fraud Office (and other prosecutors where necessary) where there is evidence of offences which are beyond the scope of its own powers of investigation.
On February 6, the FSA issued a final notice to RBS imposing a fine of £87.5 million for misconduct in submitting rates for the calculation of LIBOR. RBS’ misconduct included the manipulation of submissions and several failings in respect of risk management systems and controls (including ongoing failings to identify inappropriate LIBOR submissions), as well as RBS’ collusion with other LIBOR panel banks and brokers in setting rates.
The FSA stated that the significant financial penalty of £87.5 million is intended to reflect both the widespread nature of the misconduct, as well as the harm caused to market participants and the integrity of the UK financial system. In related actions, RBS has agreed to pay $324 million to the US Commodities and Futures Commission and $150 million to the US Department of Justice.