After a relatively quiet start to the year on the enforcement front, the FCA published three notable Final Notices in June 2020. All relate to areas which have been a focus for the FCA for some time: the fair treatment of customers experiencing financial difficulty (especially important in light of Covid-19); AML controls; and ensuring timely and accurate market disclosures.
On 11 June 2020, three banking subsidiaries of a leading financial services group were fined over £64 million for their failures in relation to the handling of mortgage customers in payment difficulties or arrears, in breach of Principles 3 (management and control) and 6 (treating customer fairly). The FCA found that, between April 2011 and December 2015, the banks’ systems and controls for collecting information from their mortgage customers facing payment difficulties resulted in a failure to obtain adequate information to appropriately ascertain customers’ financial circumstances and their ability to meet their obligations. This created a risk that customers were treated unfairly.
In calculating the fine, the FCA took into account the fact that the banks have undertaken an extensive redress exercise, with payments to customers estimated to total £300 million. The banks also showed a significant level of cooperation with the FCA during its investigation, including providing notes of interviews with staff to the FCA with privilege waived. The banks agreed to settle the FCA’s findings, but made representations to the FCA’s Regulatory Decisions Committee (RDC) on the proposed financial penalty under the FCA’s partly contested case process. The penalty in the Final Notice is higher than that originally proposed in the Warning Notice (which was £51.2 million) as the RDC decided that there should be no proportionality discount at Step 2 of the calculation, contrary to the position taken in the Warning Notice.
On 17 June 2020, the London branch of an international commercial bank was fined £37,805,400 for breaching Principle 3 (management and control), arising from its failure to have in place adequate risk management systems, organise its affairs effectively and responsibly, and have policies and procedures in place to enable it to identify, monitor, assess and manage money laundering risks between October 2012 and September 2017. Issues included: no comprehensive documented process for terminating a relationship with a client for financial crime risk; a lack of clarity around responsibilities and risk and issue owners; and a backlog of KYC checks for existing clients, developed in part due to resourcing constraints on first and second lines of defence.
The failings occurred after three FCA visits relating to weaknesses in the bank’s AML control framework and a heightened awareness within the bank of weaknesses in its global financial controls following action taken by the US Regulator in 2015 (although that action did not involve the London branch). Since 2017, the bank has implemented a remediation plan in relation to its financial crime framework and has worked with a skilled person to address this and implement a variety of business restrictions (which are now being lifted gradually). When calculating the bank’s fine, the FCA considered the seriousness of the breach to be level 4, but to achieve a penalty that was proportionate to the breach the step 2 figure was reduced from £163,660,050 to £45,006,513.
Ensuring accurate market disclosures has been on the regulatory agenda for a few years now and on 26 June 2020, an AIM listed IT service provider was publicly censured by the FCA for publishing incorrect information about its net debt and holdings of cash equivalents in its interim and final year results in November 2015 and June 2016 respectively. The incorrect results caused the provider’s shares to trade at a higher price than would otherwise have been the case and, consequently, investors who purchased shares during this time paid more than they would have done if the results had been accurate. The FCA found that the provider knew or ought to have known the information in the results was false and concluded that the provider had committed market abuse contrary to section 118(7) of FSMA (now replaced by MAR).
In the Final Notice, the FCA commented that such misconduct would usually result in a high penalty. However, taking into account the balance of public interest, the FCA decided that a censure was more appropriate. The provider has implemented a compensation scheme for investors who suffered loss as a result of the market abuse, with the value of the scheme estimated to be £11.4 million. The provider’s customers include a number of NHS Trusts and it provides key services in respect of the Covid-19 pandemic. The FCA considered it preferable for the provider to provide compensation under the scheme rather than risk disruption to the provider’s business given this context.
The FCA has brought separate but related criminal proceedings against three former employees of the provider. Charges include two counts of making a false or misleading statement contrary to Section 89(1) of the Financial Services Act 2012.