Naming and shaming proposals reconsidered and other enforcement and litigation case updates
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Financial Institutions 360 – Q3 2024: Enforcement and litigation case updates
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Enforcement transparency Mark 2
Earlier this year, the FCA introduced proposals to introduce further transparency around opening enforcement investigations. The proposals did not go down well, and quickly became referred to as “naming and shaming”.
The FCA has since reconsidered, and on 28 November published some updated proposals in a new consultation: CP24/2 Part 2. These proposals look like a watered down version of their original proposals, for example in deciding whether to publish an investigation the FCA proposes to consider the impact of the announcement on the firm under investigation, which was not a relevant factor in the original proposals. The FCA also proposes to give firms at least 10 days’ notice, rather than the one day in the original consultation, to give firms time to make representations.
The FCA has also published some case studies, to assist stakeholders in understanding the sorts of cases it might decide to publicise at an early stage.
Barclays plc
On 25 November the FCA published its final notice to Barclays plc and Barclays Bank plc, fining them £40m. It had originally published a decision notice in 2022, fining the firms £50m, which Barclays had appealed to the Upper Tribunal, and which was due to be heard the week of the announcement of the final notice, so it is assumed that Barclays decided to settle. The fine relates to Barclays’ conduct during the financial crisis in 2008 in relation to its capital raising from various Qatari entities. The FCA found that Barclays had acted recklessly and lacked integrity in its capital raising, and was in breach of the Listing Rules.
Macquarie Bank Ltd
On 18 November, the FCA published a final notice to Macquarie Bank Ltd London Branch, fining it £13m for breaches of Principle 3 of the FCA’s Principles for Businesses. In February 2022 Macquarie discovered that a trader had attempted to hide trading losses of $57.8m by recording fictitious trades over a period of nearly 2 years. These trades were not prevented or detected due to deficiencies in the Bank’s systems and controls relating to oversight and monitoring of trader positions. The losses did not have any market impact.
Metrobank
On 12 November the FCA published a final notice to Metrobank, fining it over £16m for breaches of Principle 3 of the FCA’s Principles for Businesses with regards to failures in its AML controls. Metrobank’s AML systems involved new transactions being fed into an automatic system for monitoring potential financial crime, but an error meant that many of transactions were missed, including those made on the day an account was opened. This took four years to notice and remedy, and meant that over 60m transactions with a value of over £51bn were not properly monitored.
Wise plc
On 28 October the FCA published a final notice to Kristo Käärmann, the CEO of Wise plc, fining him £350k for failing to notify them of a penalty he had received from HMRC relating to a failure to inform them of CGT on a share disposal. The FCA considered that this was relevant to his fitness and propriety, and that he therefore had a duty to inform them of the fine under Senior Management Conduct Rule 4, which requires senior managers to inform the FCA of anything of which they would expect notice. The FCA has allowed him to continue in his role.
Final Notice to Volkswagen Financial Services
On 21 October the FCA published a final notice to Volkswagen Financial Services (UK) Limited (VWFS), fining them £5.4m for breaches of Principles 3, 6 and 7 in respect of customers in financial difficulty.
The FCA found that VWFS failed to:
- take reasonable care to organise and control its affairs responsibly and effectively;
- pay due regard to the interests of customers in financial difficulty and treat them fairly; and
- pay due regard to the information needs of those customers and communicate with them in a way that was clear, fair and not misleading.
The FCA found that VWFS also breached provisions of CONC and DISP.
VWFS identified over 100,000 customers who suffered or were at risk of suffering detriment as a result of these failings.
Starling Bank
On 27 September 2024 the FCA issued a final notice to Starling Bank, fining it nearly £29m (reduced from £40m due to their cooperation) for serious AML failings and financial crime controls.
In 2020 the FCA launched a review of financial crime controls at challenger banks, in which it identified issues with Starling’s AML and financial crime controls. In May 2021 the FCA required Starling to appoint a Skilled Person under s.166 to test the adequacy of its transaction monitoring and financial crime risk governance. The Skilled Person found several failings, in particular in relation to Starling’s customer onboarding controls.
In September 2021 Starling agreed to a voluntary requirement (VREQ) not to open any accounts for high or higher risk customers while it improved its AML control framework.
However, it appears that Starling did not address the FCA’s concerns or comply with the terms of the VREQ. In July 2022 it discovered that due to the failure of a key financial crime risk control, it had been providing new accounts to customers who had previously been exited for financial crime breaches, including being subject to SARs. Its 2LOD then commenced a review of its compliance with the VREQ, which was completed in December 2022, during which it discovered that it had opened over 54k accounts for 49k high or higher-risk customers since it had agreed to the VREQ.
In January 2022 the 2LOD commenced a review of its screening of financial sanctions, which found that due to a system misconfiguration they had only been screening names against a small section of the Consolidated List (only ones with UK citizenship). It undertook a back book screening review which generated 48k alerts against its entire customer base.
The FCA found that Starling had therefore breached the term of its VREQ, as well as Principle 3 (failing to design, implement and maintain adequate systems and controls to mitigate financial crime risks) and fined it accordingly.
Finfluencers
The FCA announced on 22 October 2024 a further “crackdown” on finfluencers. The FCA interviewed 20 finfluencers under caution, and also issued 38 alerts against social media accounts which may contain unlawful promotions.
There has been a significant increase in finfluencers over recent years, which the FCA defines as social media personalities who use their platform to promote financial products and share insights and advice with their followers.
TSB Bank plc
On 9 October the FCA published a final notice to TSB Bank plc and fined it nearly £11m for breaches of Principles 3 and 6 in relation to its treatment of customers in arrears or financial difficulties between 2014 and 2020. TSB has also paid nearly £100m in redress to around 230,000 affected customers. This related to products including retail mortgages, overdrafts, credit cards and loans.
The FCA found the following examples of unfair customer outcomes:
- Assessment of customer circumstances – In some cases, TSB did not fully assess a customer’s financial position and failed to conduct appropriate affordability assessments, which meant that some customers were making payments they could not afford, or in other cases TSB failing to identify vulnerable customers.
- Forbearance was sometimes unsustainable or only offered if a customer first made an arrears payment.
- Interest, fees and charges – these were sometimes charged even when against TSB’s own policies.
- Bank errors and poor communication – including not having updated addresses or when the customer was on a “hold” period.
The FCA found the following causes of these unfair outcomes within TSB’s collections and recoveries operation:
- Policies and processes – the FCA found that their policies contained requirements which increased the risk of unfair customer outcomes, including requiring customers to make a payment before forbearance was offered.
- Training and incentivisation – for example, TSB training to not fully equip staff to ask the right questions about a customer’s financial position.
- Systems – there were failures in systems which led to poor outcomes such as charging two arrears fees within the same period, which could affect customers’ credit files.
- Testing and assurance – their internal testing failed to properly identify unfair customer outcomes.
The FCA noted that TSB complied with the recommendations of the Skilled Person appointed in 2020, paid full redress to affected customers, and cooperated with its investigation.
London Capital & Finance
On 14 November the High Court handed down its judgment in the long-running London Capital & Finance (LCF) saga which found, among other things, that LCF was effectively running a Ponzi scheme.
As a brief reminder, LCF was a firm which sold unregulated mini-bonds to members of the public, and then collapsed owing approximately £237m to its investors. The FCA was accused of sleeping on the job and there have been various regulatory and other court cases involving the firm.
The High Court, in its lengthy judgment in the case brought by the administrators of the firm against the directors held, among other things, that:
- the firm engaged in fraudulent conduct amounting to a Ponzi scheme;
- some of the directors were liable for knowing participation in the fraudulent conduct; and
- some of the directors were also liable for breach of their fiduciary duties or for dishonest assistance in the breaches of duty.
There will be a separate hearing on quantum.
FCA v Bluecrest Capital Management
On 2 October 2024, the Court of Appeal handed down judgment in FCA v BlueCrest Capital Management (UK) LLP (BCM). The Court of Appeal overturned the decision of the Upper Tribunal and ruled that the FCA’s powers to order redress against a single firm are not subject to the same conditions as imposing redress sector-wide. The appeal raised two issues: one relating to the powers of the FCA, which we cover below, and the other relating to the jurisdiction of the Upper Tribunal.
BCM is part of the BlueCrest private fund management group, which operated two funds; the first fund being an internal fund, open to their partners and employees, and the second an external fund, which was open to investors. Both funds had a master fund/feeder fund structure, and each master and feeder fund had an investment manager which was an entity in the BlueCrest group. The investment managers of the external and internal funds appointed BCM to act as one of the sub-investment managers for the Funds under a series of sub-investment management agreements.
The FCA alleged that BCM failed to manage the conflicts of interest properly and of favouring the internal fund to the detriment of the external fund. In September 2021 the FCA issued BCM a first supervisory notice ordering them to pay redress to customers, estimated by the FCA to be at least $700 million. In November 2021 the FCA gave BCM a decision notice, imposing a financial penalty of £40m.
BCM referred both notices to the Upper Tribunal, which considered three applications from both parties as preliminary issues. The Upper Tribunal agreed with BCM that there were significant restrictions on the FCA’s use of its powers to impose market-wide redress schemes, including the necessity that loss, causation, duty and actionability were established, and that these applied to single-firm redress schemes as well. The Upper Tribunal found that a breach of the FCA’s Principles for Businesses was not actionable. The FCA, therefore, did not have the power to impose a redress scheme on BCM for a breach of Principle 8, and BCM’s strike out application was successful.
The FCA appealed to the Court of Appeal (and BCM cross-appealed part of the Upper Tribunal’s findings relating to the FCA’s application to amend its statement of case). The Court of Appeal rejected BCM’s arguments and overturned the decision of the Upper Tribunal on broadly the following two grounds:
- The restrictions BCM raised were designed for widespread market-wide schemes which were fundamentally different from a single-firm redress scheme and operated under different provisions in FSMA. If the restrictions existed, the statute would have said so expressly. The Court commented this wide discretion was not “surprising nor objectionable” given the FCA is an expert body and has a wide remit to protect the interests of consumers.
- The Court held there were sufficient safeguards through ordinary public law principles. The Court further rejected the argument based on consumer loss noting it was clearly in the public interest that profits obtained through wrongdoing and was capable of being proportionate.
As these were preliminary issues, the case will be remitted to the Upper Tribunal to make a decision on the substantive issues.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, December 2024
