UK: FCA Disciplinary Action Puts Senior Managers In The Spotlight
In a Final Notice that showcases the importance the Financial Conduct Authority (FCA) places on the responsibilities of senior managers, the FCA fined Tullett Prebon (Europe) Limited (Tullett Prebon) £15.4 million for failing to conduct its business with due skill, care and diligence (Principle 2), failing to have adequate risk management systems (Principle 3) and for failing to be open and cooperative with the FCA (Principle 11).
Following an FCA investigation, the FCA found that, between 2008 and 2010, Tullett Prebon’s Rates Division had ineffective controls around broker conduct. Lavish entertainment and a lack of effective controls allowed improper trading to take place, including "wash" trades which generated unwarranted and unusually high amounts of brokerage for the firm.
Although the events concerned pre-dated the Senior Managers and Certification Regime (SMCR), the decision underlines the importance placed by the FCA on those in senior positions in authorised firms conducting themselves with due skill, care and diligence and dealing with the FCA in an open and cooperative way.
Senior managers ignored red flags
With regard to the breaches of Principles 2 and 3 of the FCA’s Principles for Businesses, the FCA found senior managers failed to act with due skill, care and diligence over "wash trades" conducted by brokers even when faced with blatant signals of broker misconduct. Rather than taking steps to address the risk presented, they took no action. For example, when significantly high brokerage was generated on a trade and a senior manager asked the broker responsible if it was an error, the broker confirmed it was correct and told him "you don't want to know, all right"; no steps were taken to explore the obvious risk of broker misconduct. This should have been a "red flag" and led to a recognition of risk and further action. This was not a one-off incident. When another senior manager noticed the same brokerage, he was told by the broker involved in arranging the trade "you don't really want to know" to which the senior manager said "that is exactly what [another broker] said as well, so I definitely don't want to know". The broker then immediately asked if the senior manager would "look after" the expenses claim he made for boxing tickets. The senior manager failed to take any steps to investigate the legitimacy of the trade or the size of the brokerage generated.
Interestingly, the Compliance Department and the Tullett Group Executive Committee considered that Divisional Directors had central compliance responsibilities within the business. These responsibilities were reflected within a "Statement of Responsibilities". However, in practice, the Statement of Responsibilities was signed and returned to the Compliance Department with limited understanding as to its actual meaning. One senior manager commented: "I don't think there was any clear understanding from anyone exactly what we were signing to be quite honest."
There was no training of any nature in relation to compliance responsibilities which meant the "first line of defence" was "little more than a theoretical notion" and, other than the Statement of Responsibilities, no steps were taken to ensure that this was an effective tool to deal with compliance risks. The senior managers in the Rates Division essentially did not appreciate that compliance responsibilities fell to them. The FCA takes a dim view of such procedures being rolled out as a rubber-stamping exercise without any effective training or procedures put in place in practice. Perhaps a timely reminder to firms with the SMCR being rolled out to all solo-regulated firms from 9 December 2019 that a Statement of Responsibilities with no accompanying steps to ensure senior managers understand and are managing their responsibilities will be ineffective in preventing compliance failings.
Principle 11 breach and the FCA focus on senior managers
Tullett Prebon also breached Principle 11 of the FCA's Principles for Businesses by failing to be open and cooperative with the FCA. This breach occurred between August 2011 and October 2014 and related to the FCA's request to Tullett Prebon in August 2011 for broker audio tapes. Although Tullett Prebon had the majority of the audio that the FCA required, they failed to produce it to the FCA until 2014. Tullett Prebon also initially provided an incorrect account as to how the audio had been discovered.
The FCA felt that the impact and nature of the Principle 11 breach was particularly serious because a senior manager in the Legal Department (Senior Manager A) and a senior manager in the Compliance Department (Senior Manager B) were at the centre of the matters giving rise to the breach. What is interesting is the weight the FCA has placed on the Principle 11 breach to which the FCA attributed 32% of the overall fine. It will be interesting to see if the FCA takes any action against Senior Manager A and Senior Manager B.
It is also thought-provoking to consider how the outcome might have differed had the SMCR been in force at the time, especially regarding Senior Manager A in the Legal Department. If Senior Manager A was Head of Legal, they would be excluded from the requirement to be approved as a Senior Manager (unless they were a Senior Manager for other reasons). This then begs the question whether Senior Manager A would have been able to walk away, while Senior Manager B faced regulatory action.
By Katharine Harle , Celyn Armstrong and Jaime O'Connell, November 25, 2019