Financial services investigations and enforcement round-up - August 2020

A round-up of recent enforcement actions and investigations in the financial services sector as well as a look ahead to the autumns’ expected activity.

Quick links for this month:

• What’s on the horizon for FCA Enforcement?
• Guidance on the fair treatment of vulnerable customers
• SFO receives approval for DPA with G4S Care and Justice Services (UK) Ltd
• High Court orders illegal pension introducers to pay £10.7m in restitution
• HM Treasury publishes report on AML and Counter-Terrorism Supervision
• Complaints Commissioner defends FCA in whistle-blower claim

What’s on the horizon for FCA Enforcement?

In what has been a quiet month for regulators and prosecuting agencies for headline actions, we have set out some thoughts on where we foresee FCA Enforcement actions arising during the coming months. This by no means covers all potential investigations and we would be more than happy to discuss with you areas in which firms such as yours may be at risk of greater regulatory scrutiny.

The FCA and other regulators have seen unexpected calls on their time and resources over the last 6 months. As a result of the Covid-19 pandemic they have had to divert resources to tackle a number of pressing concerns, many of which were not contained in their 2020/2021 Business Plan. Significant time and energy has been put into seeking legal clarity on business interruption insurance coverage and providing guidance on forbearance expectations for customers in temporary financial difficulty as a result of the global pandemic, among other things.

We still await the publication of the Enforcement annual performance report for 2019/2020 which is usually published in July. This document accompanies the FCA’s Business Plan and provides useful insight into the activities of the FCA’s Enforcement teams, including the number and types of cases in the Enforcement pipeline. With the average regulatory and civil case, resolved by agreement, taking an average of 29.1 months from start to finish (in 2018/2019) the market can take some useful insights from the types of cases in the Enforcement portfolio.

For example, of the 650 civil and regulatory cases open as at 31 March 2019, the 4 areas of focus and consequently the largest number of cases involved (excluding unauthorised business):

1. retail conduct
2. insider dealing
3. financial crime
4. culture and governance 

It will be interesting to see whether the published outcomes in 2020/2021 reflect this split.

In the medium term we may see Enforcement focus on those areas of risk heightened by the pandemic such as employees working remotely. Whilst firms are grappling with the changing landscape of operating in the pandemic, the FCA has made it clear that they will not compromise on what they expect from firms.

This increased conduct risk in a remote working environment will need to be managed carefully. It is likely that there will be an increase in individual behaviour issues, challenges in maintaining a firm’s culture and disseminating/embedding that culture to new employees as well as challenges in managing people in this environment. This is in addition to the policy and procedure challenges emanating from the pandemic situation.

Guidance on the fair treatment of vulnerable customers

On 29 July 2020, the FCA published guidance for firms on treating vulnerable customers fairly. The guidance sets out feedback to the FCA’s initial view of what the Principles for Businesses require of firms to treat vulnerable consumers fairly.

In our recent article, Angela Hayes and Noline Matemera consider how firms can implement the guidance in practice, and any areas of concern of which firms should be mindful.

SFO receives approval for DPA with G4S Care and Justice Services (UK) Ltd

On 17 July 2020, the SFO received approval to enter its eighth deferred prosecution agreement (DPA) with G4S Care and Justice Services (UK) Ltd (G4S), bringing the SFO’s investigation to a close.

The SFO’s investigation related to alleged fraudulent practices by G4S under its contracts with the Ministry of Justice. In particular, G4S are alleged to have intentionally misled the Ministry of Justice as to the actual value of its profits under the agreements in an attempt to avoid contractual obligations to share the value of costs reductions.

The DPA will remain in force for three years from 17 July 2020, with the main terms of the DPA including:

1. G4S paying a fine of £38.5 million plus the SFO’s costs of approximately £5.9 million; and
2. G4S agreeing to an extensive programme of review, assessment and reporting on its internal controls, policies and procedures to be permitted by the SFO, with performance being guaranteed by G4S’ parent company, G4S plc.

The director of the SFO, Lisa Osofsky stated that the DPA ensured ‘G4S is held accountable for its methodical fraud against the Ministry of Justice’ and that G4S will be subjected to unprecedented, multi-year scrutiny and assurance.’

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High Court orders illegal pension introducers to pay £10.7m in restitution

On 7 August 2020, the High Court ordered that Avacade Limited and Alexandra Associates (UK) Limited (the Companies) and three directors of the Companies pay £10.7 million in restitution to consumers who were induced to transfer their pensions into SIPPs.

The Court had previously found on 30 June 2020 that the Companies’ activities were unlawful on the basis that they had engaged in the following regulated activities without authorisation:

• ranging and advising on investments;
• making unapproved financial promotions through their websites, promotional material and in telephone calls to consumers; and
• making false or misleading statements.

A further hearing took place on 31 July 2020 to determine the amounts the Companies and its directors should pay in restitution for their roles in the unlawful activity.

The Companies and its directors have been banned from engaging in regulated activities without authorisation, making financial promotions and making false or misleading statements about regulated investments.

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HM Treasury publishes report on AML and Counter-Terrorist Financing Supervision

HM Treasury has published its eighth annual Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) Supervision Report for 2018 to 2019 (the Report).

The Report contains several significant insights, including:

1. During the report period, the FCA took formal action on approximately 57% of the firms reviewed and approximately 52% of the firms visited.
2. Alongside its enforcement activity, during the report period, HMRC took informal action, such as a letter to the business offering advice and feedback, against 23% of those who were subject to a desk-based review or onsite visit.
3. The total value of fines issued has increased from £8.9 million in the previous year to £121.8 million. This suggests that supervisory bodies are taking stronger action against those who fail to comply with their AML requirements. The fines include the FCA’s £102.2 million fine of Standard Chartered Bank.
4. The FCA currently has 65 AML investigations open and has made 5 referrals to law enforcement agencies for AML/CTF related matters.

According to the Report’s introduction, effective supervision means focussing supervisory and law enforcement resources on ‘the highest risk but does not place unnecessary burdens on business.’

The Report recommends that the FCA and HMRC should determine the appropriate intensity of supervision according to their assessment of risk presented by those under their supervision and that the FCA should consider the wider use of criminal background checks to ensure that financial institutions are not owned or controlled by criminals and their associates.

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Complaints Commissioner defends FCA in whistle-blower claim

The Complaints Commissioner, the FCA’s watchdog, has defended the regulator following claims that senior FCA staff treated a whistle-blower unethically through the use of ‘heavy handed tactics.’

The whistle-blower claimed that the health and medical teams working on behalf of the FCA had been aggressive and forced the whistle-blower to reveal ‘highly personal information’, focussing on them rather than the ‘persons committing the crimes.’

However, the Complaints Commissioner found that the FCA had not been involved in heavy handed or pressure tactics and did not have a flawed policy for dealing with such cases.

This is of particular interest considering the number of cases brought forward by whistle-blowers may increase given the FCA’s focus on individual responsibility and in firm’s embedding effective ‘speak up’ policies.

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