With Brexit preparations continuing apace, the financial services regulators have been busy through December and January. Our mission is to bring you these items of news that touch upon the people dimension of regulatory compliance.
Compliance is not only about regulations, policies, procedures and systems. It's also about people, and about understanding what leads them to make errors of judgement, and in some cases, to act in brazen disregard of the rules.
Here's the selection of news stories that we've found most informative. Select the links or scroll down for more details.
- FCA confirms £79m fines to Keydata CEO and Sales Director
- Santander fined £32.8m for failing to treat deceased customers and their representatives fairly
- Former Credit Suisse Bankers arrested over $2bn fraud scheme
- CMA urges FCA to act following investigation of Consumers’ loyalty penalty Super-Complaint
- FCA publishes its Sector Views
FCA confirms £79m fines to Keydata CEO and Sales Director
The Financial Conduct Authority (FCA) has issued final notices ordering the former Chief Executive and Sales Director of failed investment firm Keydata to pay a total of £79m in fines.
In November 2018 the Upper Tribunal upheld the FCA's regulatory action against Keydata’s former Chief Executive, Stewart Ford and former Sales Director Mark Owen, ruling both had acted without integrity when the firm collapsed in 2009 at a cost of compensation of around £330m to the Financial Services Compensation Scheme.
Keydata designed, launched and, via IFAs, distributed structured investment products to retail investors. In 2005, Keydata began marketing products based on bonds issued by a Luxembourg-based company called SLS Capital SA (SLS) and underpinned by US life settlement policies. However, it did so without conducting adequate due diligence and using misleading brochures.
In 2006, Ford replicated the SLS structure using the company, Lifemark, earning himself £73.3 million in fees out of the £373m invested in Keydata’s ‘Lifemark’ funds. Ford personally paid Owen undisclosed “commissions”, totalling over £2.5 million, based on the volume of sales of the Lifemark Products. Despite being made aware of various concerns about the SLS and Lifemark products, Ford and Owen failed to disclose these to investors, IFAs or the Authority.
The FCA’s final notice, dated 16 January 2019, ordered Ford to pay £76m within 16 days of receiving the notice. The final notice sent to Owen, ordered him to pay his £3.2m fine by the same date. The notices prohibit Ford and Owen from performing any future role in regulated financial services. The Tribunal agreed that both individuals should be prohibited from performing any role in regulated financial services.
Ford has spoken out saying that he does not agree with the decision, claiming that he has been the victim of a "grave injustice".
Santander fined £32.8m for failing to treat deceased customers and their representatives fairly
The Financial Conduct Authority (FCA) has fined Santander UK £32.8m fine for delays in transferring over £183m to beneficiaries, following customers deaths.
The regulator found that Santander’s probate and bereavement process contained weaknesses which:
- reduced its ability to effectively identify all the funds it held which formed part of a deceased customer’s estate;
- resulted in it failing to effectively follow-up on communications with deceased customer representatives, increasing the likelihood of probate and bereavement cases not being closed;
- failed to make adequate allowance for the potential vulnerability of consumers in its probate and bereavement process; and
- led to ineffective monitoring of open probate and bereavement cases.
The weaknesses meant the probate and bereavement process would start but then stall, resulting in funds not being transferred to those who were entitled to them despite Santander being informed that a customer had died. In some cases, funds were held for many years.
Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said: “'These failings took too long to be identified and then far too long to be fixed.”
The obligations of a bank in respect of a customer’s accounts and investments are not terminated by a customer’s death. The FCA’s final notice to Santander confirms that the firm breached Principle 3 and Principle 6 of the FCA’s Principles for Businesses between January 2013 and July 2016 by failing to take reasonable care to organise and control its probate and bereavement process responsibly and effectively, with adequate risk management systems, and by failing to treat its customers and those who represented them on their death fairly. Santander also breached Principle 11 by failing to disclose to the FCA information relating to the deceased customer accounts issue of which it would reasonably expect notice.
Former Credit Suisse Bankers arrested over $2bn fraud scheme
Three ex-Credit Suisse bankers were arrested in London on 3 January over US charges that they conspired in a $2bn (£1.6bn) loan scheme involving state-backed companies in Mozambique.
Andrew Pearse and Surjan Singh, former Credit Suisse managing directors, and Detelina Subeva, a former vice president in the firm’s global financing unit, have been charged with conspiring to violate US anti-bribery law and committing money laundering and securities fraud.
The three men face extradition to the US for their alleged role in the fraudulent scheme, which allowed Mozambique to borrow $2 billion for maritime projects and coastline protection, through loans guaranteed to the Mozambican government in financial transactions between 2013 and 2016.
According to prosecutors in New York, the trio withheld information from Credit Suisse’s compliance staff as they “intentionally diverted portions of the loan proceeds to pay at least $200m in bribes and kickbacks to themselves, Mozambican government officials and others”.
In a statement, Credit Suisse comments: “No action has been taken against Credit Suisse. The indictment alleges that the former employees worked to defeat the bank’s internal controls, acted out of a motive of personal profit, and sought to hide these activities from the bank”. The bank added that it will cooperate with the authorities to help with the investigations.
The men have been released on bail in London while the US seeks their extradition. Their arrests were made 5 days after Mozambique’s former finance minister, Manuel Chang and a negotiator Jean Boustani were detained in South Africa over the same criminal case.
CMA urges FCA to act following investigation of Consumers’ loyalty penalty Super-Complaint
The Competition and Markets Authority (CMA) has published its response to the Citizens Advice super-complaint about long term customers paying more for goods and services, which it refers to as ‘the loyalty penalty’. The super-complaint covers several markets, including insurance, cash savings and mortgages.
The CMA found that millions of people are affected, from around 1 million in the mortgage market to nearly 12 million in the insurance market. Following its investigation, the CMA has made recommendations to the FCA concerning Cash Savings, Insurance, and Mortgages.
The CMA’s concerns include the following:
- That there is evidence of firms continually raising prices in the insurance market. The CMA calls on the FCA to look closely at insurance pricing practices and to act to prevent people being exploited by firms. The CMA suggests this could include pricing interventions.
- The CMA supports work being carried out by the FCA to review the mortgage market and to tackle those who cannot switch in this market by helping these customers move onto better tariffs, where feasible. The CMA points out that 10% of longstanding customers could switch and make significant savings but do not and it urges the FCA to find out more about those customers and to consider measures to help or protect them.
- Interventions to date have had limited impact on addressing the harm to longstanding Cash Savings customers. The CMA welcomes the FCA’s consideration of a ‘Basic Savings Rate’ and says if implemented the FCA should evaluate whether it has the intended impact and if not, consider further pricing interventions, such as a targeted absolute price floor in cash savings. It also urges the FCA to consider whether collective switching can be applied.
Andrea Coscelli, Chief Executive of the Competition and Markets Authority said: “Millions of loyal or vulnerable customers are being taken advantage of each year by firms – and end up paying much more than they should do. This must come to an end. ..There must be a step change to protect the people being hardest hit, including targeted price caps where necessary. Together the CMA, regulators and government must act more promptly and powerfully to hold firms to account, stop them exploiting their customers and restore people’s trust in markets.”
Christopher Woolard, FCA Executive Director of Strategy and Competition, commented: “It is important that this issue is tackled and harmful practices are stopped. We expect firms to look after the interests of all customers and treat them fairly, whether they are new or longstanding. Where we have concerns about conduct by firms, we will explore all options to address this using the full range of our powers.”
FCA publishes its Sector Views
The FCA has published its Sector Views of how it considers each financial sector is performing. This document describes financial sectors, the issues and developments the FCA is seeing within them and the actual or potential harm to consumers or markets.
Each Sector View helps the FCA to determine where to focus its efforts. The FCA business plan which will be published in April 2019 will then set out which areas the FCA will focus on for the coming year.
Sector Views also highlights the following cross-sector themes, which the FCA has identified as emerging common themes driving change across sectors:
- Referring to the increased use of technology to aid decision making across sectors, the FCA comments that it is important that it understands what assumptions firms use to build any automated services, to avoid consumers being sold products that do not meet their needs, or prevent widespread exclusion of vulnerable consumers. Firms will need to ensure they have strong compliance and control functions to mitigate financial, cyber crime, and misuse of data risks.
- Preventing and tackling financial crime will continue to be a focus across all sectors for the FCA.
- Cyber-attacks in the financial services sector are becoming more frequent and widespread. This is potentially made worse using complex and ageing IT systems, outsourcing of operations and the growing transfer of data between firms.
- As the UK population is changing, the FCA will continue its work to deepen its understanding of both societal change and macroeconomic factors to consider their impact across sectors and the potential for harm to be caused.
- The FCA has initiated a wide range of Brexit workstreams and will need to continue to work with firms and government to resolve practical issues.