Total Financial Penalty Amount Rises 5.3% on Average Across Leading Financial Regulators
- Financial penalties levied by the UK’s FCA dropped 38% to £905.2 million in 2015
- In the U.S. FINRA reported a 28% drop in total amount of fines to U.S. $91.5 million, while the CFTC posted a 75% increase driven by new enforcement powers and the largest single penalty in its history
- SFC in Hong Kong saw aggregate fines rise 18% to HK$70.9 million driven by several large single fines
- Regulators embrace the use of data and whistleblowers to target enforcement against individuals
LONDON, September 19, 2016 – The total financial penalties levied increased 5.3% on average in 2015 across the Financial Conduct Authority (“FCA”), the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”), the Commodity Futures and Trading Commission (“CFTC”) and the Securities and Futures Commission (“SFC”) according to the Global Enforcement Review 2016, a report published by Duff & Phelps, the premier global valuation, corporate finance and regulatory services advisor. However, this aggregate figure masks some underlying trends and differences at the individual regulators.
Financial penalties levied by the UK financial regulator, the FCA, declined in 2015 as the body concluded its investigations into LIBOR manipulation. Accordingly, fines from the FCA totalled £905.2 million last year, a drop of 38% from 2014. The FINRA in the U.S. posted the second biggest fall in the amount of total fines, decreasing by 28% to U.S. $95.1 million in 2015.
In contrast, the CFTC reported a 75% increase in fines to $3.14 billion, driven by new enforcement powers granted under the Dodd-Frank Act and the prosecution of LIBOR and Forex exchange benchmark rate cases. The other key U.S. regulator, the SEC saw aggregate total enforcement penalties (inclusive of penalties and disgorgements) stay broadly the same at U.S. $4.19 billion, representing an increase of 1% compared to 2014. In Hong Kong, the SFC reported a 18% increase in aggregate fines to HK$70.9 million, which was the result of some large individual fines.
Figure A: Change in Total Financial Penalty Amount from 2014 to 20151
Emergence of Data
Financial regulators embraced the use of data analysis to support enforcement action in 2015, with the SEC leading the way in using a data-driven approach in cases involving complex insider trading rings. The SEC used such an approach for the first time in 2015 to identify potentially fraudulent trade allocations, including the case of an adviser disproportionately allocating profitable trades to favored accounts. This illegal practice also received attention from the FCA in the last year, the regulator taking action against both companies and individuals.
With the introduction of MiFID II in 2018 and its focus on data quality, the UK is likely to experience a strong increase in data-based enforcement action in the coming years. Increased reliance on data in enforcement means that businesses are expected to have compliance systems in place to collect data and provide it to regulators when requested.
Monique Melis, Managing Director within Duff & Phelps’ Compliance and Regulatory Consulting practice and global service line head of Regulatory Consulting, commented: “As LIBOR and FX rigging investigations are coming to a close, regulators will broaden their focus from not just banks but to other financial institutions, such as the asset management industry, wealth management industry and critically in the UK, the new consumer credit firms. In 2016, we have seen a greater focus on insider trading cases, an area in which regulators have seen considerable success penalizing individuals in the past. Detecting and prosecuting these cases has been made easier for the regulators by the adoption of data-driven approaches to the detection of complex insider trading rings. For firms, this means they must ensure their data for reporting is in order and meets the expectations of regulators.”
U.S. Leads on Whistleblower Programs
The SEC paid out $38 million to eight whistleblowers over the course of its 2015 fiscal year, while the CFTC made its second ever award under its whistleblower program in 2015. While the U.S. has dedicated whistleblower programs, neither the FCA nor the SFC have an equivalent reward regime for disclosures in place. However, this does not appear to be a deterrent for UK whistleblowers; disclosures to the FCA increased from 1,040 in the 2014 financial year to 1,340 in 2015, representing a greater percentage growth than for the SEC, which totaled 3,923 in 2015 against 3,620 in 2014.
Greater Enforcement Against Individuals
Continuing last year’s trend, financial regulators in 2015 focused enforcement action on individuals, with the total raised from fines by the FCA more than doubling from 2014 to £6.7 million in 2015. At the UK regulator, 22 out of 40 of its cases in 2015 (55%) were fines against individuals, compared to 33% the previous year. At the SFC, 55 out of 88 enforcement actions were against individuals (63%) in 2015, while FINRA’s work was also largely focused on individuals. In the UK, enforcement action against individuals was further formalised by the introduction of the Senior Managers and Certification Regime for banks in March 2016, which will be introduced for all firms by 2018.
Across the FCA, CFTC, SEC, FINRA and SFC, expenditure rose by 9.7% on average over the last fiscal year, while staff numbers increased 5.5%. In the UK specifically, the FCA faces pressure from an industry concerned about the impact and costs of regulation, as well as a government that has less of an appetite for interfering with the financial services industry.
Figure B: Annual expenditure and Staff Growth Rates by Regulator2
In compiling the report, Duff & Phelps studied data released by the UK FCA, the U.S. SEC, the U.S. CFTC, the U.S. FINRA, and the SFC of Hong Kong published in 2015 and recent years.
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M&A advisory, capital raising and secondary market advisory services in the United States are provided by Duff & Phelps Securities, LLC. Member FINRA/SIPC. Pagemill Partners is a Division of Duff & Phelps Securities, LLC. M&A advisory and capital raising advisory services are provided in a number of European countries through Duff & Phelps Securities Ltd, UK, which includes branches in Ireland and Germany. Duff & Phelps Securities Ltd, UK, is regulated by the Financial Conduct Authority.
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