Global Enforcement Review 2016

Now in its third year, Duff & Phelps' Global Enforcement Review (GER) provides analysis and commentary on global enforcement trends in the financial services industry.

To compile this report, we studied published data released by the UK Financial Conduct Authority (FCA), the U.S. Securities and Exchange Commission (SEC), the U.S. Commodity Futures Trading Commission (CFTC), the U.S. Financial Industry Regulatory Authority (FINRA), and the Securities and Futures Commission (SFC) of Hong Kong in 2015 and recent years. We have also explored the enforcement trends in various offshore jurisdictions.

Content includes:

  • Executive Summary: The New Enforcement Landscape
  • Back to Normality: Expenditure and Penalty Levels Begin to Settle
  • Someone to Blame: Rising Action Against Individuals
  • Growing Expectations: Widening the Enforcement Scope
  • The Changing Tides: Trends in Offshore Financial Centers
  • Looking Ahead: 2016 and Beyond 

Executive Summary: The New Enforcement Landscape

After the post-crisis frenzy and benchmark rigging scandals, this year’s Global Enforcement Review shows regulators returning to business as usual. However, business as usual and the enforcement environment are likely to look a little different for the financial services industry.

Our analysis of financial sector regulators shows a calmer, steadier picture in 2015. Rapid growth in spending and staffing at the regulators following the global financial crisis is no longer widely evident. Regulators' staffing levels continue to increase – in part as their responsibilities grow – but at a more modest rate. The 5.8% increase in headcount at Hong Kong’s Securities and Futures Commission (SFC) between 2014 and 2015 exceeded growth in other regions.

Penalties, too, despite a few big fines at the UK’s Financial Conduct Authority (FCA) and US Commodity Futures Trading Commission (CFTC), are edging lower as the LIBOR and Forex manipulation cases come to a conclusion.

But It's a New Normal

First, it is a normal where trust has been weakened. The LIBOR and Forex scandals conclusively demonstrated that the financial crisis did not see an end to the industry’s cultural problems.

Second, those scandals and the penalties that resulted have re-calibrated expectations when it comes to enforcement action, perhaps irrevocably. We may see fewer massive fines as the last benchmark rigging cases are finalized, but penalties for more mundane failings are likely to be more severe as a result. “Credible deterrence” doesn’t mean what it used to, at least in terms of the size of penalties.

Regulators are also less tolerant of failures by firms. After a few years of high drama, enforcement is The US Securities and Exchange Commission returning to normality. (SEC), the FCA and others increasingly take strong enforcement action for failures even where no financial crime results. This is not only among the large regulators we have studied but elsewhere too, such as shown by the more focused approach of the French Autorité des Marchés Financiers (AMF) and some offshore regulators.

Finally, individuals are not immune from the regulators’ focus. A large part of the regulatory response to the crisis and subsequent scandals has been to encourage individual accountability. Whilst it has long been the case at the SEC, actions against individuals also made up the majority of cases at the FCA, SFC and the Financial Industry Regulatory Authority (FINRA) last year.

Encouragements for whistleblowers, either through financial incentives (in the U.S.) or new requirements on firms to ensure they facilitate disclosures (as in the UK), as well as improved data reporting and analysis, have helped regulators identify misconduct and the individuals responsible.

In the UK, the drive for individual accountability received a further boost from the introduction of the Senior Managers Regime, introduced in March 2016. Its effectiveness in clarifying individual responsibilities in large organizations will be closely monitored ahead of its roll-out to all FCA regulated firms in 2018.

The Road Ahead: A Wider Focus

Overall, recent years have resulted in a much tougher enforcement approach. And now regulators will apply this to a much wider range of issues.

Benchmark manipulation has dominated regulators’ workloads in recent years. As these cases come to a conclusion, regulators are free to look at other priorities – old and new. We may expect resurgence in insider trading action, for instance, as well as continued pressure on areas such as anti-money laundering (AML). Regulators are also increasingly looking at developing risks. Last year saw a number of first-time enforcement cases as regulators implemented new powers or came to grips with emerging issues, such as crypto currencies and cybersecurity. For those firms fortunate enough to escape some of the big enforcement drives of recent years, business as usual may feel unusually pressing as regulators focus more widely.

There are a number of ways firms can prepare, however.

First, and most obviously, all should be familiar with their regulator’s publicly stated priorities and ensure their governance and compliance framework, systems and controls are in line with the standards regulators expect.

Second, they should ensure their data for reporting is in order. Just as regulators’ intolerance for failures in systems and controls has grown, pressure is increasing on businesses to improve their data quality. Data analysis is behind an increasing number of enforcement actions, and regulators do not want these efforts undermined.

Finally, firms must continue to review and monitor their cultures. Recent years have shown that top-down messages and policies may disguise rather than address underlying problems, with businesses’ public face and formal culture often at odds with the informal culture that prevails in practice. With a stricter enforcement regime and widening scope of action, discrepancies will be discovered sooner or later by the regulators.

We hope that you find this report of use. If you have any questions or comments, we would be pleased to hear from you.

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