The Senior Managers Regime

Tom Hayes did not bring down a bank but he paid a heavy price for being a part of the wider dirty casino culture built into the world of finance. During his trial, important questions were thrown up about the degree to which his seniors were culpable in his actions. In applauding the Senior Managers Regime (SMR), which aims to fill the lacuna in the regulatory regime, it has already been argued that Sir Jeremy Cooke was right to say that those supervising Hayes were irrelevant to his crimes: they would, after all, raise the stale decades old “we didn’t know” defence. But this historical rebuttal has been stretched to its outer limits: too overworked and overloaded, it has crowded itself out. As Roger McCormick explained in a recent interview referring to the famous Swaps Case from the 1980s: “Patience has run out and it’s no longer acceptable for them to just say, ‘It’s not our fault, we didn’t know.’ Laws of this kind reflect that impatience. We’ve had enough of this. We can’t have big, unruly banks that are out of control with no one at the top really accepting responsibility for what’s going on.” We must not lose sight of the fact that a divergence of views exists in this field. Senior lawyers and academics do not necessarily see eye to eye on everything that the regulators say.

Some unknown authors in the media argue that: “The LIBOR conviction is welcome. Now directors must be held accountable too.” It is said that the trial “was a landmark moment in the cleanup of the City after the financial crisis.” Mark Carney pledged that the SMR will in principle apply to him and the Bank of England but the bank is uneasy about opening up to official auditors for fear that such proposals may reduce its autonomy. George Osborne has been, as of July, consulting in relation to a Bank of England Bill targeting accountability and transparency at Threadneedle Street. The bank is “uneasy” and “surprised” by thoughts of being swept within the audit powers of the National Audit Office outside whose scrutiny it has historically been. As regards future prospects of independence, the bank is not satisfied with the limited comfort offered by the retention of its policy making functions and potentially keeping them outside the scope of the National Audit Office’s oversight.

Hunter into Prey: City Watchdog Exposes its Achilles’ Heel – Part 2

The issues in the last post must be examined in light of the scandal which erupted in late 2014 when the FCA came under heavy fire from the Davis Report because of the highly irresponsible way in which it had leaked sensitive data to the media earlier in March that year. Simon Davis, a partner in the Magic Circle firm Clifford Chance, stressed that there had been nothing less than systemic failure. Davis was adamant that the FCA failed to address the issue of whether the information given out might be price sensitive. The conclusion was unsurprising because the leak culminated in an article in the Telegraph headlined Savers locked into ‘rip-off’ pensions and investments may be free to exit, regulators will say which claimed that the regulator was planning an investigation of 30 million pension policies, some sold as far back as the 1970s. Consequently, big insurance companies had billions wiped off their share prices. The misapprehension that selected annuity products would be picked out meant that major UK insurers saw their share prices plummet. The insurers called for Wheatley’s resignation. Even the Chancellor George Osborne bemoaned he was “profoundly concerned” by the episode. In his inquiry, Davis unearthed multiple failures symbolic of a dysfunctional organisation, and he emphasised that the regulator was “high-risk, poorly supervised and inadequately controlled.”

Davis – who was unsparing in his criticism – held the FCA’s Board responsible for the flaws in the regulator’s controls on the identification, control and release of price sensitive information. The buck ultimately stopped with the board because it “failed in its oversight of the FCA’s executive and … failed to identify the risks inherent in the FCA’s communications strategy.” The episode required urgent action and an external organisation needed to review the board’s practices and effectiveness. So serious were the mechanical failures of corporate governance of the City watchdog. To scotch the confusion, in light of public hearings that ensued, on 17 March 2015 the House of Commons Treasury Select Committee (the Treasury Committee) published Thirteenth Report (2014-2015): Press briefing of information in the Financial Conduct Authority’s 2014/15 Business Plan (HC881).

Hunter into Prey: City Watchdog Exposes its Achilles’ Heel – Part 1

“When the pendulum swung back it did so in dramatic fashion,” claims the iconic Howard Davies in his admirable sketch of the 2008 global meltdown entitled Can Financial Markets Be Controlled? “Bankers have vanished from the Honours lists in London. They are barely respectable in New York,” continues the first ever chairman of the abolished Financial Services Authority (FSA, 2001-2013). Yet in May 2015 the tide turned against the FSA’s successor. In The Financial Conduct Authority (FCA) v Achilles Macris [2015] EWCA Civ 490, the legal pendulum swung back in favour of the banks because an unhesitant Court of Appeal safeguarded the reputation of the global financial elite by unanimously dismissing the FCA’s appeal against the decision of the Upper Tribunal: reported as [2014] UKUT B7 (TCC). At first blush, the decision looks like a small step. But properly understood it significantly derails clichés about the bugbear of evil bankers. It equally exposes the FCA’s Achilles’ heel. The issue before Longmore, Patten and Gloster LJJ was whether the FCA’s notices identified Mr Achilles Macris for the purposes of section 393 of the Financial Services and Markets Act 2000 (FSMA) in which case the watchdog ought to have given him third party rights. The third party procedure secures the fair treatment of the reputation of third parties so that they are not presumed guilty in the enforcement process.

Oddly, despite the recent 800^th anniversary of the fight for freedom incorporated in Magna Carta, present day executive procedures are not being properly followed. These two posts argue that the tough talking FCA’s Achilles’ heel is becoming increasingly exposed not only because of the important issues in the landmark case of Macris but also because of its unpardonable misconduct in relation to the Telegraph article headlined Savers locked into ‘rip-off’ pensions. Mishaps such as these seem to be turning the hunter into easy prey and questions loom large over its prowess to hold mischief to account. Similarly, these two posts also examine the new Senior Managers and Certification Regimes and question the conventional wisdom in relation to whether a heftier rulebook will bring us closer to a better formula for conduct. Light is also shed on the Supreme Court’s existing jurisprudence involving the FSA/FCA because Macris is in the process of being appealed

Consultation on New Benchmarks entering the Regulatory Perimeter

The Fair and Effective Financial Markets Review (FEMR or the “review”) – a triumvirate headed by Nemat Minouche Shafik (Bank of England) and co-chaired by Martin Wheatley (FCA) and Charles Roxburgh (HM Treasury) – has the twofold objective of (i) reinforcing confidence in the fairness and effectiveness of wholesale financial market activity conducted in the United Kingdom and (ii) influencing the international debate on trading practices, including highlighting issues that can only be addressed through co-ordinated international action. The review, which is expected to produce a final report by June 2015, focuses on both regulated and unregulated wholesale markets – such as fixed-income, currency and commodity markets, including associated derivatives and benchmarks – in relation to which most of the recent concerns about misconduct have arisen.

However, at the Chancellor of the Exchequer’s invitation, until the delivery of the final report in June 2015, the review has recommended a list of additional major benchmarks across the fixed income, currency and commodity markets (FICC) that should be included in the regulatory framework originally implemented in the wake of the LIBOR scandal. The review considers the Wheatley Review of LIBOR 2012 to be the blueprint for reform and recalls that Mr Wheatley had envisaged adding further benchmarks to the present LIBOR regime (see here). The ambit of the review includes matters such as trading practices, scope of regulation, supervision of firms and markets and the impact of recent and forthcoming regulation.

ICE LIBOR and the Slippery Road Ahead

The head of the Financial Conduct Authority (FCA) is somewhat of a superstar in the world of finance and regulation. Unsurprisingly, Martin Wheatley makes a lot of speeches. He famously authored the Wheatley Review (the review) – the blueprint as regards reforming the world’s “most important number”, i.e. the London Interbank Offered Rate (LIBOR). Aiming to impress the government and the public, Wheatley’s rhetoric revolves around buzzwords such as accountability, conduct and governance.

Only late last year, speaking on modelling integrity through culture, he reiterated that:

Our own emphasis on conduct and culture is heralded by our work to strengthen benchmarks. We’ve been at the vanguard of establishing a regime that is practical, but that nonetheless results in a shift in firm behaviour and individual accountability. As I prepared to take on the task of chief executive of the FCA, I was also asked to review whether the revelations surrounding LIBOR required a wider policy response. The policy recommendations resulting from this review – now known as the Wheatley Review – have delivered a LIBOR regime that provides for accountability, strengthened governance and robust systems and controls around the submission of rates.

Court of Appeal Overturns Upper Tribunal on FCA Issuing Notice of Discontinuance

The Financial Conduct Authority v Hobbs [2013] EWCA Civ 918 (29 July 2013)

In this case, the Court of Appeal (Sir Stanley Burnton, Rimer and Ryder LJJ) overturned the Upper Tribunal’s (UT) decision and held that if the Financial Conduct Authority (FCA or the Authority) publishes a statement intimating discontinuance on its website and subsequently removes that statement, the Authority is not in fact bound by such a statement because the statement does not follow the procedural requirements set out in the Financial Services and Markets Act 2000 (the Act). The FCA could therefore pursue its appeal even after retracting the statement announcing discontinuance on its website.

Sounds rather extreme. Yet the Court of Appeal so held and of course from what one can make of it their lordships were dead right.

I. Background

The FCA appealed against the UT’s decision that the Authority had bungled in properly making its case that the respondent trader David John Hobbs (H) was not a fit and proper person to perform functions in relation to a regulated activity within the meaning of the Act. H, who conducted proprietary trading for Mizuho, traded in coffee futures and associated derivatives on the London International Financial Futures and Options Exchange.