UK regulators get “tougher” on financial wrongdoers

BY Fraser Tennant

UK regulators are “getting tougher on financial crime” by issuing increasingly stringent penalties to wrongdoers, according to new analysis published this week by EY.

EY’s Investigations Index reveals that, over the past two years, the punishments handed out by the UK’s regulatory bodies – the Financial Conduct Authority (FCA), the Serious Fraud Office (SFO), the Competitions and Markets Authority (CMA) and the Office of Fair Trading (OFT) – saw fines soar by 271 percent (with £2.45bn issued in the past two years) and prison sentences increase 124 percent. Company directors also face an average prison sentence of four years or more.

Additional findings in the EY study include: (i) 58 percent of cases investigated by the SFO resulted in prison sentences; (ii) 56 percent of cases investigated  by the FCA resulted in fines; (iii) of the 82 cases investigated by the FCA over the course of two years, 25 were against individuals; (iv) of those 25 cases, 36 percent resulted in prison sentences; (v) 10 percent of all cases dealt with individuals or firms committing fraud; and (vi) of the 125 cases investigated by the CMA and OFT in the past two years, 119 were due to a proposed or completed merger or acquisition.

“UK regulators are getting tougher on financial crime," said John Smart, head of EY’s UK Fraud Investigation & Dispute Services team. “In the wake of recent corporate scandals and growing political pressure, there seems to be a greater focus by the regulators to pursue cases that may once have been considered ‘too difficult’, to ensure those responsible for wrongdoing are held to account.”

Despite the tougher stance, the Index did find that the average prison sentence has decreased by 40 percent over the past two years, from 87 months to 52 months.

Nevertheless, Mr Smart believes that the Index findings should also serve as a warning to companies, to review their processes on a regular basis, stating that the top reasons for fines, namely systems failings, business misconduct and misleading information, were all factors that could have been avoided by having stronger control processes to identify and resolve any corporate blind spots.

The EY Index examined 231 cases (which took place between 1 October 2013 and 30 September 2015) involving fines and criminal prosecutions against business and individuals.

News: U.K. Regulatory Fines Soar Amid Crackdown on Financial Crime

Hausfeld agrees $120m Libor settlement with Barclays

BY Fraser Tennant

Following four years of complex private litigation, global claimants’ law firm Hausfeld has announced a $120m settlement with Barclays Bank plc regarding Libor (London Interbank Offered Rate) fraud claims made by Over-The-Counter (OTC) investors.

Barclays, along with 15 other global financial institutions, had been accused of manipulating Libor – the mechanism used to set the cost of borrowing on mortgages, credit cards, loans and derivatives worth more than $450 trillion (£288 trillion) globally – so that its traders could make big profits on derivatives pegged to the base rate.

It is believed that Barclays first manipulated Libor during the global economic upswing of 2005–2007 before coming under suspicion from a number of regulatory authorities (based in the US, Canada, Japan, Switzerland, and the UK, among others). This particular litigation stretches back to 2011 when the City of Baltimore and other purchasers filed lawsuits against Barclays and other international banks alleging that they conspired to artificially suppress the US dollar LIBOR rate during the financial crisis.

Barclays previously admitted to manipulating LIBOR (in the run up to the financial crisis and in its aftermath) during settlements with US and UK regulators - the US Commodity Futures and Trading Commission and the FSA, respectively - in June 2012. In this instance, the bank was fined £290m and chief executive Bob Diamond resigned amid the fallout.

In addition to the monetary compensation agreed this week, Barclays, which only last month agreed to pay $94m in a separate litigation involving manipulation of Libor's euro-denominated equivalent, Euribor, has also committed to assisting the OTC plaintiffs in their continuing litigation against the other bank defendants .

The settlement with the OTC plaintiffs was achieved shortly before the Second Circuit Court of Appeals heard arguments on whether the plaintiffs’ antitrust claims should be reinstated after they were dismissed by the trial court.

“The settlement with Barclays, which comes over four years after the case was first filed, not only represents an important breakthrough in resolving this long-running litigation, it also provides significant monetary recovery and cooperation that will benefit the victims of the banks’ conduct," said Michael D. Hausfeld, chairman of Hausfeld.

Hilary Scherrer, a partner at Hausfeld LLP, called the settlement with Barclays an “icebreaker that could open up this litigation to future settlements".

News: Barclays to pay $120 million in U.S. Libor litigation - lawyers

Phenomenon of 'too big to fail' banks at an end following regulatory action by FSB

BY Fraser Tennant

In a move that brings about the end of the phenomenon of banks being ‘too big to fail', the  Financial Stability Board (FSB) has this week unveiled its final Total Loss-Absorbing Capacity (TLAC) standard for global systemically important banks (G-SIBs).

The TLAC standard issued by the FSB, the body that coordinates regulation across the Group of 20 economies (G20), is essentially a buffer that will allow a big bank to fail whilst ensuring that no economic disorder ensues, as it did at the height of the 2007-09 financial crisis.

To do this, failing G-SIBs will be given access to sufficient loss-absorbing and recapitalisation capacity available for authorities to implement a resolution that minimises impacts on financial stability, maintains the continuity of critical functions, and avoids exposing public funds to loss.

Furthermore, the TLAC standard states a minimum requirement for G-SIBs bail-in but does not limit authorities’ powers to expose other liabilities to loss through bail-in or the application of resolution tools other than the TLAC. G-SIBs will also need to meet the TLAC requirement alongside the minimum regulatory requirements outlined in the Basel III framework (a comprehensive set of reform measures developed by the Basel Committee on Banking Supervision (BCBS)).

The existence of the TLAC tool follows on from the G20’s request in the wake of the financial crisis for the FSB to undertake a program of reforms such as increasing bank capital requirements, making derivatives markets more transparent and keeping a tighter rein on bankers' bonuses.

“The FSB has agreed a robust global standard so that G-SIBs can fail without placing the rest of the financial system or public funds at risk of loss," said Mark Carney, chair of the FSB. “This new standard, which will be implemented in all FSB jurisdictions, is an essential element for ending too-big-to-fail for banks. The economic impact assessments conducted as part of the detailed policy work shows that the economic benefits of the final standard far outweigh the costs.”

The FSB’s consultation period on a proposed standard on TLAC began in November 2014 in consultation with the BCBS; the final standard (November 2015) features numerous changes made following the consultation and impact assessment studies (also published this week).

In a letter to G20 leaders ahead of next week’s summit in Turkey (15 to 16 November), Mr Carney said that "countries must now put in place the legislative and regulatory frameworks for these tools (the TLAC standard) to be used."

News: G20 finalizes tools for ending 'too big to fail' banks

Volatile global markets leave financial services sector in business volume slowdown

BY Fraser Tennant

Volatile global markets are having a marked effect on the financial services sector with business volumes slowing from July to September, according to the latest CBI/PwC Financial Services Survey.

Strong competition is being blamed for the slowdown, with financial services firms taking a big hit on fees & commissions, net interest, investment and trading income.

Despite this impact on income growth, the overall business situation is viewed as stable, with profitability still growing, albeit at a significantly slower rate than that seen in recent years.

The Survey’s key findings include: (i) 25 percent of financial services firms reporting that business volumes were up, while 21 percent said they were down (the slowest rate of growth seen since September 2013); (ii) 24 percent of firms expecting business volumes to increase, while 8 percent believe they will fall; and (iii) 28 percent of financial services firms stating that they felt more optimistic about the overall business situation compared with three months ago, while 26 percent said they felt less optimistic (the lowest rate of growth since September 2012).

“The winds of volatility blowing through global markets have left a clear mark on the financial services sector, impacting business volumes and investment intentions, particularly in investment management and securities trading," said Rain Newton-Smith, director of economics at the CBI.

“Nevertheless, building societies’ business volumes have rebounded, and with financial sector costs under control, profitability is in good shape. At the same time, investment in IT is set to increase as firms aim to improve efficiency.”

Mr Newton-Smith also points out that slower growth in China and other emerging markets has had a knock-on impact on confidence in the world economy, with the Federal Reserve holding off raising interest rates in the United States.

Kevin Burrowes, PwC’s UK financial services leader, added: “Business confidence among banks flat-lined in the quarter leading to September 2015, leaving the sector cautious over its short-term outlook. Recent macro-economic events such as the fall in oil prices, China’s Black Monday, and the ongoing turmoil in global stock markets might have fuelled this sentiment. With interest rates expected to remain on hold, growth for UK banks continues to be challenging.”

Challenging for sure, but the outlook for the financial services sector is encouraging with growth forecast to pick up over the coming months (keeping pace with business volumes in  life insurance, building societies and securities trading), although still well short of the growth levels seen in early 2015.

Report: CBI/PwC Financial Services Survey – September 2015

Banks agree $1.9bn antitrust deal

BY Richard Summerfield

A number of the world’s biggest banks have agreed a $1.9bn settlement to resolve the claims of investors who alleged that the banks conspired to fix prices and freeze competitors out of the market for credit default swaps.

Twelve banks and two industry groups stuck a preliminary agreement with the plaintiffs in a civil suit which will see the financial institutions pay $1.87bn to settle the case, which was borne out of a raft of regulatory activity and private lawsuits which alleged that the banks manipulated foreign-exchange and commodity markets, as well as interest-rate benchmarks. Those cases have resulted in a number of banks paying fines worth billions of dollars.

Should the deal win final approval it will see the group of defendant banks - Bank of America Corp, Barclays PLC, BNP Paribas SA, Citigroup Inc, Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc, HSBC Holdings PLC, J.P. Morgan Chase & Co, Morgan Stanley, Royal Bank of Scotland Group PLC and UBS Group AG – agree to pay one of the largest antitrust settlements in US history.

Though a tentative agreement has been reached there are still some issues which must be resolved. The settlement would also need to meet with a judge’s approval, but this is a significant step as it would avert a costly and expensive trial.

The plaintiff group, made up of a number of hedge funds, pension funds, university endowments, small banks and other investors, alleged that the banks "made billions of dollars in supracompetitive profits’ by taking advantage of ‘price opacity in the CDS market".

In an interview with Bloomberg TV Daniel Brockett, a partner at the plaintiffs’ law firm Quinn Emanuel Urquhart & Sullivan LLP, noted that the formal agreement of the deal would take about 10 days to come through. “We are pleased to have reached agreement on many of the important terms, including the amount of the settlement, but there are a few issues that remain to be discussed and negotiated," said Mr Brockett.

Under the terms of the settlement the banks will pay different amounts towards the settlement. The size of each bank’s contribution will be derived from its share of CDS trading.

A spokesman for the International Swaps and Derivatives Association (ISDA) said the group was “pleased the matter is close to resolution". He added: “ISDA remains committed to further developing [swaps] market structure to ensure the market functions safely and efficiently." ISDA had previously noted that the allegations against the banks were without merit.

News: Big banks in $1.865bn swaps price-fixing settlement