fsa calendar year-end update 2012€¦ · 1 fsa calendar year-end update 2012 by robert patton with...

FSA Calendar Year-End Update 2012

By Robert Patton with Zachary Slabotsky and Paul Hinton

Five of the 10 Largest FSA Fines of All Time Have Been Levied since 1 January 2012

www.EnforcementTrends.com 1

FSA Calendar Year-End Update 2012

By Robert Patton with Zachary Slabotsky and Paul Hinton

2 January 2013

Fines imposed by the Financial Services Authority (FSA) since 1 January 2012 (through 20

December) have totalled £310 million, more than four times the total for 2011 (see Figure 1).

This increase is due to a handful of very large fines, including the £160 million fine against

UBS for LIBOR manipulation announced 19 December, which is the largest-ever FSA fine by a

substantial margin.

The number of fines assessed against firms, 25, was in line with last year. In contrast, the number

of fines against individuals fell to its lowest level since 2009, and the aggregate fine amount

imposed on individuals fell slightly compared to 2011.

The dramatic increase in aggregate fines is the result of a few headline-grabbing penalties

against banks, notably those against UBS and Barclays for manipulation of LIBOR and EURIBOR,

and against UBS for failing to prevent unauthorised trading by a rogue trader, Kweku Adoboli.

Those three fines alone totalled nearly £250 million. The size of fines against banks, of which

there were nine in 2012 as compared to seven in 2011, largely explains the £244 million jump in

the annual totals.

2 www.EnforcementTrends.com

Figure 1: Annual FSA Fines, 1 January 2011 – 20 December 2012

Number of Fines Aggregate Fines

2011 20121 2011 20121

(1) (2) (3) (4)

(£ millions)

Individuals 35 28 12.1 11.3

Firms 24 25 56.2 300.3

Total 59 53 68.3 311.6

Notes and Sources: 1 2012 data are for fines with Final Notices published through 20 December 2012.

The 10 largest FSA fines of all time now include five 2012 cases against firms. The fines imposed

on Barclays and UBS for interest rate manipulation were the largest of the FSA’s record four fines

in excess of £10 million this year; 2010, with two such fines, is the only other year which saw

multiple fines of that magnitude.

Figure 2: Top 10 FSA Fines against Firms

Fine Firm Fiscal Year Total Fine Category of Misconduct

Rank (2) (3) (4) (5)

(1) (£ 000s)

1 UBS AG 2012/13 160,000 Market Manipulation

2 Barclays Bank plc 2012/13 59,500 Market Manipulation

3 J.P. Morgan Securities Ltd 2010/11 33,320 Mishandling Client Assets

4 UBS AG 2012/13 29,700 Failure to Prevent Misconduct

5 Goldman Sachs International 2010/11 17,500 Approved Person Regulation Failures

6 Royal Dutch Shell plc 2004/05 17,000 Misleading Disclosures

7 Citigroup Global Markets Limited 2005/06 13,961 Market Manipulation

8 HSBC Bank plc 2011/12 10,500 Unsuitable Investments & Mis-Selling

8 Card Protection Plan Limited 2012/13 10,500 Unsuitable Investments & Mis-Selling

10 BlackRock Investment 2012/13 9,533 Mishandling Client Assets

Management Limited

Median Fine against Firms 2009/10 - 15/12/2012 525

Median Fine against Firms 2012/13 600


The £160 million UBS fine and the £59.5 million Barclays fine are the FSA’s largest fines ever

levied. Both were the culmination of cross-border investigations undertaken in cooperation with

authorities in the US, which also imposed fines. Altogether, UBS was fined a total of $1.5 billion

and Barclays was fined $450 million.1 Further large fines are expected to result from ongoing

investigations of other banks involved in the LIBOR scandal.2

The UBS rogue trading fine of £29.7 million in November was imposed as a penalty in relation

to accumulated losses of $2.3 billion through unauthorised trading. This dwarfs the previous

highest fine for a Failure to Prevent Misconduct,3 of £1.2 million in November 2006 against

General Reinsurance UK Ltd for failing to identify two illegitimate reinsurance transactions.

Card Protection Plan Ltd was fined £10.5 million, ordered to pay an estimated £14.5 million in

redress to those whom the firm had mis-sold insurance products, and charged with paying

investigation-related expenses that it estimates will bring its total cost to £33.4 million.4

BlackRock Investment Management Ltd was fined £9.5 million for Mishandling Client Assets; the

firm failed to obtain “trust letters” from third-party banks with which it invested money market

deposits.5 This is the largest fine this year for Mishandling Client Assets but pales in comparison

to the largest-ever fine in this category, against J. P. Morgan for £33.32 million, which is now the

third-largest to date.

Fiscal Year Results to Date

Nearly three-quarters of the way into the 2012/13 fiscal year, which ends 31 March 2013, the FSA

has already surpassed its previous high-water mark for total fines against firms in a fiscal year. To

compare the partial 2012/13 year to previous full fiscal years, we scale up 2012/13 fines to date.6

Excluding the major fines, fines against firms are down

With £284 million in fines imposed already, fines against firms have already exceeded the

combined total from all previous fines against firms in the FSA’s history (see Figure 3). Of the

2012/13 total, 95 percent is composed of the five fines among the FSA’s all-time top 10. Setting

aside these largest fines, the size of more typical fines, measured by the median, has dropped to

the 2010/11 level of £600,000.


While the FSA has made waves with the very large fines, the number of fines against firms is

similar to the number in recent fiscal years. The FSA has levied 19 fines in the 2012/13 fiscal

year to date. At this rate, the FSA will eventually issue 26 fines against firms in 2012/13, which

would just exceed the annual average of 24.7 fines against firms over the prior three fiscal

years (see Figure 4).

Figure 3. Major Fines Drive Record High in Aggregate Fines against Firms Aggregate Amount of FSA Fines against Firms

£7.8£26.2 £30.9 £39.2 £48.3

£14.8£5.2

£50.8£10.5

£49.7

Barclays & UBS

MarketManip.Fines,

£219.5

£36.4

£13.0£26.2 £30.9

£90.0

£58.8

£320.5

£700

£63

£823

£595

£1,500

£600

£0

£250

£500

£750

£1,000

£1,250

£1,500

£1,750

£0

£50

£100

£150

£200

£250

£300

£350

2002/03 - 2007/08

Annual Average

2008/09 2009/10 2010/11 2011/12 2012/13

Med

ian

Fin

e (£

tho

usa

nd

s)

Ag

gre

gat

e Fi

nes

(£ m

illio

ns)

Fiscal Year of Fine

Excluding Top 10

Top 10 Fines

Projection

Median Fine


The Market Manipulation fines against UBS and Barclays were not classified as Market Abuse7

even though the alleged manipulation of LIBOR rates clearly had the potential to affect markets.8

The February 2012 fine against Greenlight Capital Inc. for Insider Dealing remains the only fine

against a firm in the last two fiscal years classified by the FSA as relating to Market Abuse.

After not fining a single firm for Transaction Reporting, Record-Keeping & Pricing Failures during

2011/12, the FSA issued four fines for such misconduct this fiscal year. The largest of these was

against Bank of Scotland for £4.2 million in relation to errors in its records pertaining to 250,000

mortgage customers. Ten firms faced fines for records and reporting rule breaches during either

2009/10 or 2010/11.

Fines against individuals have dropped dramatically

This year has witnessed a sharp decline in the number and aggregate amount of fines against

individuals. There has been a particular paucity of large fines; the £1.25 million fine against

former UBS desk head Sachin Karpe is the only fine this fiscal year in excess of £500,000, and

even that fine was in connection with a Decision Notice issued two years prior and more recently

heard by the Upper Tribunal. Last year, there were six fines assessed for more than £500,000,

four of which were for £2 million or more.

Figure 4. Number of Fines against Firms Consistent with Recent Years Annual FSA Fines against Firms

1 12.32 5 8

16

13.5

28

12

24

19 11

1.7

4 3

12

7

17.7

35

18

35

21

26

0

10

20

30

40

50

60

2002/03 - 2007/08 Annual Average

2008/09 2009/10 2010/11 2011/12 2012/13

Nu

mb

er o

f Fin

es

Fiscal Year of Fine

Fraud or Other Deliberate Misconduct

Compliance Failures

Customer Protection Failures

Market Integrity

Projection


The absence of very large fines has reversed the prior pattern of year-over-year growth in

aggregate fines against individuals (see Figure 5). Aggregate fines had doubled or nearly

doubled every year since 2008/09—from £1.4 million in 2008/09 to nearly £20 million last year—

but have totalled just £3.2 million so far in 2012/13 and are projected to reach £4.8 million.

Figure 5. Significant Drop in Fines against Individuals, Recent Upward Trend Halted Aggregate Amount of FSA Fines against Individuals

£1.4 £1.5

£5.1 £4.1£1.9

£1.0

£3.6

£15.7

£1.3

£1.6

£0.4£1.4

£2.5

£8.6

£19.8

£4.8

£74

£54£49

£75

£100

£73

£0

£20

£40

£60

£80

£100

£120

£0

£5

£10

£15

£20

£25

£30

2002/03 - 2007/08

Annual Average

2008/09 2009/10 2010/11 2011/12 2012/13

Med

ian

Fin

e (£

tho

usa

nd

s)

Ag

gre

gat

e Fi

nes

(£ m

illio

ns)

Fiscal Year of Fine

Excluding Top 10

Top 10 Fines

Projection

Median Fine

The number of fines against individuals is also on pace to fall to its lowest level since 2008/09

(see Figure 6). A combined 90 fines were levied against individuals during the previous two years,

but there have been only 16 fines to date in 2012/13.

A driving factor behind both the reduction in total fines and the reduction in very large fines

is the reduced number of fines for Market Integrity9 violations. Only two individuals—Jay Alan

Rutland and John Blake—have received Market Integrity fines this year, and neither fine exceeded

£100,000. In contrast, 12 Market Integrity fines accounted for over £15 million in fines against

individuals in 2011/12. There were even more Market Integrity fines the prior year, although more

than half were for £100,000 or less.


The drop-off in the number of cases against individuals may also in part reflect an allocation of

enforcement resources to the development of LIBOR cases that will result in fines at a later date.

The FSA is reportedly pursuing criminal and civil cases. According to the Financial Times, the

FSA recently expanded its probe into individuals sending at least five notices of investigation

to people in the last two weeks.10 A particular focus of investigations is the role of interdealer

brokers.11 The Serious Fraud Office has already arrested a UBS trader and two employees of the

interdealer broker, RP Martin.12

The absence of fines for Mortgage Fraud also contributed to the sharp decline in fines. After

accounting for 22 of the 32 fines in the Fraud or Other Deliberate Misconduct category over the

prior four years, there have been no fines for mortgage fraud so far this fiscal year. The volume of

mortgage fraud cases that arose in connection with the recent decline in housing prices appears

to have been largely resolved.

There was also a notable absence of fines for Failure to Prevent Misconduct. Six individuals were

fined for Failure to Prevent Misconduct in each of 2010/11 and 2011/12, but no individuals have

received fines in that category this year.13

As always, we will be following and updating our analysis, so be on the lookout for our 2012/13

fiscal year end report.

Figure 6. Notable Drop in Market Integrity and Mortgage Fraud Fines during 2012/13 Annual FSA Fines against Individuals

36

1310

3

8

79

1

10

8

13

9

10

3

9

4

17

12

2

6

4.5

22

26

50

40

22

0

10

20

30

40

50

60

2002/03 - 2007/08

Annual Average

2008/09 2009/10 2010/11 2011/12 2012/13

Nu

mb

er o

f Fin

es

Fiscal Year of Fine

Fraud or Other Deliberate Misconduct

Compliance Failures

Customer Protection Failures

Market Integrity

Projection


* The authors would like to thank their colleague Patrick Conroy for his comments on an earlier draft and William Cole for his assistance in the research and drafting of this paper.

1 “UBS pays price for ‘epic’ Libor scandal,” Financial Times, 19 December 2012. http://www.ft.com/intl/cms/s/0/0c8bd408-4945-11e2-b25b-00144feab49a.html#axzz2FXtQLCFU.

2 Jill Treanor, “RBS still negotiating with FSA over Libor fine,” The Guardian, 17 December 2012. http://www.guardian.co.uk/business/2012/dec/17/rbs-negotiating-libor-fine-fsa.

3 NERA has developed a proprietary database which classifies FSA fines according to the category of the underlying misconduct. For a detailed explanations of the categories, refer to NERA’s “Trends in Regulatory Enforcement in UK Financial Markets: Fiscal Year 2011/12.” http://www.nera.com/nera-files/PUB_FSA_Trends_A4_0612.pdf.

4 “CPP fined £10.5 million for widespread mis-selling and agrees to pay redress,” 15 November, 2012. http://www.fsa.gov.uk/library/communication/pr/2012/102.shtml.

5 http://www.fsa.gov.uk/library/communication/pr/2012/086.shtml.

6 We project the number of fines at 2012/13 year-end by scaling up fines to date by 12/8.67. We project the aggregate amount of fines during the remainder of the fiscal year by applying the average fine amount since the start of the 2009/10 fiscal year to the number of projected fines.

7 The FSA has codified market abuse in the Code of Market Conduct, as consisting of insider dealing, market manipulation, and certain misleading disclosures. We classify the UBS and Barclays fines as Market Integrity cases, defined as violations as inclusive of behaviour that distorts or otherwise negatively affects financial markets. Further analysis of trends in market abuse cases is presented in our Fiscal Year-End report: “Trends in Regulatory Enforcement in UK Financial Markets: Fiscal Year 2011/12.” http://www.nera.com/nera-files/PUB_FSA_Trends_A4_0612.pdf.

8 One possibility is that these cases were not classified as Market Abuse because, in settlements with the FSA, neither UBS nor Barclays admitted that, by altering submissions, they affected published rates.

9 We define Market Integrity violations as inclusive of behaviour that distorts or otherwise negatively affects financial markets. Our Market Integrity violation category is slightly more expansive than the concept of “market abuse” specifically authorised under the Financial Services and Markets Act, in that it includes cases alleging the failure of firms or individuals to disclose information they were obligated to disclose in accordance with the Listing Rules and cases in which the misconduct was similar to misconduct that would seemingly constitute Market Abuse.

10 Caroline Binham, “Case hints at direction of other probes,” Financial Times, 20 December 2012.

11 Brooke Masters, Philip Stafford, and James Shotter “Scandal puts interdealer brokers in focus,” Financial Times, 19 December 2012.

12 Brooke Masters, Caroline Binham, and Daniel Schäfer “LIBOR arrests signal switch to individuals,” Financial Times, 12 December 2012.

13 See NERA’s “Trends in Regulatory Enforcement in UK Financial Markets: Fiscal Year 2011/12” for a further discussion of fines for Failure to Prevent Misconduct. http://www.nera.com/nera-files/PUB_FSA_Trends_A4_0612.pdf.

Notes

About NERA

NERA Economic Consulting (www.nera.com) is a global firm of experts dedicated to applying

economic, finance, and quantitative principles to complex business and legal challenges. For

over half a century, NERA’s economists have been creating strategies, studies, reports, expert

testimony, and policy recommendations for government authorities and the world’s leading law

firms and corporations. We bring academic rigor, objectivity, and real world industry experience to

bear on issues arising from competition, regulation, public policy, strategy, finance, and litigation.

NERA’s clients value our ability to apply and communicate state-of-the-art approaches clearly and

convincingly, our commitment to deliver unbiased findings, and our reputation for quality and

independence. Our clients rely on the integrity and skills of our unparalleled team of economists

and other experts backed by the resources and reliability of one of the world’s largest economic

consultancies. With its main office in New York City, NERA serves clients from more than 25 offices

across North America, Europe, and Asia Pacific.

ContactFor further information and questions, please contact the author:

Robert Patton, CFA

Associate Director

+44 20 7659 8620

+1 212 345 3269

[email protected]

The opinions expressed herein do not necessarily represent the views of NERA Economic Consulting or any other NERA consultant.

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