The Financial Conduct Authority (FCA) has fined and banned two former senior executives of interdealer broker Martin Brokers (UK) Limited (‘Martins’) for compliance and cultural failings at the firm. This follows previous enforcement action against Martins: in 2014 the FCA fined Martins £630,000 for misconduct relating to the London Interbank Offered Rate (LIBOR).
David Caplin (former chief executive) was fined £210,000 and Jeremy Kraft (former compliance officer) was fined £105,000. Both are also banned from performing significant influence functions at financial services firms.
The FCA has found that Caplin and Kraft’s failings contributed to a culture at Martins that permitted LIBOR manipulation to take place and enabled the misconduct to continue undetected over a prolonged period. The two directors failed to recognise the risk of this culture developing and failed to take reasonable steps to prevent it.
Georgina Philippou, acting director of enforcement and market oversight at the FCA, said:
"Mr Kraft and Mr Caplin were responsible for setting the right culture at Martins and ensuring that the firm’s risk management systems and controls were adequate to oversee its broking activities. They failed to do this. Proper systems and controls were non-existent and there was a culture at Martins where revenue came first and compliance was seen as unimportant rather than as an integral part of the running of the firm.
"Both individuals also ignored obvious risks such as the risk that brokers would give or accept inducements. This risk did in fact crystalise when brokers at Martins were induced to assist in LIBOR manipulation in exchange for corrupt brokerage payments. Consequently, the integrity of the financial markets was compromised.
"This case and other recent Significant Influence Function (SIF) outcomes should serve as a warning to everyone that holds a significant influence function that if a firm's misconduct can be attributed to cultural failings, then we expect senior management to answer for this."
Caplin and Kraft agreed to settle at an early stage of the investigation and therefore qualified for a 30% discount under the FCA's settlement discount scheme. Without the discount, the fines would have been £300,000 and £150,000 respectively.
David Caplin has been fined £210,000 in addition to a ban from holding a significant influence function at an FCA authorised firm because of a lack of competence in his CEO and director role. The FCA found that Caplin presided over a firm where the compliance culture was extremely weak. Caplin failed to ensure the effective oversight of the firm’s compliance function and the timely and adequate implementation of recommendations made by an external compliance consultancy. He also failed to ensure the effective supervision and monitoring of broker conduct, for which he was responsible, in particular failing to identify and remedy Martins’ lack of controls to prevent brokers making or receiving corrupt inducements.
Caplin allowed a culture to develop at Martins which prioritised profits to the detriment of regulatory compliance and was reluctant for compliance to have any role in broker oversight. Despite having assumed de facto responsibility for monitoring brokers and recognising that inducements were a key risk area for Martins, Caplin failed to ensure that brokers behaved ethically and that there were proper controls to monitor the propriety of commission income and entertainment spending. A culture developed where brokers would provide lavish entertainment to traders in exchange for commission income.
The lack of inducement controls had other consequences as there were no systems to detect "wash trades" which were executed to reward Martins for their efforts to manipulate the LIBOR submissions of panel banks. As a result, Martins’ LIBOR misconduct went undetected for several years.
Caplin’s failings facilitated Martins’ misconduct in respect of LIBOR and risked compromising the integrity of the UK financial markets.
Jeremy Kraft has been fined £105,000 and banned from holding a position of significant influence in an FCA authorised firm because of a lack of competence as an FCA approved compliance officer. He failed to give due attention to his responsibilities for Martin’s systems and controls, did not properly oversee brokers and did not challenge Caplin on compliance matters, in particular his stance in relation to the role of compliance staff in monitoring the front office .
Kraft also delegated other compliance responsibilities to unqualified members of staff and failed to act on the advice of an external compliance consultancy which identified serious compliance deficiencies at Martins.
Kraft’s failings together with those of Caplin facilitated Martins’ misconduct in respect of LIBOR and risked compromising the integrity of the UK financial markets.
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