FCA Enforcement and the Wholesale Markets

Speech by Tracey McDermott, Director of Enforcement and Financial Crime at the Financial Conduct Authority (FCA), delivered at the 13th Annual FX Week Europe, London. This is the text of the speech as drafted, which may differ from the delivered version.

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Thank you for inviting me to speak at today’s FX Week Europe conference. It is particularly opportune to speak to you today at a time when conduct in the wholesale markets, and the FX market in particular, is once again under the spotlight.

My theme today is ‘FCA Enforcement and the Wholesale Markets’ but, really, what I want to speak to you about is a duty that I think we all share – that of putting trust and integrity back at the heart of our wholesale markets.

Our financial markets have been under the microscope ever since the financial crash of 2008. And let’s face it, they haven’t fared well. Scandal after scandal has laid bare too many instances of poor behaviour and exposed a continuing culture on parts of our trading floors which is out of kilter with the tone from the top, the expectations of the regulator, and most importantly, the expectations of the UK public.

Effective, efficient and stable wholesale markets should be a jewel in the crown of the UK financial services industry. They facilitate global trade, they ensure risk can be managed, they allow us to diversify investment portfolios and support growth of new businesses. Yet poor conduct failings have damaged the reputation of UK markets and the reputations of the hundreds of thousands of people who operate in the market honestly and who work to serve the interest of their customers.

There may have been a time when our markets were given the benefit of the doubt – when the trust built up over decades insulated them and enabled UK markets to emerge from the occasional bout of trader misconduct or banking collapse with their reputation intact. That time and that trust has now, unfortunately, long gone.

You will all have read the emails and messages between traders at different institutions that have featured in some of our recent Enforcement outcomes. We make no apology for highlighting them. We do so not because of some salacious interest but because of what they say about culture and values.

And one of the striking things about our FX settlements is just how similar those messages are to Libor – they show that certain people are out for themselves first, their mates in other firms come second and then, as a distant third, their customers and the firms that employ them. If we are going to work together to enable cultural change, we need to face up to the fact that the behaviour of the past is no longer (if it ever was) good enough. The challenge for us is how we ensure we learn from the mistakes of the past so that they are not repeated.

Over the last six years we have been working hard to ensure the future strength and sustainability of the financial services sector. As a regulator the FCA has placed a new focus on how we supervise the wholesale markets. We have proposed radical changes to the way we go about authorising, supervising and enforcing to ensure individual accountability, and we have continued to shine a light on the worst conduct that we see through our enforcement actions.

The UK government has passed new legislation, and firms and their senior management have started the process of changing culture within institutions. The FX cases demonstrate that, despite the enormous effort, and resources, put into changing culture and improving behaviours by firms, and by the regulators, we are not there yet.

So clearly none of this is easy. To achieve our aims needs everyone – institutions, regulators and legislators – to be working in the same direction. We can only do this by making trust a central part of the culture of the market – not because people are forced to, but because it is the right thing to do. Nothing less will restore confidence that there is integrity at the heart of the financial services industry.

So, that is the backdrop to where we are now. I would like to talk a little about what we at the FCA are doing to help rebuild and restore integrity to the markets, and the role Enforcement plays in that, and then I will return to your role.

Our work here has many facets. I’ll start with talking about some of the high-level regulatory and legislative changes that are taking place to encourage responsible wholesale conduct. I will then talk about the FCA’s wholesale conduct agenda. And I will conclude by reminding you about what we do to identify, investigate and punish those who seek to abuse our financial markets.

We see all this work as serving the same purpose – restoring the integrity of a vibrant and self-confident UK financial market.

Regulatory and legislative change

I would like first to highlight three important regulatory initiatives which are looking to the future.

Individual accountability

Something that has been the source of much discussion since 2008 is the lack of individual accountability: the perception that few senior individuals have been brought to account for the failures of the past. As I will mention later it is not strictly true that individuals have got off scot-free. We have seen people fined, banned and sent to prison for misconduct in wholesale markets. Yet it is fair to say that in many cases it has not been possible to hold people to account. Why is this?

At its core is a basic failure of governance. Firms have not always known who is responsible for what (particularly when things go wrong). This has allowed poor behaviour to go unchecked and meant people were not taking responsibility for what went on under their watch.

We’re working to change this. Earlier this year – jointly with the PRA – we issued a consultation paper seeking views on a new regulatory framework for individuals. The proposals are intended to create a new framework to ensure individuals take greater responsibility for their actions, and to provide a greater degree of accountability where they fail to do so. The proposals should make it easier for firms and regulators to know who is responsible for what. So, when things go wrong, it should be easier to determine who needs to answer questions about why it went wrong and, where appropriate, for those people to be held to account. But this is not fundamentally about Enforcement; it’s about taking responsibility for all aspects of your business to ensure less goes wrong in the first place. Making it clear that is the job of the business, not of compliance. This really should be good business practice and not be a shock to anyone.

Fair and Effective Markets Review

The Fair and Effective Markets Review – which is being conducted jointly by the Treasury, the Bank of England and the FCA – is focusing specifically on the fixed-income, currency and commodity markets, and seeking answers to fundamental questions around trading practices and the scope of regulation in those markets.

Manipulating LIBOR is already a criminal offence and, as its first step, the review recommends that the manipulation of a further set of Fixed Income, Currencies, and Commodities (FICC) benchmarks be made criminal offences, this includes, of most interest to this audience, the WM Reuters 4pm FX fix. The government intends to have the new legislation in place by the end of the year.

If industry wants to own the future, it needs to come up with the solutions.

But regulation is not necessarily the only answer here. The review is also considering wider aspects of the FICC markets; asking questions about the root cause of the problems and how they can be tackled. Is this about structure, about competition, about guidance or about poor conduct? Where appropriate regulatory or other changes are not already in the pipeline, the review will make recommendations for improvements. And it has made it very clear that, if industry wants to own the future, it needs to come up with the solutions.

Wholesale Sector Competition Review

And finally, in July this year, the FCA launched a review of competition in the wholesale sector. The review will focus primarily on competition in wholesale securities and investment markets, and related activities such as corporate banking. The objective of the review is to highlight areas where competition may be weak or not be working properly in these markets. I’m pleased to say that we received a good response to the initial call for inputs which ended in early October and you will hear more from us on this in the early part of 2015.

The breadth and scale of these initiatives reflect what is at stake: the current and future reputation and shape of the UK financial services sector.


As a regulator we use a number of tools to achieve our objectives – I’ve talked about some big picture initiatives. But fundamentally supervision and enforcement remain at the heart of our approach.

When the FCA was being created three years ago, we recognised the opportunity to develop a new approach to conduct regulation. We have since then focused more closely on wholesale conduct. This is because we recognise that poor conduct in wholesale markets can harm the wider market by passing on risk and detriment to retail consumers. And importantly, by eroding trust and confidence in financial services.

So this year we have done supervisory work to strengthen the Suspicious Transaction Report (STR) regime, and we have conducted thematic reviews looking across a range of firms on a range of topics including, for example, the flow of information within investment banks and market abuse controls in asset managers. Staff from across the FCA work on these projects, bringing together a range of intelligence and insights from a wide variety of firms and market sources.

We want to work with firms where we can, spotting issues in the early stages and seeing them corrected behind the scenes. But sometimes that is not possible – the failures or breaches of our principles are too serious and demand a public and forceful reaction to send a clear, deterrent message to others. And this is where enforcement comes in – as part of the FCA’s strategic approach to wholesale conduct, not as a standalone.

To help me understand what you might already know about what we’re doing, I thought I’d experiment with something that everyone seems to be talking about: ‘Big Data’. It’s everywhere and apparently it will help to reduce traffic congestion; to predict the outcome of elections; to pick football teams; even to predict flu pandemics. Pretty powerful stuff, then? So, what does Big Data say about what the FCA does, and what better way than to run a couple of Google searches?

A search for ‘FCA’ together with references to either ‘LIBOR’ or ‘foreign exchange’ produces more than a million results; and a search for ‘FCA’ together with references to either ‘insider dealing’ or ‘market abuse’ produced around 100,000 results.

I’m sure we would all have expected the LIBOR and FX search to produce significantly more results. However, I must confess that I was a little surprised by the extent of the difference – I don’t think I’d blame you for thinking that we spend all our time on benchmarks.

Fortunately or unfortunately – depending on your point of view – to rely on Big Data in this case would be to accept a highly skewed impression of what we do. The reality is that our enforcement work covers a broad range of activities to protect and enhance the integrity of all of our markets.

In November 2012, we fined UBS nearly £30 million for systems and controls failings that allowed an employee to cause substantial losses totalling US$2.3 billion as a result of unauthorised trading.

In September 2013, we fined JP Morgan over £137 million for serious failings relating to its Chief Investment Office’s ‘London Whale’ trades. We fined State Street over £22 million in January 2014 for deliberately overcharging six clients a total of $20.2 million by its UK Transition Management business and we fined FXCM UK £4 million in February 2014 for allowing the US-based FXCM Group to withhold profits worth US$9.9 million that should have been passed on to FXCM UK’s clients.

Significantly, both FXCM and JPMorgan’s penalties included sanctions for failing to be open and cooperative with the FCA. Where things go wrong we need to know quickly and comprehensively.

In May 2014 we fined Barclays £26 million for failings surrounding the London Gold Fixing. The trader at the heart of the misconduct was also banned and fined.
We have to date fined seven firms nearly £500 million for misconduct relating to LIBOR and other benchmarks. We have published Warning Notice statements in relation to 11 individuals. The Serious Fraud Office (SFO) has charged 13 individuals. There have been guilty pleas in criminal prosecutions in both the UK and the US.

This month we imposed £1.1 billion in fines against five banks, for failing to control business practices in their G10 spot FX trading operations. Other regulators in the US and Switzerland also imposed fines. An investigation into Barclays continues. The banks’ failings meant that, from 2008 to 2013, traders were able to put their banks’ interests ahead of those of their clients, other market participants and the wider UK financial system. That enabled attempts to manipulate the fix, misuse of client information and triggering of stop losses.

The resulting fines have been substantial – substantial enough to prompt certain commentators to speak of “regulatory revenge”.

But the point is not to wreak revenge. The reason the fines were so high is because this is post-LIBOR misconduct – steps had been taken but not enough. The aim, as the FT put it, is that: “[fines] are supposed to force banks to clean up their act and avoid future transgressions.”

And the FX penalties have also prompted inevitable questions about whether fines work and whether financial services institutions can actually change how they behave.
And it’s a fair question. The issues underpinning FX – failure to manage conflicts, a poor culture, a failure to think about the big picture –mirror those in LIBOR. And that is why our penalties in these cases were so high.

The industry needs to learn lessons from our Enforcement cases, taking advantage of the errors of your peers to learn how to do things better.

Our cases give you unique opportunities to benefit from others’ failings: you can see what poor outcomes look like and why they happen; you should therefore be better placed to anticipate them, and to prevent them.

It is a source of some concern to me that firms are still not reading across the root causes of misconduct in one area and ensuring that the same issues don’t exist in another. That does require a bit of thought, a bit of creativity and a real understanding of why things happen, not just what happened. But in my view that would be time and energy well spent.

And to that question of whether fines on firms work or is this all about individuals. Of course, as I have said individual accountability is important but firms have to take responsibility for the way their business is run. They have to understand the risks it poses and take steps to control these risks. They cannot assume saying the right thing is enough.

Firms set the culture and the tone, they decide what to reward and what to punish, they decide who to promote and who to fire and, unless they get that right, misconduct will continue.
People do not operate in vacuums; they reflect the culture around them. Their role models are rarely the CEO – it is the desk head, or the top trader or salesman and if they see them rewarded – financially or otherwise – they will assume that is the way ‘things get done around here’ and emulate it.

If wrongdoing is ignored, condoned or even encouraged, if getting around compliance is seen as a game, we will not move on. Individuals can, and should, be held to account but firms must also pay the price for their failures.

Monitoring our markets

And very briefly, to counter Big Data’s skewed impression of what we do in Enforcement, I’d like also to mention some of the more traditional areas of abuse of our financial markets.
Our financial markets are increasingly complex, increasingly interrelated, and fast-moving. And they’re changing all the time.

In these circumstances, accurate and timely transaction reporting and surveillance of the market are vital components of our toolkit for enhancing the integrity of our financial markets. We search across millions of transaction reports to detect and investigate suspected cases of market abuse, insider trading, and market manipulation. As things stand, the list of reportable instruments includes equities, bonds, futures, options, warrants, CDSs, CFDs, spread bets, listed commodity derivatives, etc.

Under MiFIR – which is expected to be implemented in mid-2015 – interest rate swaps, FX derivatives, repos, etc. will also be included.

The transaction reports are a vital tool in the fight against market abuse and we rely on firms to be providing accurate reports.

And that is why, when firms fail to report transactions accurately, we will take action. We have fined six firms for failure in this in the last five years.

We have also worked with industry to improve quality and quantity of Suspicious Transaction Reports (STRs). We now receive over 600 alerts or STRs per month. Every single alert is considered. Some are escalated for more thorough investigation, with a number ultimately becoming the subject of enforcement action.

Insider dealing

So, unsurprisingly, although benchmark manipulation may be flavour of the month, lots of the work that crosses my desk is also good old-fashioned favourites – insider dealing and market abuse being two of those. We have, since 2009, secured 25 convictions for insider dealing. Most recently, Julian Rifat, formerly of Moore Capital, pleaded guilty to insider dealing. He will be sentenced next year. The Defendants in Operation Saturn - the FCA’s largest insider dealing prosecution to date - were recently made subject to confiscation orders of £3.2 million.
We also recently charged Paul Coyle, formerly of Morrisons, and Damien Clarke, formerly of Schroders, with insider dealing.

We continue to investigate a number of other complex and significant insider dealing cases. The nature of these cases means that they take time to investigate and to prosecute but we expect you will see the fruits of our labours on this over the next few years. So, if you thought our focus on benchmarks meant we had taken our eye off insider dealing, you could not be more wrong.  

Market abuse

Where criminal action is not appropriate, we also bring regulatory action for market abuse.

Since 2012, we have imposed fines of nearly £3 million on seven individuals, and imposed eight prohibitions for market abuse and market manipulation. These have included cases in relation to High Frequency Trading (HFT), complex manipulation through layering and manipulation of the gilt markets, as well as more traditional equity-based market abuse. Our focus on the cleanliness and integrity of all our markets should be clear – as should the consequences for those who don’t play by the rules.


I started this morning by talking about a shared mission between market participants and regulators to put integrity back at the heart of our financial markets. Our enforcement actions have highlighted some of the worst practices and have punished some of those responsible. Our enforcement actions have also played a part in driving a groundswell for cultural change that is beginning to take place within the industry. Enforcement will continue to be an important tool in seeking to protect and enhance the integrity of the UK financial system – to ensure that the relevant markets work well.

We will continue to reinforce our expectations of wholesale firms and markets by taking decisive action where firms or individuals fail to manage risk effectively or to observe proper standards of market conduct. We will continue to pursue those who abuse our markets to the full extent of the law.

But all of this work will, however, be for nothing if the lessons are not learnt and culture does not change.  This is not the regulator’s job, nor is it the job of compliance. The frontline must own this and the business must take responsibility. The task for all of you here today is to determine how you play your part. How do you ensure that cultures are established within your firms where the poor behaviours of the past are both unacceptable and cannot be repeated?

That is where you come in – I urge you to grasp this opportunity for change and ensure that you and your firm are on the right side of this debate in years to come. I expect history to take a dim view of those who are not.