December 17, 2020
Estimated reading time: 10 minutes
All change or business as usual?
As 2020 draws to a close, CUBE looks over the
available regulatory data* to analyse the trends
that have arisen from enforcement actions across
the globe this year.
Download a copy of the report
1. Securities and Exchange Commission
A year ‘colored’ by covid
The Securities and Exchange Commission’s (SEC) Division of Enforcement published its Annual Report in November 2020 and, of all the major financial regulators, it was the frst to clearly show the impact that the global pandemic may have had on enforcement actions.
What is particularly noteworthy in the SEC’s data is that it reported a number of cases stemming specifically from the global pandemic. This is information that has been alluded to but is yet to be seen from other financial regulators.
The SEC reported numerous instances of financial institutions and individuals attempting to monopolize on Covid-19
Examples that the SEC gave of financial institutions trying to capitalize on the pandemic included false statements being made to drive up share prices, false claims about vaccines, testing and – of course – PPE. Undoubtedly, we will see other such cases come to the fore as the dust settles in the New Year.
Accountability for those at the top
The SEC’s Division of Enforcement Director, Stephanie Avakian, commented within the report that “in the face of so many unprecedented challenges, the Commission brought 715 enforcement actions – 405 of which were ‘standalone’ actions.”
Of the 405 standalone actions, 72% were brought
against one or more individuals
That 72% included individuals “at the top of the corporate hierarchy—including chief executive officers, chief financial officers, and chief operating officers—as well as gatekeepers like accountants, auditors, and attorneys.”
Towards the end of 2019, it was suggested that 2020 would see a rise in individual
accountability at the highest levels of the business. Initial data from the SEC suggests that those predictions may have been true.
A wide variety in types of enforcement
The 405 standalone cases brought by the SEC in the 2020 Fiscal Year
can be broken down as follows:
2. Financial Industry Regulatory Authority
Cases give insight into enforcement
The Financial Industry Regulatory Authority (FINRA) had not issued its annual report at the time of writing, however, over the course of 2020 it has published 5 news releases concerning high-profile cases; providing a window into the activities it has focused on over the year.
5 high-profile FINRA fines in 2020
$3.6 million issued for violations related to unit investment trusts
$1.55 million for a firm that failed to submit accurate trade data
$2 million for supervisory failings related to variable annuity switches
$15 million to a firm that was found have an ineffective AML program in place.
$7.2 million to a firm that caused customers to incur unnecessary sales
charges and pay excess fees
In Case 4, the firm had grown at pace but “in spite of that growth… failed to dedicate the resources necessary to meet its AML obligations”. FINRA’s investigation found that the firm had failed to reasonably surveil wire transfers for money laundering and lacked the policies, procedures, internal controls, and personnel to investigate suspicious activity.
This case was particularly egregious given that “even after a compliance manager at the firm warned his supervisor that we are ‘chronically understaffed’ and ‘struggling to review reports in a timely manner’ it took [the firm] years to materially increase its AML staffing or augmen its AML systems”.
Case 5 concerned a well-known financial institution that received a penalty after it was found to have caused customers to incur unnecessary sales charges and pay excess fees in regard to mutual funds transactions. FINRA found that the firm had not had reasonably designed supervisory systems and procedures in place for a period spanning 6 years.
These cases are noteworthy as they do not concern sophisticated illicit activity, but rather point to run-of-themill regulatory obligations that were not met due to inefficient tools and processes.
3. Financial Conduct Authority
Year-to-date enforcement data
The Financial Conduct Authority (FCA) has published several reports and insights throughout 2020 to disclose the enforcement actions and approaches it has taken against financial institutions and consumers.
The FCA published its ‘Enforcement Data – Annual Report 2019/2020’, spanning the period of September 2019 to September 2020.
‘Enforcement Data – Annual Report 2019/2020’
- 203 final notices
- There were 187 final notices issued against firms or individuals trading as firms
- The remaining 16 were issues solely against individuals
- 15 financial penalties totalling £224.4 million
Three years of levied fines
The value of fines issued between September 2019-2020 decreased by 1% from the previous period, when £227.3 million of fines were issued. However, the 2020 value is still a significant increase compared to fines issued in 2017-2018 (£69.9 million).
Types of cases enforced
Many will be looking back at 2020 to understand what impact Covid-19 had on enforcement action. It is perhaps worth noting at this point that many settled enforcement actions are the result of years of investigation, often dating back several years.
It is interesting, then, to look at the types of cases the FCA has opened in 2020, as an indication of the areas in which misconduct arose.
Opened cases point to insider trading
It is unsurprising to see that Insider Dealing makes up a significant proportion of cases, given that it was a concern for many compliance teams in the move to a ‘work from home’ (WFH) environment.
It will be interesting to see in coming months whether such cases were spurred on by the degree of freedom that WFH affords.
Meanwhile, investment scams and financial crime case numbers remained relatively low, with 11 apiece.
Given the warnings issued throughout 2020 concerning the increasing level of scams and fraud, we might have expected there to be more cases related to Investment Scams
Fines levied during the year
The FCA maintains a continuously updated page detailing its 2020 fines. This page gives a fascinating insight into the state of play as the year draws to a close.
As of December 2020, the total value of fines issued was £157,450,418. This is significantly lower than the £392,303,087 issued in 2019.
The sum of £157,450,418 is shared across eight actions:
- Three for unfair treatment of consumers (£64,046,800 + £2,774,400 + £91,000)
- One for wholesale conduct in the investment bank sector (£48,308,400)
- One for anti-money laundering (AML) failures in the retail bank sector (£37,805,400)
- One for wholesale conduct in the wholesale broker sector (£3,444,100)
- One for disclosure failings in regard to short selling disclosure rules and the failure to assess and manage risks (£873,118)
- One for conflict of interest and failure to provide suitable advice (£107,200)
4. Monetary Authority Of Singapore
A strong focus on enforcement
The Monetary Authority of Singapore (MAS) published its Enforcement Report – covering enforcements from January 2019 to June 2020. Of course, this covers a length of time which saw a number of significant changes, not least the pandemic.
Over this period of time, MAS issued $3.4 million in financial penalties across 18 financial institutions. This sum is notably lower than other financial regulators, especially given the time period that it covers.
Three key focus areas in 2019-2020
1. Market abuse – This includes insider trading, false trading,
and corporate disclosure breaches
2. Financial services misconduct – This includes the mis-selling of
financial products, breaches of business conduct rules and serious unfitness of impropriety
3. Anti-money-laundering related control breaches – Firms are expected to have robust AML/CFT controls to detect and disrupt abuse of financial systems. Members of the Board and senior management are not immune from scrutiny and have a role to play in exercising oversight over AML/CFT activities
Technology boosts enforcement
As the financial regulator behind the Singapore FinTech Festival, it is perhaps no surprise that MAS is the only regulator that commits a portion of its Enforcement Report to the role that technology plays in such enforcements.
In particular, MAS notes that it has leveraged technology to identify misconduct within the field of AML, as well as to:
- Enhance surveillance capabilities to proactively detect DPT service providers that operate illegally; and
- Gather granular data from selected firms as part of data analytics initiative to detect potential mis-selling and identify other forms of misconduct in the industry.
The Regulator encourages the industry to put in place systems to collect and retain structured data to enable them to harness technology for the proactive detection of misconduct, one of the only regulators to directly endorse the use of technology within compliance systems.
Collaborating for compliance
MAS is a Regulator that actively works towards collaboration in all forms. From climate change – it recently announced plans to collaborate with China on funds for green finance – to innovation. Speaking in 2019, MAS’ Managing Director Ravi Menon noted that countries must “learn from one another’s experience in developing public digital infrastructures”.
MAS is proactive in its efforts to collaborate towards effective enforcement action too, and proudly notes that it “collaborates closely with international regulators and enforcement agencies to combat cross-border misconduct”.
Over the course of 2019-2020, MAS rendered assistance in 81 IOSCO requests from 13 international regulators and sent 15 requests to 6 international regulators.
Operational efficiency is key
2020 has been a year of confusion and uncertainty and has presented a mixed bag for global financial regulators.
The FCA’s Kate Tuckley reporting little change to their enforcement action. While, on the otherside of things, the SEC’s Stephanie Avakian commented that COVID-19 has “colored so much of the last half of the year”, with the Division of Enforcement having “focused significant time and resources responding to challenges created by the global pandemic.”
It is worth noting that, while many cases may have reached restitution in 2020, the true effect of COVID-19 on enforcement activity could take years to come to light.
The most common reasons for enforcement remain relatively unchanged from previous years:
- Anti-money laundering failures
- Financial services misconduct, including unfair treatment of consumers and conflicts of interest
- Market abuse
- Individual accountability at the highest level of the business
However, it is interesting to see that, in the majority of high-profile or high-value
enforcement action taken by global financial regulators, there is a running thread of operational ineffectiveness.
In most of these instances, the misconduct at hand (e.g., insider trades or money laundering) played only a fraction of the role in the final enforcement action.
What regulators have been most aggrieved by is the lack of effective or well-managed processes to handle such misconduct.
Take, for instance, the action taken by FINRA against a firm that failed to provide sufficient resources for its AML controls, despite the firm growing at pace.
In another example, the FCA issued a fine nearing £40 million; in that instance, a firm allowed money laundering activity to go undetected over a period of 6 years. In that time, the financial institution in question had an AML control framework in place but failed to check whether the automated tool it had installed was working.
These are just two examples that highlight the regulators increased focus on the effectiveness of compliance tools. Not only are they concerned by financial misconduct, but by the policies, processes and controls that firms have in place to detect and, ultimately, prevent such instances.