Financial regulators crack down on individual misconduct

Financial regulators in the UK, US and Hong Kong are cracking down heavily on cases of individual misconduct, reports valuation and corporate finance advisor Duff & Phelps.

D&P’s fifth annual Global Enforcement Review reports that a total of 1,761 cases were brought by regulators in the three financial centres against individuals in 2016, equivalent to almost seven for every working day of the year, as enforcement actions against individuals outnumbered those against firms by four to one.

Of the six global regulators assessed by D&P across three continents – the UK’s Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), the US’ Financial Industry Regulation Authority (FINRA), Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) and Hong Kong’s Securities and Futures Commission (SFC) – the FCA was the only one not to see a rise in the number of cases involving individuals.

However, while the total number of enforcement actions brought against individuals by the FCA decreased, the percentage of cases brought against individuals compared with those brought against firms increased dramatically – 64% of cases brought by the FCA were against individuals in 2016 against just 37% in 2014, highlighting its renewed focus on individuals.

The Review notes that the increasing emphasis on personal liability provides insight into the effectiveness of the FCA’s flagship Senior Managers and Certification Regime (SM&CR), which was fully implemented in March 2016. As the regime is expanded to incorporate all sectors of the financial services industry, this concentration on personal liability is set to increase further – as outlined in the FCA’s latest annual report. On July 14 the FCA fined a compliance oversight officer £75,000 (US$98,000) over mishandled pension scheme advice, demonstrating this new intent further.

In Hong Kong 72% of fines from SFC were levelled against individuals last year – up from 63% in 2015. D&B predicts that the new Managers-In-Charge (MIC) regime announced last December will also likely provide further impetus for intensified scrutiny of individuals. As an example, last month the SFC brought charges against a number of senior executives and a former chairman of a technology company for providing false and misleading market information.

The report also highlights that the US still leads the way when it comes to convictions of individuals. All three US regulatory bodies reviewed saw increases in prosecutions against financial employees. Cases brought against individuals by the CFTC increased by 80% in 2016, to 90 from 50 a year earlier. FINRA alone accounted for over 70% of all penalties across all six regulators globally, with a total of 1,244 prosecutions made against individuals, up 58 since 2014.

The report attributes these high levels of convictions in part to the US’s commitment to whistle blower regimes that reward individuals who report possible securities law violations. These continue to have strong support from the regulators: CFTC grew its programme in 2016, making its largest award to date and similarly, the SEC awarded over $57m to 13 whistle blowers, more than in all previous years combined.

“We are in an era of greater individual accountability,” said Julian Korek, D&P’s global head or regulatory and compliance consulting. “The Review is now in its fifth year, and never before has the regulatory magnifying glass been so emphatically focused on the actions of senior executives.

“In the past, firms were slightly less worried about the size of fines imposed by regulators. But now with individuals being targeted, management may be keener to push back against enforcement actions at every stage.

“The recent spate in proceedings against individuals shows too that the regulators are willing to bare their teeth in the face of ongoing financial crime. It is now widely accepted that new regulations will likely lead to even more enforcement actions against individuals in future years. The chasm that now exists between fines against individuals compared with those against firms will therefore widen significantly.

“As this level of scrutiny continues to grow, it will become increasingly important for financial institutions across the globe to focus on cultivating a more transparent and responsible corporate culture.”


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