Four years on, the financial services watchdog has yet to convince lawyers representing victims of alleged wrongdoing that it is living up to its rhetoric. Elle McDonald reports.
April marks the fourth anniversary of a new financial regulation landscape in the UK. The Financial Conduct Authority blazed on to the scene in 2013 with a promise that there would be ‘nowhere to hide’ for financial services firms and individuals who misbehaved.
Four years on, however, some solicitors representing small business owners and punch-drunk shareholders are questioning whether anything really changed with the arrival of the new City watchdog.
As head of commercial litigation at complex disputes specialists Stewarts Law, Clive Zietman acted for RBS shareholders in relation to losses sustained in its April 2008 rights issue.
He told the Gazette: ‘If there was another financial crisis you would find a lot of the banks had [again] invested in products where they didn’t understand the underlying risk. You would be naive to think that it has all been cleaned up. I just don’t buy that.’
The leaden pace of redress for consumers ill-served by the sector has continued to grate. Predecessor watchdog the Financial Services Authority was criticised for its tardy handling of the payment protection insurance scandal, for example, not least because it gave birth to a vast claims management industry. It was also lambasted for repeated delays in the publication of its report into the collapse of banking group HBOS, as well as its handling of interest rate swaps mis-selling.
Alison Loveday, chief executive of Manchester-based Berg Solicitors, is acting for a number of small business clients who allegedly suffered at the hands of RBS’s controversial (and now defunct) restructuring unit. A 2013 report by Lawrence Tomlinson, former adviser to the then business secretary Vince Cable, alleged that the bank wrecked small businesses in pursuit of profit. The state-controlled bank has admitted it ‘could have done better’, but has rejected allegations it tried to profit from distress situations.
She says: ‘We were hoping that the FCA would really take hold of the [Global Restructuring Group (GRG)] dispute. Tomlinson clearly showed that something had been going on for years, but we still haven’t seen the regulator’s own report and I don’t think that puts the regulator in a good place.’
Loveday is not the only one frustrated by how long it takes the FCA to produce reviews into wrongdoing. Andrew Tyrie, chair of the Commons Treasury Select Committee, has written more than once to FCA chief executive Andrew Bailey asking for the GRG report to be published.
Meanwhile, the Treasury committee published its own report last month into what it sees as a major cause for the frequent delays – the so-called ‘Maxwellisation’ process, by which anyone criticised in a report is allowed time to challenge it before publication.
The review, carried out by Andrew Green QC and barristers from Blackstone Chambers, called for a fundamental overhaul of the practice.
Tyrie said: ‘The principle that those criticised in public reports should have an opportunity to respond is sound. Nonetheless, there is a balance to be struck to ensure fairness, both to those who may have been subject to potential wrongdoing or malpractice, and to those subject to criticism in reports.’
The review concluded that the representation process has not only been overused, but also used for inquiries other than those conducted under the Inquiries Act 2005 (rules 13 to 15). It proposes a list of guidelines for chairs of inquiries not covered by this act, with the aim of reducing the length of time it takes for reports to be published.
The report also calls on the government to revoke rules 13 to 15 as soon as possible; David Cameron’s administration agreed to look at this in July 2015, but nothing has happened since.
Publication delays can indeed be lengthy. The FSA’s report into the failure of HBOS took seven years from inception to publication, while the FCA’s report into RBS’s restructuring group began three years ago.
Loveday cannot be sure the GRG report does not contain material relevant to her own clients’ cases. She explains: ‘We don’t know what the report says and we are being told by the bank’s solicitors that it is not relevant. But how do we know until we see it?’
While determining accountability for past misdeeds is proving frustratingly slow, there is evidence that individuals working in the financial sector are more aware of the risks of falling foul of the rules.
Richard Burger, a former enforcement lawyer at the FSA and now a partner at RPC, claims to have witnessed a step change: ‘We are seeing more individuals at senior and mid-tier level take interest in their own responsibility, accountability and liability. Individuals are much more acutely aware of their responsibility and also their liability, and so are asking more challenging questions and seeking advice on what they should do.’
The ‘mood music’ on financial services regulation has changed since last June’s Brexit referendum. This is because access to the EU single market in financial services for the two non-member states which currently have it – Norway and Switzerland – is dependent on the pair adhering to the vast majority of EU financial regulations.
That applies to financial firms wishing to conduct business within the EU. Earlier this month, the Association of Investment Companies, a trade and lobbying voice for the UK’s £154bn investment trust industry, raised the possibility of a post-Brexit ‘layered’ approach to financial regulation.
Chief executive Ian Sayers said: ‘Brexit should allow UK policymakers to deliver better targeted and more proportionate regulation. This will mean lower costs and greater competition for the funds sector: a “Brexit dividend” delivering long-term consumer benefits.’
The organisation wants to see the UK redraw its financial regulations for the 80% of asset management funds which are not sold into the EU. The lobby group singled out the key information document as one area where the UK could go it alone following Brexit. The final version of this pan-European document has been delayed, but once implemented it will provide investors with standardised information regarding the risks and costs associated with investment products.
Burger believes publicity accorded to criminal trials and regulatory action against peers has been more influential here than the introduction of the Senior Managers Regime (see below).
One of the most high-profile enforcement actions resulted in a 14-year prison sentence (reduced to 11 on appeal) for former UBS and Citigroup derivatives trader Tom Hayes, for his part in manipulating the London inter-bank lending rate (Libor) in 2015.
Separately, three Barclays traders were convicted for manipulating the US dollar Libor last year and are currently serving prison sentences. That trio will soon be subject to a confiscation hearing. Other trials are pending.
Burger adds: ‘There is a heightened sense of “this could happen to me”. We have seen individual traders and bankers and those in asset management wanting to take their own advice and “sense checking” before, during or after they have made an internal report. Clients are also more readily reporting concerns to the regulator, as well as internally.’
Burger reports an increase in clients seeking representation during internal investigations, as well as greater interest among financial institutions in looking for advice on how to conduct such probes.
He adds: ‘There has certainly been an uptick in firms who want to conduct investigations.’
Under the senior managers and certification regimes, firms are required to provide the FCA with an annual report on breaches of conduct rules by approved individuals. The first annual reports were submitted at the end of October.
In terms of consumer redress, meanwhile, there is now the additional weapon of new rules on collective action, whereby all affected consumers are considered part of a complaint unless they opt out. This was introduced in the UK under the Consumer Rights Act 2015.
Most notably, litigation boutique Quinn Emanuel Urquhart & Sullivan filed a collective action against MasterCard on behalf of millions of UK consumers whom it believes were overcharged by the payments group between 1992 and 2008.
This has been billed as the UK’s biggest-ever legal claim and, in an ironic twist, the firm intends to use MasterCard’s own previous court testimony in pursuing its case.
Partner Boris Bronfentrinker explained how when launching the action in September: ‘MasterCard has itself argued before English courts that any unlawful charges were passed on to consumers by retailers when trying to defend itself in cases brought against it by retailers. Despite arguing that
consumers bore the cost of its illegal fees, MasterCard has made no effort to try to compensate consumers through new voluntary compensation mechanisms.
‘We have taken account of that evidence in the allegations and damages analysis made in our claim. The consumer claim is completely consistent with what MasterCard has been saying about who paid these unlawful fees. It is not clear how MasterCard can now turn around and argue the opposite to prevent our case from succeeding.’
The firm estimates that as much as £14bn in compensation could be due to UK consumers. The case, which is being funded by Chicago-based litigation funder Gerchen Keller Capital (newly acquired by Burford Capital) will be heard by the Competition Appeal Tribunal in 2018.
MasterCard has said it disagrees with the basis of the claim and will oppose it vigorously.
Access to justice
Collective action may have made it easier for consumers to take on financial services providers, but the high cost of bringing any action against banks is preventing many small business owners from seeking redress through the courts.
‘The resources in terms of time and money needed to launch an action are considerable. It took three years to write the RBS case and about £1.5m – but that is what you need if you want to be taken seriously,’ says Zietman.
The Senior Managers Regime is intended to increase accountability within financial institutions by creating clear lines of responsibility, making a named senior manager responsible for each business unit. These named individuals could ultimately be held accountable if wrongdoing occurs on their watch.
The regime came into force on 7 March last year for banks and building societies, as well as investment firms supervised by the Prudential Regulation Authority. It is expected to be extended to all FSMA-registered firms from 2018.
All staff designated as senior managers must have statements of responsibility establishing which areas of the business they will be held personally responsible for. In addition, firms will have to compile a map of responsibilities for the organisation to demonstrate how responsibility is designated across the entire business entity.
Under the approval rules the FCA can invite any proposed senior manager to an interview if it wishes to discuss any details of their career or suitability for their proposed role. The regulator declined to say either how may interviews it has carried out as part of the new regime or how many individuals it has approved in total.
The FCA is consulting about whether to include general counsel and heads of legal in the SMR. The Law Society and other critics argue that this risks creating conflicts of interest between in-house lawyers and their employers and eroding legal professional privilege.
A certification regime has also been introduced, in parallel. From March, all institutions covered by the regime will have procedures in place to reassess the fitness and propriety of their certified staff on an annual basis. The firms are also required to produce an annual report to the FCA detailing all internal investigations for breaches of the FCA conduct code they have carried out in the preceding 12 months.
Worse, many SMEs placed in the bank’s GRG unit have subsequently had their businesses put into administration. For them to mount action, they would have to persuade their administrator such a course was worth pursuing.
Loveday says there is a real access to justice problem for small business owners: ‘RBS is taxpayer-owned and so is using taxpayers’ money to fund its litigation. If you asked the [average] person whether they would like their tax money being used to litigate in this way, I think they would really question that. Business owners have no access to such funding.’
Loveday also believes that the regulator’s actions have left some businesses unable to seek redress for alleged interest rates swaps mis-selling.
She explains: ‘[The FCA] told people at the start of the [IRHP] product review that it was a very simple process and they shouldn’t get legal advice. We have been approached by hundreds of businesses that accepted this and relied on what the regulator told them. They have now lost their legal right to pursue action, [which has been] timed out.
‘So there are issues around whether banks should be allowed to take that statute of limitation point [where] the regulator has not flagged [this] sufficiently early and, if anything, has lulled people into a false sense of security.’
Berg protected the position of clients who came to the firm instead of merely relying on the FCA, by issuing claims before applying ‘standstill’ agreements for the duration of the FCA review.
It will still be a long haul, though. Loveday adds: ‘You will see themes but each case will fall or stand on its own merits. We have at least two or three years left to run; some of our cases won’t come on until the second half of 2018 so I can easily see it getting to the end of the decade.’
Last month solicitors firm Lexlaw launched an online petition in a bid to overcome the costly and slow access to justice problem for business owners and establish a tribunal to hear their cases.
The petition states: ‘Only a tiny fraction of financial services disputes are ever litigated and the vast majority of good litigation cases settle, which means there is a lack of meaningful court precedents to force financial services institutions to deal with customer disputes fairly, particularly where those disputes have £multimillion financial values.
‘This leaves a vacuum for a Financial Services Tribunal which could offer not only judicial scrutiny over the financial services industry, but also provide a sense of justice for customers who might finally get their “day in court’.’’
The idea has some political support. SNP MP George Kerevan, a member of the Treasury select committee, sponsored a Commons debate on establishing a commercial dispute resolution platform last month. FCA chief Bailey is also on record as saying he can see the the merits in bespoke resolution services.
Last June’s Brexit referendum is also a window of opportunity here, according to Zietman: ‘There is a golden opportunity to look at all this stuff [with Brexit] and sort a lot of it out – once we can
think for ourselves and not be bossed around. However, my experience of politicians makes me cynical and I am pessimistic that anything [positive] will happen.’
Zietman would like to see the UK adopt a US-style system whereby it would be possible for UK shareholders to hold the management of companies properly accountable: ‘In the US, directors are held to account – they have legislation going back to the Securities Act of 1933. In this country we have the very opposite, as a general rule. Under laws going back to the 19th century, shareholders can’t sue – with one or two exceptions, such as in the RBS case using the Financial Services and Markets Act on prospectuses. If things are going to change we need to have a piece of legislation similar to the US. But that is just not going to happen.’
Hopes have been raised by US-style ‘vicarious liability’ and new ‘failure to prevent’ offences coming under consideration in long-awaited government proposals to reform the law on corporate criminal liability (see news, p3). But initial reaction from corporate crime specialists was divided, with some lawyers seeing the proposals as a climbdown or even a cop-out.
One piece of US legislation that has been imported to the UK is that of deferred prosecution agreements. The Serious Fraud Office has to date issued one agreement in respect of a named financial services firm – Standard Bank – under Section 7 of the Bribery Act 2010.
Alun Milford, general counsel at the SFO, explained its strategy for deploying the new tool last year: ‘Our first question is whether our evidential sufficiency test is met. If so, and only if so, we consider the public interest in that prosecution. If the company has cooperated with us by shortening the process of the investigation and assisting us in our cases against the individuals who were themselves responsible for the corrupt conduct, then we might invite them to enter into a deferred prosecution agreement.’
DPAs are controversial. In the US, for example, they continue to be criticised by lobby groups such as Better Markets for allowing companies to pass the costs of criminal behaviour on to shareholders through fines to the corporate entity.
A related issue is the resourcing of the SFO, whose gross budget for 2016/17 is £45.7m, down from £62.3m in 2015/16.
Zietman says: ‘The SFO is underfunded and it doesn’t have the right skill set, and that’s because the government doesn’t take fraud seriously enough. If it did, it would devote more resources. So it is the old story: nick a tin of beans from Sainsbury’s and you go to prison; go and commit a complicated financial fraud and get away with it”.’
Elle McDonald is a freelance journalist and financial services consumer advocate