The latest slew of fines against banks (almost US $6 billion) in wake of the FOREX scandal has attracted predictable headlines from the press along the lines of “How can it be that so few individuals have been held to account?”
Yet, as I write this blog, a senior trader with two of the banks concerned is today becoming the first person to face trial by jury over allegations he conspired to rig global Libor interest rates when his case begins in London.
The former yen derivatives trader is charged by the Serious Fraud Office (SFO) with eight counts of conspiracy to defraud between 2006 and 2010, a criminal offence that carries a maximum jail sentence of 10 years. A range of other individuals are expected to face trial here in the UK and beyond.
The UK is also about to introduce the Senior Managers Regime (SMR), one of the most far-reaching reforms focusing on individual accountability ever implemented.
Are They Getting Away With It?
So how justified are the headlines? Are the bankers really “getting away with it”? Perhaps even more importantly, will they get away with it in the future or will the new reforms eradicate what Martin Wheatley the Chief Executive of the Financial Conduct Authority has called the “Murder on the Orient Express Defence”?
Industries characterised by weak accountability – or by individuals seeking to protect themselves on a ‘Murder on the Orient Express’ defence (it wasn’t me, it could have been anyone) – are almost invariably less financially stable, and more prone to misconduct.
Plenty has already been written about the SMR including on my previous blogs. So I don’t intend to go into the detail of it here. Instead I want to focus on a particular tension between the concepts of accountability and effective regulation, which has been highlighted by a recent Court of Appeal judgment.
A specific challenge for regulators and investigators seeking to apply and enforce the concept of “accountability” against individuals is how to be fair (and be seen to be fair) and deliver justice.
This is what Section 393 of the Financial Services and Markets Act 2000 is all about. It is designed to give “identified” individuals the right to make representations in relation to warning and decision notices given to others in respect of whom the Financial Conduct Authority is taking regulatory action.
The question is what does “identified” mean in this context. This formed the basis for the FCA’s recent unsuccessful appeal to the Court of Appeal. The case concerned a former senior manager of JP Morgan at the time of the London Whale rogue trader losses in 2012.
The FCA in its Final Notice to JP Morgan, in which it fined the bank £137million, made reference to the bank’s “CIO London management” but did not name any individuals. Mr Achilles Macris was at the time within the management structure of the bank, exercised a controlled function and had the job title of International Chief Investment Officer. He complained that, looked at in its proper context, the notice did, in effect, single him out through use of the phrase “CIO London management”.
The FCA disagreed. It argued that a general reader would not unambiguously and unequivocally have been able to identify Mr Macriss.
The Court of Appeal took a different view. It found that the test for identification should be similar to that applied in defamation cases. The correct approach was summed up as follows:
“Are the words used …. such as would reasonably in the circumstances lead persons acquainted with the claimant/ third party, or who operate in his area of the financial services industry, and therefore would have the requisite specialist knowledge of the relevant circumstances, to believe as at the date of the promulgation of the Notice that he is a person prejudicially affected by matters stated in the reasons contained in the notice?”
Applying this test to the facts of the case, The Court of Appeal ruled that Mr Macriss ought to have been given representation rights under Section 393 before the Notice was issued.
Whether the FCA will apply to the Supreme Court for leave to appeal this decision remains to be seen but it is not hard to see how see how the case has the potential to give the FCA a severe headache under the new SMR regime.
The very new tools which the FCA will have at its disposal to render individuals accountable such as Statements of Responsibility and Management Responsibility Maps will be additional sources by which individuals can be identified. Indeed that is the whole point of them. Does this mean that the FCA will in future have to choose between either full-blown enforcement against individuals or the issuing of notices to the entity alone, which are so deprived of colour and context (for fear of identifying individuals) that they lack the very punch and deterrent effect which the FCA is looking for?