Welcome to Maples and Calder's quarterly newsletter on financial services regulatory enforcement, where we provide you with updates on all current regulatory and enforcement topics, from global trends to in-depth analysis of Irish-specific issues.
ENFORCEMENT ACTIONS – IRELAND
The Central Bank of Ireland ("CBI") issued six warning notices against unauthorised investment firms during the fourth quarter of 2015.
There were six enforcement sanctions issued against Irish regulated entities during this quarter.
The CBI's on-going investigation of Custom House Capital Ltd (in liquidation) and persons concerned is listed for mention in the Examiner's Court on 4 February 2016.
ENFORCEMENT ACTIONS – INTERNATIONAL
The UK Financial Conduct Authority ("FCA") and the Prudential Regulation Authority introduced new whistleblowing rules which apply from 2016 to deposit takers with over £250 million in assets and insurance companies subject to the Solvency II Directive.
An asset management firm was fined £6m by the FCA for failing to put in place adequate controls for its fixed income business, for providing inaccurate information to the regulator and for failing to correct the inaccuracy for four months and a bank was fined £72m for failures in anti-money laundering compliance. The former head of an investment fund who was sentenced to 13 years' imprisonment in January 2015 was banned from the financial services industry following his fraud convictions resulting in losses of US$536 million.
Also in the UK, one trader (following convictions in 2012 of two counts of fraud by abusing his position and a seven year term of imprisonment) was banned from performing any function in relation to any regulated financial activity. A former investment analyst was also fined £139,000 and banned from performing any function in relation to any regulated activity in the financial services industry and for failing to act with honesty and integrity (in particular for "cherry picking" transactions for hedge funds).
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The US Securities and Exchange Commission ("SEC") fined a bank US$37m in conjunction with the UK Serious Fraud Office for bribing Tanzanian government officials to award it a debt capital markets mandate. For the UK, the fine was the first levied under the Bribery Act 2010 and included a deferred prosecution agreement. The SEC lacked jurisdiction to fine for bribery but imposed the penalty for failures to disclose payments in offering documents.
A large investment bank was fined US$267m by the SEC and US$40m by the Commodity Futures Trading Commission after admitting its failures in relation to steering retail and high net worth investors to its own products without disclosing the possible conflict of interest. Six Swiss banks also agreed to settle allegations of facilitating client evasion of US tax and paid US$42m in penalties.
During the quarter the SEC also charged a number of firms and individuals with overcharging, market and stock manipulation, failing to disclose conflicts of interest, insider dealing, various forms of fraud, market abuse and running pump and dump schemes.
LEGISLATIVE/REGULATORY ENFORCEMENT DEVELOPMENTS – IRELAND
On 23 November 2015 the CBI published its Strategic Plan for 2016 to 2018. The CBI's main focus will always be to safeguard the market but doing so whilst protecting consumers. Its key actions for the coming period include enhancing supervisory engagement, processes and tools in light of new powers, new mandates and upgraded international standards and use of enforcement powers effectively to achieve credible deterrence and extending onsite inspections in sectors that have not been targeted to date.
On 14 December 2015 the CBI published its 2016 programme of themed inspections in markets supervision. The inspections represent both supervisory priorities and anticipated areas of emerging risk. The focus for 2016 is on outsourcing arrangements for investment firms; fund managers and fund service providers; AIFM programme of activities; client asset management plans; investment funds production costs; director time commitments; the operation of the risk function within firms; the use of financial indices as eligible investments for UCITS; the resilience of firms' IT systems; firms' suitability assessment of clients; conduct with clients; hedging arrangements at share class level for investment funds; and practices of firms when dealing with insider information and complying with the Market Abuse Regulations.
The CBI issued a statement in December 2015 on whistleblower allegations that a former auditor was asked to delete critical findings from an internal report into the CBI itself in October 2014. It stated that it is committed to developing an environment where whistleblowers will be protected upon raising concerns. The whistleblower concerned says that he was unfairly dismissed as a result of him bringing his claim forward. The case is ongoing.
High Court Approves Administrative Sanctions Regime against Former Officer – John Breslin
The High Court on 4 January 2016 refused a judicial review of the administrative sanctions procedure (the "ASP") commenced by the Central Bank of Ireland (the "CBI") against Michael P Fingleton, a former director and chief executive of the Irish Nationwide Building Society ("INBS") (Fingleton v The Central Bank of Ireland  IEHC 1).
This decision is the first judicial analysis of CBI's powers under the ASP. The ASP allows CBI to investigate regulatory breaches by a regulated institution. An ASP can lead to a caution, reprimand, a fine of up to €5 million and/or disqualification. The regulated institution and those concerned in its management, e.g. directors and other officers, can be the subject of an ASP. The applicant's challenge centred on the interpretation of CBI's statutory powers to pursue the ASP against a person who is no longer an officer of the regulated institution. The challenge failed.
The applicant was a director of INBS from 1971 until January 2008. He was then chief executive officer until April 2009. INBS collapsed in 2008. CBI presented evidence that the collapse of INBS resulted in a cost to the Irish taxpayer of €8 billion (albeit that this figure was disputed by the applicant). In February 2011 all of INBS' deposits were transferred to Permanent tsb and in July 2011 all of INBS' remaining assets and liabilities were transferred to IBRC at which point INBS ceased to carry on business.
In January 2012 CBI informed the applicant that it was embarking on an examination of suspected contraventions of financial services law by INBS. In March 2012 the applicant confirmed, through his then solicitors, that he would assist and co-operate with the CBI. However, he subsequently changed his position and, in May 2012, he informed CBI that he would not participate. On 9 July 2015 CBI served a notice of inquiry concerning INBS on the applicant, INBS and others. On 15 July 2015 CBI entered into a settlement agreement with INBS under the ASP whereby INBS admitted "multiple breaches" of regulatory provisions and consented to a fine of €5 million (the statutory maximum). In the light of INBS' insolvency CBI said that it did not intend to pursue recovery of the fine.
The applicant's challenge focussed on a point of statutory interpretation. He contended that the legislation establishing the ASP meant that CBI could not begin an ASP against a person who was no longer an officer of a regulated institution. This argument was rejected. The provisions were designed to enable CBI to investigate conduct by persons who were in a position to control the activities of the regulated entity at the time of the suspected contravention. The judge held that the interpretation contended for by the applicant could not have been intended by the legislature because it would mean that an officer of a regulated entity could avoid being subject to an ASP by simply resigning his position. Conversely, the applicant's interpretation would mean that a person who had a subordinate role at the time of the contravention would become the subject of an ASP simply because he or she had been promoted to the position of a director or other officer.
The applicant also contended that CBI had no jurisdiction to conduct the ASP because it amounted to the administration of justice and under the Constitution this function is reserved to the courts. Noonan J held that this contention could not be advanced because the applicant had not joined Ireland and the Attorney General to the proceedings as respondents – an essential procedural step required in any challenge to the constitutionality of legislation.
Noonan J also held that CBI's settlement with INBS did not mean that CBI could not proceed with the ASP against the applicant. It was open to the applicant to make submissions to the panel conducting the ASP to ensure that he obtained a fair hearing notwithstanding CBI's settlement of an ASP against INBS.
The applicant's challenge failed because his basic contention (that only current management of the regulated institution could be made the subject of the ASP) did not accord with logic or common sense. It has been considered that the principal basis on which an applicant would challenge the ASP would have been on the ground that it amounts to the administration of justice, involving as it does an investigation and the potential imposition of penalties. Such an argument would require Ireland and the Attorney General to be party to the proceedings. The applicant's proceedings were not appropriate for a constitutional challenge and so his constitutional arguments were not entertained.
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