Welcome to Maples and Calder's quarterly newsletter on financial services regulatory enforcement, where we provide you with updates on all hot regulatory and enforcement topics, from global trends to in-depth advice on Irish-specific issues.
ENFORCEMENT ACTIONS – IRELAND
The Central Bank issued warning notices against nine unauthorised investment firms during the first quarter of 2014. These warnings can be very damaging to a firm's reputation and have a knock-on impact when applying for regulatory licences in other jurisdictions or when applying to be an approved person.
For further details please see: http://www.centralbank.ie/regulation/unauthorised-firms/pages/list-search-unath.aspx
There were also three enforcement sanctions issued against Irish regulated entities during the first quarter of 2014 with the Central Bank reprimanding the three firms and imposing total fines of €575,000.
For further information please see: http://www.centralbank.ie/publications/Pages/settlement-agreements.aspx
ENFORCEMENT ACTIONS – INTERNATIONAL
During quarter one the UK Financial Conduct Authority ("FCA") issued warning notices against a large number of firms acting without the necessary regulatory licence. Also in the UK, six entities were fined (c. £77.2 million which includes the largest ever retail fine issued by the FCA of c. £30 million); four people were banned from acting in significant influence roles; two people received personal fines of £20,000 and £663,000; and one person received a seven year jail sentence. Also in this quarter, three people were arrested in connection with an investigation into boiler room activity.
For further details please see: http://www.fca.org.uk/news/list?ttypes=&yyear=2014&ssearch
In international news, the US Securities and Exchange Commission ("SEC") has issued its largest monetary sanction of $7.2 million for short-selling. The SEC has also issued fines totalling c. $17.5 million for breaches of insider trading regulations to six individuals and two firms.
LEGISLATIVE/REGULATORY ENFORCEMENT DEVELOPMENTS – IRELAND
Central Bank Enforcement Priorities 2014
The Central Bank announced its 2014 enforcement priorities in February. It noted the individual priorities for each key sector (banking and insurance, markets, credit unions and consumer protection), as well as highlighting for all sectors the continuing importance of fitness and probity obligations of the Central Bank Reform Act 2010, as well as compliance with anti-money laundering/counter-terrorism financing regulations.
For further details please see: http://www.centralbank.ie/press-area/press-releases/Pages/CentralBankPublishesEnforcementPrioritiesin2014.aspx
Central Bank Themed Reviews and Inspections
The Central Bank also released its planned series of themed reviews and inspections for 2014 across three key sectors: consumer protection; markets; and anti-money laundering compliance. The Central Bank will also continue to conduct additional reactive inspections on any issues, events or themes as they present themselves throughout the year.
It is crucial that regulated financial service providers carry out reviews of these areas in advance of regulatory inspections to ensure that they have a robust, effective systems and controls environment.
For further details please see: http://www.centralbank.ie/press-area/press-releases/Pages/CentralBankPublishesProgrammeofThemedReviews.aspx
On 26 February 2014, the Financial Services Ombudsman ("FSO") published the bi-annual FSO review for the second half of 2013. For the first time, under the "name and shame" powers in the Central Bank (Supervision and Enforcement) Act 2013, the FSO identified 15 regulated financial service providers who had at least three complaints against them, which were either substantiated and/or partly substantiated.
For further details please see: https://financialombudsman.ie/documents/Bi-Annual_Review_2013-July-Dec.pdf
The Central Bank's on-going investigation of Custom House Capital Ltd (in liquidation) and persons concerned in its management has been listed for mention in the Examiner's Court on 19 May 2014 with a full day hearing scheduled for 30 May 2014.
For further details please see: http://www.centralbank.ie/press-area/press-releases/Pages/UpdateonCustomHouseCapital.aspx
The Revision of Inquiry Guidelines
As part of the regularisation and enhancement of the Central Bank of Ireland's ("CBI's") enforcement powers under the Central Bank and Financial Services Authority Act 2004, a new Part IIIC of the Central Bank Act 1942 (the "Act") was introduced. This provides a framework within which the CBI may invoke its powers to investigate and sanction parties for breaches of the rules (the "Administrative Sanction Procedure") and fleshes out the CBI's powers.
The CBI published an Outline of the Administrative Sanction Procedure in 2005, together with Inquiry Guidelines ("Guidelines"). These Guidelines were updated in late 2013, after the CBI had sought submissions from industry on the proposed and/or required changes.
There are two important points to note about the Guidelines. First, the introduction expressly states that the Guidelines may be departed from where necessary ("in appropriate circumstances"). Secondly, the CBI has yet to invoke its power to activate its powers of inquiry. Every investigation brought under the Administrative Sanction Procedure to date has concluded in a settlement before an inquiry commenced.
The Guidelines, however, provide insight regarding the CBI's thinking as to how an inquiry will be conducted.
The Financial Services Regulatory Enforcement Group in Maples' Dublin office made submissions to the CBI in relation to the revision of the Guidelines. Some of the proposals were taken on board; others were not. The key points to note from the Revised Procedures are as follows:
- The CBI continues to reserve the right to disapply the Guidelines where it considers that the Guidelines are not appropriate to an individual case, providing that any departure from the Guidelines would have to be justified and the resulting inquiry would still have to comply with procedural fairness. It is doubtful whether the CBI would be entitled under the Act to depart from the Guidelines.
- The CBI reserves the right to appoint single-member inquiries, but it has been confirmed that this will only occur where this is appropriate by reference to the nature, scale and complexity of the case.
- The CBI has confirmed that no member of the inquiry will have had any prior involvement with the matters which are the subject of the inquiry, whether internal CBI appointees or external members.
- The CBI has conceded that regulated entities will be informed of the identities of the inquiry members at the Notice of Inquiry stage, to allow the bringing of any challenge to an inquiry member at an early stage.
- The CBI has confirmed that multi-member inquiries will typically have an odd number of members, to avoid the possibility of tied votes.
- Any information provided by the Enforcement Section of the CBI to the inquiry under Section 2.11 of the Guidelines will also be made available to the regulated entity.
- The CBI confirmed that an inquiry would not be bound by the strict rules of evidence, but was bound by the rules of procedural fairness. The CBI acknowledged that this includes the right to make submissions and cross-examine witnesses. However, it should be noted that any dis-application of the rules of evidence may, depending on the context, result in a breach of constitutionally guaranteed fair procedures.
- The CBI has conceded that a stenographer is to be provided for all inquiry hearings and not just for the taking of oral evidence.
- Witnesses to the inquiry will be called by the inquiry, not by the regulated entity. Although the regulated entity will be afforded an opportunity to inform the inquiry of any witness it may wish to call, there is no automatic right to call a witness. Equally, there is no automatic right to have an oral hearing or evidence.
- The CBI confirmed that an inquiry is considered to be complete (for the purposes of reaching a settlement agreement with the regulated entity) when the inquiry members issue their written findings.
- It was noted that in calculating any monetary penalty to be paid by a regulated entity, the inquiry should have regard to any costs of the inquiry or the CBI, in order to ensure that the combined amount does not cause the regulated entity to cease trading or (if a sole trader) be declared bankrupt.
- It was argued that where a regulated entity offered to admit a contravention during an inquiry (in without prejudice settlement meetings) but agreement could not be reached with the CBI on sanctions, the timing and fact of this offer should be taken into account by the inquiry when determining any sanction to be imposed by it (this is similar to the "Calderbank" procedure in civil proceedings). The CBI, however, did not favour such a proposal. The CBI maintains that if a regulated entity is willing to concede a contravention, it should do openly before the inquiry, and that the without prejudice negotiation proposal should not be disclosed to the inquiry if and when it comes to impose a sanction.
- The Guidelines provide that where a monetary penalty is imposed under Section 33AQ or 33AR of the Act, and where the contravention in question is also an offence, the regulated entity will not be liable to prosecution or punishment for that offence. Section 33AV deals with settlement agreements, and provides that the terms of a settlement agreement "may include terms under which that financial service provider or person accepts the imposition of sanctions of the kind referred to in section 33AQ" (emphasis added). The CBI refused to confirm that a firm which paid money under a settlement agreement under Section 33AV would benefit from protection under those provisions. This will be a very real concern for any regulated entity considering entering into a settlement agreement.
In summary therefore, the CBI has accepted Maples' submissions with regard to procedural elements (notice of inquiry members, composition of inquiry, stenographer). One would hope that a well-run inquiry would provide for these in any event. The CBI did not, however, concede on the more fundamental issues (e.g. double jeopardy, and the "Calderbank"-type admission). A key concern which may remain is the potential for "double jeopardy" even after settling with the CBI.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.