RegTech Intelligence

New regulatory consequences could be personal nightmares

JWG analysis.

Following our review of the $260,000,000,000 total cost of regulatory transgressions, we now take a look at what the actual fines are and what the future holds?

Firstly, according to the LSE’s review of 2009-2013 fines, is that 38% of fines are related to control failures like governance, internal controls, market abuse and money laundering; 31% for miss-selling and 28% for failure to disclose information to customers and regulators.


Source: LSE Conduct Cost study[i] 2014.  We’ve ignored the 2% losses due to bad judgement for this analysis

All well and good but, as we have frequently noted, current penalties are still based on old rules.  For the new rules, delivered since 2012, we have yet to see any serious consequences for not getting it right.  So, are past fines a good enough indicator of what is to come?

Control and disclosure failures

Fines for poor internal controls have already increased as a result of the post-crisis policy landscape and are likely to continue to do so.  In July, BNP Paribas reached an $8.97 billion settlement with the US Justice Department – that also took it out of the market for 12 months – as a result of breaching sanctions on Sudan, Iran and Cuba[ii].  Any future violations of client money rules could increase the severity of penalties – both financial and personal.

However, AML is no longer the only serious control risk.  As recently as August 2014, US regulators hit the panic button over living wills which were submitted in 2012 by the 11 largest global firms.  This group includes Bank of America, Bank of New York Mellon, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, State Street Corporation and UBS.  In a show of force, the Fed and FDIC declared that action was required to improve the way the plans dealt with the complexity of legal structures, business portfolios, customer agreements and global operations, and the ability to produce reliable information in a timely manner.  If progress is not made by July 2015, firms will be deemed non-compliant with the requirements of the Dodd-Frank act[iii].


According to the LSE, prior to this year only 18% of all fines and associated costs were due to general mis-selling.  One might have thought that this is good news as the ‘sins of the past’ have now been put to bed.  Then the recent settlement of Bank of America brought pre-crisis accountability back to the table.

Not only will mis-selling come back, but we will also need to reconcile the new crimes of benchmarking manipulation and customer disclosure failures.  Both are in the news, thanks to RBS’ £14.5 million mortgage advisory business last week and Lloyds’ £218 million fine for their role in the LIBOR scandal[iv].

For all these areas, the cost curve will surely climb this year and into the foreseeable future.  As noted above, only the US has really weighed in with any significance and Europe’s penance has yet to be dished out.

What next?  Personal accountability

We would be remiss if we concluded this review of the cost impacts with mere financial penalties.  While the US forced the hand of BNP, so that a number of their employees are no longer with the firm, the UK has recently unleashed a much more holistic framework for enforcing personal liability.  Still in consultation, it requires senior managers to register and keep current their management responsibilities.  Not only that, it introduces a new presumption of responsibility where senior managers could be held accountable if they are unable to satisfy the regulators that they have taken ‘reasonable steps’ to prevent or stop a contravention.

Of course, the specific details of how senior individuals are being defined are still to be worked out, but the consultation gets very detailed on the scope of what should be considered to be a management function.  Such functions include administration of client assets, settlement, investment research, business continuity, incentive scheme heads and, of course, information technology.

Regardless, the regime is calling for 20 prescribed responsibilities for all senior managers, including compliance with the:

  • Rules relating to the firm’s management responsibilities map
  • Culture and standards in relation to the business and behaviours of staff
  • Production and integrity of the firm’s financial information and its regulatory reporting.

As any regular reader of this site knows, these three new measures could find many senior managers well short of the mark!

In sum, the cost of doing nothing has now escalated far beyond monetary fines and is getting personal.  Got something to say on the matter?  Responses in the UK are due in on Halloween – make sure you let the regulatory bogeyman know your views.


[i]      LSE Conduct Costs Blog, CCP4 – Summary Table and Results

[ii]      David Dayen, BNP Paribas’ $8.8 billion fine shows it’s time to break up the banks, The Guardian 30 June 2014

[iii]     Gina Chon and Tom Braithwaite, US watchdogs reject banks’ ‘living wills’, The Financial Times 5 August 2014

[iv]     BBC business news, Lloyds fined £218m over Libor rate rigging scandal, 28 July 2014

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