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April 23, 2014 - Latest:

Coutts FSA fine raises penalty level issues

  • 26 March 2012

The watchdog said that the failings at Coutts, the Royal Bank of Scotland owned exclusive bank which has a branch at Eton, were "serious, systemic and were allowed to persist for almost three years.  They resulted in an unacceptable risk of Coutts handling the proceeds of crime."

While £8.75m is a lot of money for most, it was calculated after the FSA's 30% discount for "fessing up" without too much of a fuss – it would otherwise have been £12.5m.  And £8.75m is a drop in the ocean for RBS, which, in any case, is majority taxpayer owned so the fine on the posh people's bank will effectively be paid by everyone.

Now outgoing FSA head of enforcement Margaret Cole has told The Financial Times that financial watchdogs should step up penalties.

Cole said: "Fines mustn't be a cost of doing business. Whether you apply a multiplier or a step change, we're in a moving world where we expect penalties to be higher."

Was the fine high enough?

In the United States, they take violations of securities regulation more seriously. In 2010, Goldman Sachs was fined a record $550m to "settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse."

And last November hedge fund manager Raj Rajaratnam was fined $92.8m by the SEC for insider trading, the largest penalty ever imposed on an individual. The SEC said: "The insider trading schemes cumulatively generated more than $52 million in illicit gains."

In the UK, the biggest FSA fine was the £33.2m penalty on investment bank JP Morgan Chase in June 2010 for "for failing to protect client money by segregating it appropriately."

Margaret Cole, FSA director of enforcement and financial crime, said at the time:

"JPMSL committed a serious breach of our client money rules by failing to segregate billions of dollars of its clients' money for nearly seven years. The penalty reflects the amount of client money involved in this breach."  Again, the penalty was after the 30 per cent "early settlement" discount.

Balancing the parties to a penalty

Regulators have to consider a number of points in penalising firms and individuals.

  • What was the cost of the transgression?  Was this actual or potential? And would the system be harmed because the activity threatened markets, or individual investors?
  • Will the fine be enough to deter others from the activity or force them to face up to past problems?
  • Who will pay the fine? Will it be the individuals responsible? Or shareholders? Or, in the case of mutuals, will the penalty ultimately be paid by savers and investors who had no part in the problem and who may well have suffered as well? 
  • Will the fine be backed by compensation? In some cases, the cost of restoring money to investors has been 50 times the penalty level.

Bank of Scotland gets away buckshee

The FSA has sometimes not fined bankrupt individuals or firms because they would have either been incapable of paying or the fine would have diminished funds available to victims, or in the recent Bank of Scotland case, it decided to censure  rather than fine the bank for rule breaking, including "very serious misconduct, which contributed to the circumstances that led to the UK government having to inject taxpayer funding into HBOS." The watchdog justified this stance because it prevented the taxpayer forking out once for the Bank's rescue and then again for the misdeeds which had contributed towards it.

Politically exposed persons and criminal associates

Reading the whole FSA report on the Coutts affair gives a glimpse into some of the  clientèle the Strand, London based bank attracted. Besides toffs, there were those with criminal links (higher risk customers) and "PEPs" – politically exposed persons. A PEP is polite speak for, amongst others, assorted dictators and corrupt family members. Officially it is "an individual who is or has, at any time in the preceding year, been entrusted with a prominent public function" and an "immediate family member, or a known close associate, of such a person."  The definition only applies to those holding such a position in a state outside the UK, or in a European Community institution or an international body.

Coutts, the FSA says, "failed to take reasonable care to establish and maintain effective anti-money laundering (AML) systems and controls in relation to customer that posed a higher money laundering risk than standard customers." This risks the  laundering of money through UK financial institutions, undermining the UK financial services sector.

The FSA adds: "It is the responsibility of UK financial institutions to ensure that they are not used for criminal purposes and, in particular, that they do not handle the proceeds of crime."

Bank ignored intelligence

In two cases, the AML team gave insufficient weight to adverse intelligence and approved customers without appropriate further enquiry on the basis that the intelligence revealed only allegations of criminal conduct rather than actual convictions, or because the AML team considered that sufficient time had elapsed since the allegations were first raised.

In a third case, RBS had issued a notice to all companies in its group some years before requiring them to close any relationships with a particular family due to their political support for a criminal. The notice was subsequently rescinded but further adverse intelligence about the family came into the public domain. Despite being aware of that adverse intelligence, appropriate steps to mitigate the risks posed by the family were not taken.

Richard Lloyd, a director of consumer group Which?, said: "The FSA must set fines at a level that act as proper deterrents to firms and make shareholders sit up, take notice and demand change. Fines in other retail sectors are much harsher."

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More from Mindful Money:

A Brief History of Insider Trading

Its the end of the FSA – But will the PRA and FCA do any better?

Is this the end of the hedge fund manager?

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