Compliance and Regulatory Consulting
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In an attempt to improve conduct, global financial regulators have switched their focus from imposing large fines against firms, to making individuals more accountable and improving their ability to detect misconduct earlier, through data and technology. This is according to the annual Global Enforcement Review, now in its fifth year, published by the Compliance and Regulatory Consulting Practice of Duff & Phelps, the global adviser that protects, restores and maximizes value.
Duff & Phelps’ analysis of large enforcement cases1 collated by Corlytics, the regulatory risk intelligence firm, shows that total penalty amounts globally climbed by 30% between 2015 and 2017 to US$26.5b. However, total penalty amounts globally are forecast to be lower this year, reaching just US$8.1b in the first six months of 2018 compared to US$18.35b over the same period in 2017. This decline is particularly evident in the U.S., UK and Europe.
Of the total global penalties in 2017, the U.S. remains the dominant force, levying penalties accounting for 94% (US$24.4b) of the global total against firms and 99% (US$621.3m) against individuals. In the U.S., total penalty amounts against firms and individuals rose by 2% and 23% respectively from 2016 to 2017.
In the UK, total penalty figures rose markedly to £866m in 2017 from £71m in 2016, though this can be explained in part by two large penalties issued separately by the Serious Fraud Office and Financial Conduct Authority totaling £673.3m. However, penalties against individuals dropped significantly from £18.8m to £970,000 over the same period, the lowest amount on record since the financial crisis in 2008.
In line with the global picture, total penalty amounts in the UK are forecast to be lower this year, having reached just £175m in the first six months of 2018. With the introduction of the Senior Managers and Certification Regime (SMCR) for banks in 2016, which is being rolled out to all firms by December 2019, enforcement cases and penalties against individuals can reasonably be expected to rise in the UK over the next few years.
In Europe (excluding the UK), total penalty amounts from enforcement action against firms decreased significantly from €527.5m in 2016 to €109m in 2017, although the 2016 total is skewed by three large benchmark cases totalling €485m. Activity in Europe was bolstered by more active enforcement by regulators such as the European Commission, Central Bank of Ireland and France’s Autorité des Marchés Financiers. Penalty amounts against individuals in Europe, whilst still modest, grew from €1.6m in 2016 to €2.9m in 2017.
Globally, the trend from 2013 to 2017 shows on average a notably larger proportion of total penalty amounts being levied against individuals in southern hemispheres compared to northern hemisphere jurisdictions: Hong Kong (34%), Singapore (62%) and Australia (32%) all recorded higher proportions than the United States (2%), UK (7%) and Europe (1%).
Nick Bayley, Managing Director of Compliance and Regulatory Consulting at Duff & Phelps, commented on the findings: “Massive fines on firms have lost their power to shock, not just in the industry but also among the public. The declining penalty amounts from previous years in the UK point to the end of the big benchmark manipulation cases but also potentially suggests a change in regulators’ enforcement approach and their faith in the ability of big fines alone to change culture. Regulators globally are also using a wider range of enforcement tools in an attempt to improve conduct.
“The UK regulators have led the way in promoting the importance of individual accountability through the SMCR, something which has been subsequently mirrored in Australia (‘BEAR’), Hong Kong (‘MIC’) and Singapore (‘Individual Accountability and Conduct’). As a result, we can expect the FCA to increasingly focus on enforcement action against individuals as it seeks to make the new regime bare its teeth. However, as the majority of UK financial services firms will not be in scope of the SMCR until 2019, combined with the time for regulators to investigate and conclude cases, we expect it could be up to three years before a significant increase in penalties against individuals start to come through.
“While regulators are revising and updating their priorities, we saw the potential for unforeseen issues such as the LIBOR and FX cases to arise or new market developments and risks emerge, which inevitably will shift regulators’ attention and their resources. Regulators globally are investing in their technology capabilities, which in conjunction with more granular regulatory reporting, should enable them to detect misconduct more quickly and greater use of early intervention and disruption techniques.”
Notes to editors
About Duff & Phelps
Duff & Phelps is the global advisor that protects, restores and maximizes value for clients in the areas of valuation, corporate finance, investigations, disputes, cyber security, compliance and regulatory matters, and other governance-related issues. We work with clients across diverse sectors, mitigating risk to assets, operations and people. With Kroll, a division of Duff & Phelps since 2018, our firm has nearly 3,500 professionals in 28 countries around the world. For more information, visit www.duffandphelps.com.
M&A advisory, capital raising and secondary market advisory services in the United States are provided by Duff & Phelps Securities, LLC. Member FINRA/SIPC. Pagemill Partners is a Division of Duff & Phelps Securities, LLC. M&A advisory, capital raising and secondary market advisory services in the United Kingdom are provided by Duff & Phelps Securities Ltd. (DPSL), which is authorized and regulated by the Financial Conduct Authority. M&A advisory and capital raising services in Germany are provided by Duff & Phelps GmbH, which is a Tied Agent of DPSL. Valuation Advisory Services in India are provided by Duff & Phelps India Private Limited under a category 1 merchant banker license issued by the Securities and Exchange Board of India.
About the Global Enforcement Review
Now in its fifth year, Duff & Phelps’ Global Enforcement Review (GER) 2018 provides commentary and insights on global enforcement trends with a focus on the financial services industry. The research was compiled using Corlytics’ extensive RiskFusion Global Enforcement database for the period 1st January 2013 to 30 June 2018. Corlytics is a world leader in determining regulatory risk impact. The firm prioritizes and selects penalties for inclusion in its database based on the following criteria:
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1 Please refer to scope of research in notes to editors
April 28 - May 1, 2019 Cayman Islands