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Industry Spotlight > Broker Dealers

Regulators Look Beyond Mega-Fines on Firms

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Global financial regulators have refocused their efforts from imposing big fines against firms to holding individuals more accountable and improving their ability to detect misconduct earlier, according to Duff & Phelps’ fifth annual global enforcement review.

In an analysis of large enforcement cases collated by the regulatory risk intelligence firm Corlytics, Duff & Phelps found no dramatic change in enforcement activity when it comes to fines. After a surge in 2013 and 2014 comprising the bulk of the Libor and foreign exchange abuse cases, fine totals fell sharply.

They have since edged up, rising to $26.5 billion globally in 2017, from $20.5 billion in 2015. This year, the analysis forecast these amounts globally to be lower. In the first half, they reached just $8.1 billion, compared with $18.5 billion over the same period in 2017. The decline was particularly evident in the U.S., the U.K. and Europe, the review found.

U.S. regulators continue to account for most of these fines — 95% of the total global sum of fines against firms last year, and 96% of the sum since 2013. These large U.S. fines are also frequently levied against non-U.S. headquartered institutions.

“The perception that the U.S. is continuing to act as ‘Globo-cop’ in the industry may not be far wrong,” the report said.

Fines issued by the U.S. Financial Industry Regulatory Authority rose slightly in the first six months of 2018, while restitution was down significantly from 2017.

Globally, the trend from 2013 to 2017 showed on average a notably larger proportion of total penalty amounts being levied against individuals in the Asia/Pacific region: Singapore (62%), Hong Kong (34%) and Australia (32%), versus the U.K (7%), the U.S. (2%) and Europe (1%).

The declining number of penalties and fine amounts compared with previous years seem to point to a weakening of regulators’ faith in the ability of big fines alone to change behavior, or at least a recognition of the importance of using other levers, according to the report.

“Massive fines on firms have lost their power to shock, not just in the industry but also among the public,” Nick Bayley, managing director of regulatory and compliance consulting at Duff & Phelps, said in a statement.Regulators globally are also using a wider range of enforcement tools in an attempt to improve conduct.”

Those levers include increased emphasis on restitution and, perhaps more significant, a focus on individual accountability. In fact, penalties against individuals accounted for 31% of the total cases globally between 2013 and 2017.

This has been rising steadily year on year except for a drop of 13% in 2017.

The report said the focus on individuals is only going to grow, even though there is still a relative dearth of large fines against individuals outside the U.S.

Of the total $627.9 million in large penalties imposed against individuals globally last year, $621.3 million, or 99%, was by U.S. regulators.

Change is coming. New rules are in the offing with the U.K.’s Senior Managers and Certification Regime and Hong Kong’s Managers in Charge rules. Singapore appears likely to join them with recently proposed Guidelines on Individual Accountability and Conduct by the Monetary Authority of Singapore.

Elsewhere, the report said, regulators have made it clear that individuals are on the firing line, not just for breaches and abuse, but also for failures for which they may not be directly responsible, but that happen on their watch.

How soon will change show up in the enforcement figures? That is uncertain, according to the report, as the regulatory pipeline is long and a change in direction from the regulators is often felt only two or three years down the line on average in most jurisdictions.

But with massive fines against firms declining, regulators are increasingly looking to alternative, more effective approaches, such as business restrictions, prohibitions and criminal actions against individuals.

In addition, according to Bayley, “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.”

Last month, the SEC used data analysis to uncover a New Jersey-based broker it charged with misusing his access to customers’ brokerage accounts.

New Priorities

Some new regulatory priorities are emerging, according to the review. Regulators globally are increasingly concerned about cybersecurity and data privacy.

In September, an Iowa broker-dealer and investment advisor agreed to pay $1 million to settle charges brought by the U.S. Securities and Exchange Commission for cybersecurity failures that compromised thousands of customers’ personal information.

Cryptocurrencies have also come onto regulators’ radar. In a first for the SEC, the agency last year charged a businessman and two companies with defrauding investors in relation to initial coin offerings purportedly backed by investments in real estate and diamonds.

As well, regulators are prioritizing the protection of retirement savings and investments. This is especially the case in countries with well-developed private-sector pensions, such as the U.S., Australia and the U.K.

In September, the SEC charged an ex-Wells Fargo broker with bilking retail customers out of more than $1 million in a long-running scam.


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