Speaker: Therese Chambers, Joint Executive Director of Enforcement and Market Oversight Lee Kravitz was a self-confessed workaholic. He had children and a wife, but everything went into his day job as an editor. Until the day that he got fired. He had lost sight of what was important and his job loss sparked an awakening. He realised the many ways in which he had failed to do the right thing. Kravitz was determined to spend the next year of his life putting things right. Kravitz had also been plagued by guilt over failing to pay back a $600 debt to his friend, money that had been borrowed decades earlier on a road trip through India and Pakistan when the pair set off to trace Alexander the Great’s steps. Initially, Kravitz did not repay the money because he could not afford to. But over the next 30 years, as his salary grew, so did his guilt over this unsettled debt. During his year of redemption – documented in the book Unfinished Business, One Man’s Extraordinary Year of Trying to Do the Right Things - he sent the cheque for $600 to his friend. His friend thanked him but added that he had totally forgotten about the money. Putting things right is commendable. For Kravitz, it entailed a lot of effort in remedying regrettable behaviour which could have been avoided if he had simply done the right thing in the first place. Often what starts as a small problem, a nagging unfulfilled task, can blow up and distort itself out of all proportion in our heads. Doing the right thing earlier would have cost Kravitz a lot less angst. Doing the right thing is what should underpin all our actions. In financial services in particular, we have a responsibility to those who rely on our products and services for their livelihoods, to put food on the table, to put a roof over their family’s heads. Even to fund trips retracing the steps of Alexander the Great. Doing the right thing when nobody is watching and when we as individuals do not directly benefit is even more important – it is a true test of integrity. And sometimes the world – or at least your industry peers, consumers and regulators – are very much watching. This is my first speech as Co-Executive Director of Enforcement. I only took up the role in April, although I have been at the FCA and its predecessor the FSA for the best part of two decades. Steve Smart, the other Co-Executive Director of Enforcement, will join the FCA on 21 June and we will set out our vision further once he is in position. What I can say today is that you can expect to see a strong alignment between our enforcement work and the FCA strategy. In the joint leadership model that Steve and I will bring, you can expect to see us working closely together, bringing the insights of the extensive but very different experience that we both have. Steve comes to us from the National Crime Agency where he is director of intelligence. There really is nowhere to hide with him so I would advise everyone to get their ducks in a row now, particularly given the extensive improvements we have made and continue to make in relation to data, technology and digital tools. I have many years of experience as a lawyer and investigator across the full range of the FCA’s extensive jurisdiction so between us, we have all bases covered. Seeing as I am without my partner in crime-fighting today, I wanted to take this opportunity to draw out some key aspects of our recent work which will have direct relevance to our future enforcement strategy. My role often involves dealing with firms or individuals who are trying their hardest to avoid taking responsibility for the harm they have caused to their customers. In other words, firms that have no intention of doing the right thing; of settling unfinished business. But let me tell you about a case where a firm not only took responsibility, but it took responsibility for a harm it did not cause. And then, it offered redress and co-operation beyond what was expected of it. Thousands of people were transferred out of their British Steel Pension Scheme after receiving faulty advice. The losses for many were huge, mounting into the hundreds of thousands. Last month (May) we censured Lighthouse Advisory Services for the unsuitable advice given to its customers who transferred out of their valuable defined benefit scheme. Lighthouse should have treated these consumers with great care, given many of them were facing the vulnerable position of moving from a pension scheme that would give them a guaranteed income for the rest of their lives into a scheme that offered no such certainty and instead exposed them to investment risk, from which they had previously been shielded. But in what is a highly unusual move for us as regulators, we decided not to impose a financial penalty on Lighthouse. That is because the new owners of Lighthouse, Quilter, put in place a proactive redress exercise quickly. Quilter took responsibility for the unsuitable advice given – advice that had been given before it had acquired Lighthouse. Quilter also took responsibility for improving the inadequate control framework that they found. And Quilter co-operated with us fully. These circumstances are more unusual than they should be. Unfortunately what we often encounter are firms who have to be strongarmed into making things right, who seek to evade their responsibilities, who duck and dive to avoid doing the right thing. Often running up large legal bills in the process. Money which would be better spent on remedying control failures and funding redress. The amount of redress paid by Quilter was far more than the fees Lighthouse received for the unsuitable advice. Quilter deserves full credit for taking responsibility and for the proactive way in which the firm and its staff worked with the FCA to put it right. They made the necessary improvements to their systems and controls. Their co-operation was exemplary. A model example of how to behave. I will let those words hang in the air for a minute – how often does the FCA praise anyone? Enforcement is about paying penalties where this is warranted. And punishment is of course a very important deterrent in our justice toolkit. There must be real and meaningful consequences for breaches by firms and individuals. Madeleine Albright once said there was a special place in hell for women who don’t help other women. I share that sentiment when it comes to firms or individuals who carry out fraud while hiding behind their authorised status. Early detection is always more effective – and that is where cooperation from those inside firms can also be extremely effective. We are investing in our data and technology, and it is already harder than ever to hide. We will find out eventually, so it is always better to come forward first if you do have any concerns about activity or individuals. And we have formed a new Financial Promotion Enforcement Taskforce to stop harmful products and services from being advertised. We have secured the cooperation from the big tech firms on this and will continue to be intervene even more assertively where we see breaches on financial promotions. Over the last financial year, we imposed financial penalties of nearly £216m, secured convictions against four people for a binary option fraud and started prosecutions into alleged market manipulation, money laundering, insider dealing and investment fraud. There are at least 20 individuals currently facing charges before criminal courts as a result of our actions. And we have 71 investigations open into suspected insider dealing. Just last month we successfully obtained fraud and money laundering convictions against the Currie brothers, who offered peer-to-peer style investments on a website fraudulently claiming to be FCA authorised. Our priority is to see the maximum possible penalty imposed on the firms and individuals that cause the greatest harm. But it is also essential that we secure the maximum redress for consumers that have been harmed. Separately, we announced a proposed compensation package of £235m pounds to investors who had lost out when the Woodford Equity Income Fund collapsed. Our investigation found that Link Fund Solutions – LFS the authorised corporate directors, had made critical errors in managing the fund’s liquidity. LFS’s errors meant that the fund failed to have the right level of liquidity from about September 2018. Investors leaving the fund from November 2018 onwards benefited disproportionately from the most liquid funds being sold. We concluded that those loyal investors who continued to hold investments in Woodford Equity at the time of its suspension were treated unfairly. They were stuck with the greater share of illiquid assets. LFS breached the FCA’s Principle 2: the obligation to carry out its activities with due skill, care and diligence, and Principle 6, the obligation to treat all customers fairly. Through our involvement, the parent company of LFS has agreed to make a voluntary contribution to bolster the funds available for redress by up to £60m. This substantial sum would not be otherwise available to investors. Investors and creditors will be asked to vote on the scheme of arrangement in respect of the redress, which then has to be approved by the court before it can be implemented. The proposed Scheme offers investors the quickest and best chance to obtain a better outcome than might be achieved by any other means. Neither FCA redress nor Fincancial Services Compensation Scheme (FSCS) compensation would cover investment losses. But the FCA’s redress applies to all investors in the fund at suspension, including investments above the FSCS limit. Investors will receive all the information necessary to decide whether or not to vote in favour of the Scheme. We are in regular dialogue with the firm and expect an update to be provided in July as previously indicated. The compensation would go to the 300,000 investors who lost out and is subject to completion of a sale of the Link Group’s Fund Solutions business. That is potentially 77p in the pound for the amount lost. We wish every pound could be recovered. Although the redress scheme does not cover all losses, we consider it is in the interests of investors to seriously consider it. The proposed scheme offers investors the best chance to obtain a better outcome than might be achieved by any other means. I notice that there has been some self-interested criticism about this, and the suggestion dangled that there could be greater financial settlements if victims join a private litigation fund. This promises an unrealistic return. This deal exhausts the resources of LFS. And the parent company contribution is voluntary. Link Group will also fight our findings should creditors vote against the scheme, which would further deplete funds available for redress. Sometimes, properly authorised firms can carry out what looks to us like wildly inappropriate activity. Fraud involving an authorised firm is something we take extremely seriously. We really care about this as it jeopardises all of our reputations – all of your reputations across industry – and the integrity of our markets. One case you may have heard about sounds more like a plot from a Dick Francis novel. At the beginning of April, we took several steps to protect consumers following the identification of serious regulatory operational issues at WealthTek LLP. We used our regulatory powers to ensure the firm immediately ceased all regulated activities. We sought and obtained the appointment of Joint Special Administrators to oversee the wind down of the firm and sought and obtained an injunction and worldwide freezing order against an individual connected to the world of horse racing. £40m worth of assets, including a horse racing business, have been frozen for the benefit of the firm’s customers while we conduct our criminal investigation into suspected fraud. Also, Northumbria Police, working in partnership with us, arrested an individual in connection with our concerns and this individual was interviewed under caution by the FCA before being released on bail. Unfortunately it appears from the detailed forensic work of the Special Administrators we appointed that there is a significant shortfall in the firm’s assets. We will investigate this thoroughly. There has been widespread reporting of this investigation in various media sources, including what may well be a first for the FCA, the Racing Post. Our original action had prompted a ban by the racing authorities on the running of race horses. We took assertive action here as part of our supercharged commitment to tackle crime and fraud. But several weeks ago, that ban on horse racing was lifted with our agreement, for the welfare of the horses and staff caught up unwittingly in the case. It was the right thing to do. And any prize money will be frozen. While the facts of this case are somewhat unusual, I hope it is clear that we will not tolerate authorised firms being used to defraud consumers; we have demonstrated in this case that we are prepared to take assertive action for the benefit of consumers in such circumstances. In every case I see, I often think back to ‘could something have been done sooner to stop this?’ Obviously, if a firm does the right thing in the way it conducts its business, these problems should not arise in the first place. But the way a firm responds to an issue is also an opportunity to do the right thing. Often firms take this opportunity. Too often they do not. It should not be up to the regulators to come in and clean up the mess. How many chains of command does something questionable pass through before it is queried? Lawyers like to see themselves as risk managers. Those defending the firms should ask themselves, what poses the greatest risk in the long term? I have been in your shoes, having started in private practice around 30 years ago. You can use your skills to block an inquiry, to claim privilege for every piece of paper and generally get in our way but what is that going to achieve? Does that mean you will get your client off the hook, that we will look more sympathetically on your call for leniency for your client? We follow the evidence and where there are failures, we will hold those responsible to account. Aggressive diversionary tactics may prolong the timeline, but they will not deflect us from our purpose. And the extent to which they serve your clients’ reputations and improve their regulatory outcome is interesting to consider. We appreciate and reward transparency and cooperation. We appreciate and reward firms that do the right thing. Ultimately, well-run firms achieve better outcomes for their clients which in turn is excellent for their bottom line. Doing the right thing is at the very heart of our Consumer Duty, which comes into force at the end of July and which I hope most of you have heard of and have actioned. Most of us do not have the luxury of taking off a year to reprioritise our lives or correct all our mistakes, like Kravitz. The beauty is that in this industry, we can do the right thing as part of our day job. It is much easier and far more rewarding in the long run.
Event: City & Financial FCA Investigations and Enforcement Summit
Delivered: 1 June 2023
Note: this is the speech as drafted and may differ from delivered version
Highlights
Tying up unfinished business
Model behaviour
Punishment must fit the financial crime
Our recent action
A redress deal to consider
Reining in inappropriate activity
Early bird catches the worms
