The FCA has fined Tullet Prebon (Europe) Limited (“Tullet”) £15.4 million for a series of serious conduct failures and lapses in management control around its broker division.

Breaches by Tullet

The FCA found that on a number of occasions between 2008 and 2010 Tullet’s rates’ division had engaged in “white wash” trades. White wash trading refers to trades that involve no change in beneficial ownership, and which have no legitimate underlying commercial purpose. The FCA said that this “generated unwarranted and unusually high amounts of work.” According to the FCA, senior managers were aware of “obvious red flags” in relation to this conduct, but turned a blind eye to the behaviour, missing key opportunities to probe as they “wrongly” believed sufficient systems and controls were in place.

The FCA said that Tullet had also breached Principle 11 of the FCA’s Principles for Businesses (“Principles”) by failing to be open and co-operative about evidence requested by the FCA in relation to its investigation. Tullet had broker audio recordings, which were relevant to the case, but failed to produce the tapes to the FCA for nearly 3 years after they were first requested. To further compound matters, the firm initially provided an incorrect account as to how the audio had been discovered.

Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA said, “…while these trades did not mislead the market, nor amount to market abuse, the wash trades were entirely improper, undermining the proper function of the market. Senior management and compliance were cocooned from seeing the misconduct, and systems and controls failed to probe broker conduct, even when warning signs were visible”.

Consequences

Tullet, now part of TP ICAP plc, agreed to settle the matter and therefore qualified for a 30% discount under the FCA’s settlement discount scheme. Without this discount, the fine would have been £22 million. TP ICAP highlighted that it has implemented new systems and controls to ensure compliance with regulatory requirements.

 The Principles

The Principles are a general statement of the fundamental obligations of firms and other persons to whom they apply, under the regulatory system. The Principles have two purposes:

1. to provide firms with a clear and concise statement of their fundamental regulatory obligations and the standards that the FCA expects them to meet in the day-to-day conduct of their business; and

2. to provide a basis for supervisory activity and enforcement action by the FCA. As a result, firms can be (and have frequently been) disciplined for breaching a Principle, even if they have not breached any of the FCA’s other rules

The Principles set high standards for firms to meet, but they allow for flexibility as to how this is achieved.

In this case, the FCA decided that Tullet breached Principles 2, 3 and 11. The breaches included failing to conduct its business with due skill, care and diligence, failure to have adequate risk management systems, and failure to be open and co-operative with the FCA.

 Comment

This case is a reminder of the fact that boards of directors and senior management of authorised firms must proactively implement their management and supervisory responsibilities.

In particular, it is crucial to police systems and controls to ensure they effectively identify and respond appropriately to real and potential risks. The mere fact that systems and controls exist and can be pointed to in the event an issue arises is not enough, and will not mitigate against the risk of substantial FCA fines in the event of any regulatory investigation. The case also emphasises the importance of firms adopting an open and cooperative approach towards investigations otherwise they risk FCA censure.