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 maximises value.
Duff & Phelps’ analysis of large enforcement cases 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 totalling £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%).
Malin Nilsson, Managing Director of Regulatory and Compliance Consulting at Duff & Phelps, commented on the findings: “The changes in attitude from regulators on a worldwide basis have changed significantly over the past few years as is evidenced by the data from the UK, the U.S., Europe and globally. Massive fines on firms have lost their power to shock, not just in the industry but also among the public. The Channel Islands can also be seen to be taking a similar path with a change in regulators’ enforcement approach. A number of tools remain at the disposal of regulators in the Channel Islands, including the power to ban individuals, but hitting people in their own pocket appears to be the direction of travel favoured by those charged with supervising the Islands’ financial services industries.
“Guernsey has had a civil penalties regime which applies to both entities and individuals for a number of years and the actions of the GFSC have shown that they are prepared to use those powers in an effort to drive individual accountability. Mirroring the UK regulatory approach through the Senior Managers and Certification Regime (‘SMCR’), Jersey has also very recently introduced a civil penalties regime for individuals who act as Principal Persons. Although no penalties have yet been levied in Jersey, we can expect the JFSC to increasingly focus on enforcement action against individuals as it seeks to make the new regime bare its teeth. As ever, given the time for regulators to investigate and conclude cases, we expect it could be a year or two before a significant increase in penalties against individuals start to come through.:
