The FCA has fined broker firm Tullett Prebon £15 million for a string of misconduct issues, so where did they go wrong and what lessons can everyone else learn?
Picture this scene… You’re a broker firm and you’re worried about some suspicious signs on a recent trade. You ask the broker about it and he says: “You don’t want to know.”
For most people that would be a big red flag to dig further. For Tullett Prebon it was the end of the conversation and it’s one of the reasons they now find themselves on the wrong end of one of the biggest fines of the year.
In total, the FCA has fined them £15.4 million for a string of failures in the firm’s broker division. It failed on a number of issues including conducting business with due skill, care and diligence and failing to put good risk management processes in place. Worse still, when they did come under investigation they were, said the regulator, neither open nor cooperative.
It’s not hard to see where they went wrong. The FCA’s assessment is pretty damning. ‘The case against Tullett Prebon was a long and complex one,” they said. “The firm’s failure to be open with the FCA about the existence of key evidence reflected a high degree of culpable incompetence and prejudiced the FCA enquiries.”
Management were wrongly under the impression that all was well with the firm. In part, that was because they had not put the proper processes in place to monitor and ensure compliance, but also because they almost willfully missed clear red flags. Systems may have been in place but they were not being used effectively and, when red flags did pop up, they were ignored.
This is why one broker’s “You don’t want to know” answer to a question about inordinately high brokerage on one deal went uninvestigated.
This incident highlights a serious problem with culture. That the broker felt comfortable being so blunt with his superiors highlights his belief that it wouldn’t be chased up.
The FCA uncovered a tendency towards ‘lavish entertainment’ which left the door open to all sorts of improper behaviour such as wash trading, which involved no change of beneficial ownership or underlying commercial purpose.
A lack of cooperation
Last, but by no means least, the regulator complained about a lack of openness and cooperation. Tullett Prebon had access to evidence in the form of audio tapes. This had been requested by the regulator in 2011 but it wasn’t until 2014 that the broker finally handed them over. They also gave an inaccurate account of how they had been discovered.
Tullett Prebon’s failures, therefore, were many and varied, which is why the regulator has issued such a high fine. Aside from just the misconduct, the broker made life worse for itself by its reaction and clear evidence that it hadn’t taken compliance seriously enough.
It was also not the first time it had fallen under the gaze of the watchdog in recent times. Investigations in 2008 and 2010 also revealed ineffective controls about conduct.
These, then, are lessons which firms can put in place. First, they need to ensure that everyone within the organisation buys into a positive code of conduct and that they are properly incentivised. Clear oversight processes must be put in place and monitored to ensure they are being used properly.
The regulator is looking at firms which are more likely to be non-compliant, such as past behaviour or weaknesses in their business structures. Firms which have these may well find themselves the subjects of FCA probes.
Finally, at all stages transparency is crucial. If a firm cooperates with an investigation, that will be noted. Aside from reducing the level of the fine, it will also lesson the impact on a firm’s reputation.