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FCA investigation

After the latest FCA investigations, the FCA censured and banned a former LIBOR submitter at an investment bank. He had manipulated rate submissions. Now, the submitter is banned for life from performing regulated activities, and must pay a £250,000+ fine. This is just the latest high-profile case.

The FCA’s investigation policy is changing. The FCA now penalises investment bank employees, not the banks. Traders and LIBOR submitters are caught out, but undercut by the banks. For submitters and traders, the bank:

A career is finished. However, there are defences.

FCA investigations: why the issue?

LIBOR is the London Interbank Offered Rate. This interest rate benchmark helps price a range of financial transactions. Daily, each bank submits a rate at which other banks can obtain unsecured funding for a particular currency over a set time period. LIBOR is calculated from the average of these rates, and then published.

All employees in every industry have daily tasks. Daily tasks can be laborious, perhaps completed subconsciously.  However, submitters should take care. Where rates have been manipulated, the FCA does not take kindly to defences of:

  • Subconscious submissions; or
  • Superior instructions.

The facts of the FCA investigation

For three years, the submitter determined and executed LIBOR submissions for an investment bank. The submitter had no collateral financial interest in the LIBOR submission, but was perhaps indirectly guided by the traders. Investment banks operate internal messaging platforms.

The FCA investigated the investment bank’s internal messaging platforms. The FCA discovered numerous internal messages asking the submitter to

  • “nudge the rate”;
  • “drop the rate”; and
  • “keep it the same today”.

Following the FCA’s investigation, the bank was fined and not for the first time. Simultaneously, the investment bank terminated the submitter’s employment for gross misconduct. Many would say the submitter was singled out as a scape goat, notwithstanding the fact that the submitter acted on instructions. The point being that the traders are of greater value to the bank.

After the FCA had fined the bank, the FCA sought disclosure from the bank on the submitter’s identity, and investigated the submitter. The FCA issued its final notice, which stated the submitter:

  1. Showed improper market conduct; and
  2. Had: “closed his mind to the risk”,
    • “acted recklessly”, and with a
    • “complete disregard for the integrity of the financial services industry”.

The employee submitter is now banned from the industry, and must pay a substantial fine. However, we suspect the story will continue.  Traders who sent the submitter requests/instructions will be tracked. The bank will sit up and comply with FCA disclosure requests. If banks do not comply with FCA disclosure requests, they are fined. Banks are keen to avoid fines after the economic crisis.

Employees: a word of warning

It was no defence that the employee submitter acted on a more senior employee’s authority.  The ramifications do not apply just to the submitters. They apply to the traders and other employees. The following issues should worry employees.

Bonus payment

Traders work towards bonuses. Bonuses are usually subject to the:

  • Investment bank’s discretion;
  • Trader’s conduct;
  • Investment bank’s internal policies.

Often banks rely on one of these points to avoid bonus payments. An employee singled out as the scape goat, dismissed for gross misconduct, does not sit in the bonus pool.

The solution is a well crafted defence to any FCA investigation or allegation. This can delay the bank’s decision to terminate for gross misconduct.

In banking, bonus disputes are common. An employee can claim in the High Court for breach of contract relating to bonus payments, or bonus entitlements, if action is taken within six years.

Here, we prefer the High Court to an employment tribunal. There is no cap on damages in the High Court, just a duty on the employee to mitigate loss.  Damaged are capped in an employment  tribunal and the limitation lasts for three months from termination of employment.

Share scheme good & bad leaver

Most investment banks operate employee share schemes. Good and bad leaver clauses are common.  These clauses enable the bank to buyback a departing employee shareholder’s shares at a value pegged to the termination reason, so:

  • Good leaver obtain fair market value;
  • Bad leaver get stock cost.

An employee subject an investigation is usually a “bad leaver”. It’s not a blanket rule, and we can certainly challenge it.

FCA investigations: Three defences

An employee’s defence depends on the evidence. The FCA targets employees, and the banks assist the FCA. It’s a paper trail in a fast-moving environment. Internal messaging platforms are strictly monitored for this sole purpose.

The latest penalties do not inspire an employee’s confidence when defending an FCA investigation. However, there are creative arguments.

On hiring

When hired, an employee should ask the bank for a full indemnity for:

  • Any fine, penalty or charge imposed by any regulatory body on the employee; for
  • Acts committed during the employee’s ordinary course of employment.

Here, drafting the indemnity is key.

Bank as contributory

On receipt of the FCA investigation notice, employees should seek to rely on the bank as a contributory. The reason is the bank, as an employer, is liable for it’s employees actions committed in the workplace.

All depends on the facts. Banks usually attempt a workaround, but the right argument leads to the right result: a full indemnity.

If an indemnity is imposed on the bank, the employee recovers from the bank all imposed fines, expenses and costs.

Superior instructions

The “no knowledge” defence did not help the recent submitter.  However, the FCA might target a junior employee, to reveal the manager who issued the instructions.  This may feel like a breach of trust but there are protections for whistleblowers.

So documents that show a superior’s instructions, or your lack of decision making authority, may be useful.

FCA investigations: comment

This recent FCA notice reinforces the message: working in financial markets entails obligations and responsibilities. Serious failures result in substantial penalties, e.g. fines and prohibitions.

Worst case is personal insolvency to meet fines following the FCA investigation. There is no ceiling on the fines.

The right defence and the bank’s indemnity avoids these problems.  Naturally banks resist an indemnity. However, these can be obtained if they need the services.  An FCA investigation triggers consequences for employees. The bank will be the second point of call for the employee; the FCA will be the first body to deal with.

Since the FCA took over from the FSA in 2013, the FCA has fined nearly all investment banks for LIBOR manipulation. The FCA can now double-dip, targeting employees, e.g. submitters and traders. This submitter is not the last employee that the banks will sell short.

Alex Kleanthous is the partner running the dispute resolution and commercial litigation teams with considerable experience resolving disputes particularly in relation to shareholders and partnerships, employment law and commercial contracts. 


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